If you are a sole trader, and referring to PAYG businesses income tax, then it is paid each quarter when doing your BAS. Funds for which are typically taken out of owners equity. It is possible to record the businesses PAYG tax paid in an asset account (reflecting what the ATO) does and use that together with any adjustment to pay your annual income tax. However I suspect most users don’t bother (with this approach a income tax liability account is also appropriate, recording future income tax payable based on regular businesses income, the ATO tax calculator & paid out of owners equity).
On the other hand the STP localisation is used if your businesses has employees, such as other staff or your businesses is a company which employees you. Again the ATO tax calculator can be used to calculate PAYG tax, which is then entered as a payslip item.
I have read and done what the link says before but I am still not sure how to set up my PAYG
Thank you for explaining but I am still not sure/clear as to how to set up my PAYG.
If I add “income tax liability” in my Liabilities and enter an amount in there, it comes with a message saying its unbalanced.
When I add “Owners equity” in my Equity list and enter the same amount as the one entered in income tax liability, it becomes balanced but doesn’t show/affects my Net profit. Which I assume its not correct?
I am not sure if I am not setting up properly or I am not entering things how I should.
I tried entering the amounts as ‘New Payments’ & as a ‘Journal Entry’ but both results seem wrong.
I suggest you just pay your sole trader PAYG tax out of owners equity. Your profit and loss in Manager will show your profit / loss before tax.
It is possible to show profit after tax in Manager but I don’t think you will find it worth the effort. To do so you need to use the same structure as is used if you managed your businesses through a company:
- profit / loss expense account for “income tax”
- Balance sheet liability account for “Income tax liability”
- Balance sheet asset account for “Businesses PAYG paid”
- at least each quarter calculate your businesses before tax profit. Use the ATO tax calculator to estimate income tax liability. Use a journal entry to transfer this amount from the income tax expense account to the income tax liability account.
- when paying your BAS your PAYG is added to your “Businesses PAYG paid” asset account.
- when you pay your annual income tax use the actual figures to achieve the correct starting balance of the above 3 accounts for the next financial year.
For further discussion see What account does corporation tax go under?
So in summary it is possible to show “income tax expense”, “income tax liability”, and “PAYG asset”. But it is easier not show any of this and to just pay sole trader PAYG tax out of owners equity. Using the latter approach you need to put aside savings to pay your income tax if your businesses grows rapidly (when PAYG is inaccurate).