What to do with Payroll liabilities (income tax)

Hi,

I’m a new user with little background in finance, and working in Myanmar. The tax system here is quite new and, as a result, tax payments can be a bit irregular (sometimes every quarter, sometimes every six months, usually when the tax office calls).

I would like to use deductions on payslips to record personal income tax deductions, and then move the money into a cash account on pay day, and then to a bank account, until the tax office call to request the tax.

I do as the guide Payslips says.

Currently the tax deductions are showing in Payroll Liabilities. This is fine. However, I am unclear about what to do next with the deductions. Should I make a payment out of the Payroll Liabilities account and then record a manual receipt in a Bank Account that we have set up to keep our tax contributions? I’m not sure what would be best practice

Thanks in advance

Your payslip income tax deductions and money movements before actually paying the liability to the tax office are two separate things.

The payslip deduction creates a liability for the company to pay the tax office on behalf of the employee some time in the future. When that payment is made, it should be entered as an ordinary payment from a bank account, posted to the Payroll liabilites account. By doing that, the Payroll liabilities account will be reduced.

If you want to set money aside in a separate bank account to be sure it is available when the tax office calls, use an inter account transfer to record movement of money from one account to the special tax bank account. This does not in any way involve Payroll liabilities, because you have not reduced your liability at that point. You have only moved an asset—money—from one bank account to another.

Thanks very much for this. Very useful. That makes total sense now that you’ve explained it.