Here is the workflow.
When you issue an invoice for 1,000 where 100 is withholding tax, 900 will go to Accounts receivable and 100 will go to Withholding tax receivable
When you click on Customers tab, you will see:
When customer remits 100 to government for withholding tax, they will send “proof” to supplier they have remitted 100 to government. This “proof” can be recorded in Manager when you click on Withholding tax receivable figure under Customers tab.
There will be New Receipt button.
The transaction is fairly simple. Just enter date and amount which customer has remitted to government.
After transaction is recorded, the amount will move from Withholding tax receivable to Withholding tax (maybe the naming of accounts is unfortunate and Withholding tax account should be actually called Withholding tax credits)
Withholding tax receivable indicates how much your customers have to remit to government and Withholding tax indicates how much tax “credits” you have. Withholding tax amount is then generally offset against your income tax at the end of year. It just keeps accumulating, then the final amount is used to decrease your income tax liability.
Basically withholding taxes is a mechanism for government to collect tax on income of businesses during the year. Just like employers are withholding payroll taxes during the year.
The system works OK as per accounting requirements but it’s a bit weak from management point of view. Some people have been asking for some “aging” report on withholding tax receivable because their customers pay invoice amount but are very slow to remit withholding taxes to government. If customer doesn’t remit withholding tax to government, you can’t get tax credit for it so it’s something businesses have to chase too (like they chase accounts receivable).