What Does Income Tax Payable Mean?

Income tax payable refers to the income tax a business or an individual owes to the government based on their taxable income. It represents the current tax liability for a specific period.

For financial accounting reasons, income tax that needs to be paid is a liability. It tells you how much a company plans to pay in taxes in the next 12 months. On a company’s balance sheet, it shows up under “current liabilities.”

Generally accepted accounting standards (GAAP) are used to determine how much income tax an organization owes, considering the current tax rates in each jurisdiction where the organization is taxed. All businesses must follow the United States federal, state, and local tax rules. They also have to follow the tax rules of other countries where they do business and make money.

How to Figure Out Your Income Tax

If a business owes taxes, they are usually listed under “income tax payable” on their balance sheet. The income tax that must be paid is shown as a current debt. This means that it needs to be paid within 12 months.

There are rules in generally accepted accounting principles (GAAP) for how to describe an event that makes money or loses money. But these are different from what the tax law says about how to report the same event on tax forms. Timing gaps are often caused by the two systems having different rules for depreciation and amortization. The financial statements of a business show these differences in how the two methods report information, especially regarding taxes.1

Deferred income tax liabilities are tax debts that have built up during the year but will not be paid until a later year. They are shown on a balance sheet.

Using the 21% business federal income tax rate for 2023 as an example, the total amount of US taxes that would be due for an event that brought in $300 in 2023 is $63.

$300 x 0.21 = $63

According to GAAP, the $300 in event-related income and the $63 in corporate tax must be shown on the organization’s income statement for the year the event happened, which is 2023.

Putting off paying taxes

Using GAAP, a tax liability may be calculated in one way but reported differently for tax reasons. Tax law lets you recognize income or a tax debt over more than one year. The financial records will show this difference in timing.

Say, for tax reasons, $300 in GAAP income in 2023 is spread out over three years. Then, the taxes due to the IRS for 2023 will be shown on the balance sheet 2023 as a current liability, or $21 in income tax that is due right away.

$300 x .21 = $63 / 3 = $21

The present liabilities part of the balance sheet would show that $21 is due for income tax. There would be a deferred tax burden for the last $42 owed to the IRS in the future.

In other words, a deferred tax liability happens when there is a gap between how much an organization owes in current income taxes and how much it pays in income taxes.

Income Tax Due vs. Income Tax Spent

Balance sheets show how much money is owed to the IRS in taxes. These taxes are divided into current tax liabilities (income tax due) and deferred income tax liabilities (long-term, noncurrent debts). On the other hand, an organization’s income statements show its income tax cost. In most cases, this amount shows up as the last cost. It is a deduction from the profit before taxes used to find the net income or profit.

When a US company files its taxes, GAAP figures out how much income tax it has to pay by adding the amount shown on the income statement as “profit before income taxes” to the current corporate tax rate, which is 21% in 2023.

Other than income taxes, payroll, property, and sales taxes may be shown on financial statements as different types of taxes. They might also be added to a total list of tax costs on an income statement or a total list of tax debts on a balance sheet.

When a business files its federal income tax return, it knows how much tax it owes the US government for the given tax year. The balance sheet shows the taxes that need to be paid within a year as current income tax obligations. Deferred income tax bills are taxes that are due in later years.

If the company also pays income taxes to the government in a state, city, or country other than the United States, those amounts will appear on its balance sheet.

What Does It Mean to “Pay Income Tax”?

In financial accounting, “income tax payable” refers to a company’s current debt shown on its balance sheet. It lists the taxes that the group plans to pay in the next 12 months.

What does the term “income tax expense” mean?

“Income tax expense” in accounting terms refers to the taxes a business has to pay on its profit before taxes. GAAP says that the amount is found by adding the tax rate that applies to the company’s profit before taxes. It shows up on a business’s income account.

Why are they different if you owe taxes to the IRS and see tax amounts on your financial statements?

The tax numbers on balance sheets show the organization’s debts that lower its value. Taxes due within 12 months are called “income tax payable” because they are current bills. Taxes that need to be paid later are called deferred tax issues.

Conclusion

• A company’s balance sheet shows it owes money on taxes. This is called “income tax payable.”
• There are sometimes differences between the rules for figuring out how much tax is due and the rules for putting taxes on financial records.
• The amount of income tax due to be paid to the government within a year is shown on a balance sheet.
• Deferred income tax bills show the income taxes that need to be paid in a later year.
• Federal, state, local, and foreign taxes are all examples of taxes that can be shown on financial records.