How to account for the payment of income taxes
2. Accounting for the payment of income taxes
Let’s assume that Bokssnel Company – a fictitious C-corporation -- has a year-end on December 31. The company pays only federal income taxes. (Even though we will discuss the payment of federal income taxes, the same basic principles apply to the payment of state and local income taxes.)
Bokssnel Company pays federal income taxes in four installments throughout the year. The firm estimated its annual income tax expense as $100,000. To record the first payment of federal income taxes, on March 15, 20X3 Bokssnel Company would make the following journal entry:
Account Titles |
Debit |
Credit |
Income Tax Expense |
$25,000 |
|
Cash |
$25,000 |
The company would make the same journal entries on June 15, September 15, and December 15.
At the year end, Bokssnel determined that its taxable income was $400,000: $700,000 in revenues less $300,000 in costs and expenses. The company pays a flat tax rate of 34%. Thus, in 20X3 Bokssnel’s tax liability was $136,000 ($400,000 x 0.34) while the company has only paid $100,000 in income taxes. Thus, the company owes $36,000to the federal government.
To recognize additional taxes owed to the federal government, Bokssnel Company would make the following adjusting entry:
Account Titles |
Debit |
Credit |
Income Tax Expense |
$36,000 |
|
Income Taxes Payable |
$36,000 |
Income Taxes Payable is a liability that will carry over to the next fiscal year.
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