Sales and Income Taxes Payable

Sales Taxes Payable

• Retailers collect sales taxes from customers on transfers of tangible personal property and certain services.
• The collected sales taxes are then remitted to the proper governmental authority.
• Some companies do not separate the sales tax from the sale amount at the time of sale.
• The company credits the total to the Sales Revenue account instead.
• To determine the sales tax payable, divide the Sales Revenue account balance by 1.0 plus the sales tax percentage, then subtract the result from the original balance.
• Example: If a $3,000 sale has a 4% sales tax, the journal entry includes a debit to Cash for $3,120, a credit to Sales Revenue for $3,000, and a credit to Sales Taxes Payable for $120 ($3,000 x 4%).

Income Tax Payable

• Businesses must prepare an income tax return to compute income tax payable.
• Taxes payable are a current liability.
• Corporations are required to make periodic tax payments.
• Differences can occur between taxable income (tax law) and accounting income (GAAP).
• The amount of income taxes payable may differ substantially from the income tax expense reported on financial statements due to these differences.

Employee-Related Liabilities

• Amounts owed to employees for salaries or wages are reported as a current liability.
• Current liabilities related to employee compensation include payroll deductions, compensated absences, and bonuses.

Payroll Deductions

• Payroll deductions include taxes, insurance premiums, employee savings, and union dues.

Social Security Taxes (since January 1, 1937)

• Federal Old Age, Survivor, and Disability Insurance (OASDI) provides benefits for individuals and their families.
• Taxes are levied on both the employer and employee.
• The current rate is 6.2 percent on the employee's gross pay up to a $118,500 annual limit.
• OASDI tax is commonly referred to as FICA (Federal Insurance Contribution Act).
• In 1965, Congress introduced Medicare, a federal health insurance program for the aged.
• Hospital Insurance tax, paid by both employee and employer, is 1.45 percent of the employee's total compensation.
• OASDI (FICA) and federal Hospital Insurance Tax are known as Social Security tax.

Unemployment Taxes

• Unemployment Taxes provide a system of unemployment insurance.
• Only employers pay the unemployment tax.
• The rate is 6.2 percent on the first $7,000 of compensation paid to each employee during the calendar year under FUTA (Federal Unemployment Tax Act).
• Employers subject to a state unemployment tax of 5.4 percent or more receive a tax credit (up to 5.4 percent) and pay only 0.8 percent tax to the federal government.
• State unemployment compensation laws differ from federal law and among states, with employers needing to consult laws in each state where they pay wages/salaries.

Income Tax Withholding

• Federal and some state income tax laws require employers to withhold income tax from each employee's pay based on their wages.
• Employers report Income Tax Withholding, FICA taxes which are employee share, and Union dues as liabilities until remitted.
• FICA taxes which are employer share, Federal unemployment and State unemployment are paid by the employer.
• Illustration: A weekly payroll of $10,000 subject to FICA and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with $1,320 income tax withholding, and $88 union dues results in Salaries and Wages Expense of $10,000, Withholding Taxes Payable of $1,320, FICA Taxes Payable of $765, Union Dues Payable $88 and Cash of $7,827.

Compensated Absences

• Compensated absences include paid time off for vacation, illness, and holidays.

Bonus Agreements

• Payment to employees in addition to regular salaries or wages.
• Bonuses paid are an operating expense.
• Unpaid bonuses should be reported as a current liability.

Current Maturities of Long-Term Debt

• This includes the portion of bonds, mortgage notes, and other long-term debt that matures within the next fiscal year.
• Exclude long-term debts maturing if they are to be retired by accumulated assets, refinanced, or converted into capital stock.

Short-Term Obligations Expected to Be Refinanced

• Short-term obligations are debts scheduled to mature within one year after a company's balance sheet date or its operating cycle, whichever is longer.
• Short-term obligations expected to be refinanced on a long-term basis are those that will not require the use of working capital during the next year.
• Short-term obligations can be excluded from current liabilities if there is intent to refinance on a long-term basis and demonstrated ability to refinance.
• Ability to refinance can be demonstrated through actual refinancing or entering a financing agreement.