Withholding Tax, also known as Retention Tax, is a tax withheld by the payer from a payment. It could be from salaries, dividends or any other income. Eventually, this tax is passed on to the government. There could be two scenarios here:

 

Recording a withholding tax from the income

Recording a withholding tax from an expense

 

 

Recording withholding tax from income

Say, Paula's Pies provided services to a customer, Dancing Stars, and charged $2000.00. While making the payment, customer deducted Withholding Tax at 2% and made the payment of $1960.00.

 

To record the withholding tax, Paula's Pies has to take the following steps:

 

1. Add a chart of account, Withholding Tax Receivable as Current Asset.

 

 

 

2. Create a regular invoice. In the first line item, enter $2000.00 and assign income type of chart of account.

 

3. Add a second line item to record Withholding Tax of -$40.00 and assign Withholding Tax Receivable chart of account.

 

 

 

 

4. Approve the invoice of $1960.00.

 

5. Receive payment of $1960.00.

 

 

 

 

6. When filing taxes, create another Manual Journal Voucher. This will clear out the amount under Withholding Tax Receivable.

 

 

 

 

Recording withholding tax on an expense

Let's say Paula's Pies received a bill of $2000.00 from one of its vendors and paid $1960.00 after deducting 2% withholding tax.

 

To record the withholding tax, Paula's Pies has to take the following steps:

 

1. Add a chart of account, Withholding Tax Payable as Current Liability.

 

 

 

2. Create a regular bill of $2000.00 and assign expense type of chart of account in the first line item.

 

3. Add a second line item to record withholding tax amount of -$40.00. Select Withholding Tax Payable.

 

 

 

4. Approve the bill of $1960.00.

 

5. Make payment of $1960.00.

 

 

 

6. When filing taxes, create another Manual Voucher and debit the Withholding Tax Payable Account. This will balance the amount under Withholding Tax Payable.