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Recording the withholding tax

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.

 

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2. Add a bank account and name it as Dummy Account.

 

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3. Create a regular invoice of $2000.00.

 

4. Receive payment of $1960.00 (excluding the Withholding Tax of $40.00 at 2% of $2000.00).

 

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5. To balance it out, receive $40.00 in Dummy Account.

 

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6. Create a Manual Voucher.

  

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

 

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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 accountWithholding Tax Payable as Current Liability.

 

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2. Add a bank account and you can name it Dummy Account.

 

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3. Create a regular bill of $2000.00.

 

4. Make payment of $1960.00 (excluding Withholding Tax of $40.00 at 2% of $2000.00).

 

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5. To balance it out, pay $40.00 from Dummy Account.

 

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6. Create a Manual Voucher to record the withholding tax payable in the system.

  

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

 

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