What Is Income Tax Payable?
"Income tax payable" is a liability reported for financial accounting purposes that indicates
the amount that an organization expects to pay in income taxes within 12 months. It is reported in the current liabilities section of a company's balance sheet.
The calculation of income tax payable is determined in accordance with generally accepted accounting principles (GAAP), taking into account the tax rates in the laws of the jurisdictions where the organization is subject to tax. United States taxpayers are subject to federal, state, and local tax laws as well as the tax laws of any other countries where they operate and realize income.
- The rules for determining the amount of taxes owed government tax authorities for a year and the financial accounting rules for reporting taxes on financial statements differ.
- For US companies, the taxes reflected on financial statements include federal, state and local taxes as well as taxes imposed by other jurisdictions where the companies operate and realize income.
- Income tax payable is the financial accounting term for a current tax liability reported on a company's balance sheet.
- The balance-sheet amount for income tax payable equals the amount of taxes due to be paid to government tax agencies within 12 months.
- Income taxes to be paid in a future year are reported on the balance sheet as deferred income tax liabilities.
Understanding Income Tax Payable
Generally, the taxes owed under applicable tax laws for most events reported in the
financial statements for a year are included in the amount reported as income tax payable on an organization’s balance sheet. Income tax payable is shown as a current liability to the extent of the amount that will be resolved, i.e., paid, within 12 months. Tax liabilities that have accrued in
a year, but whose payment is due in a later year, are shown on a balance sheet as deferred income tax liabilities.
Some rules in the generally accepted accounting principles (GAAP) that govern financial accounting for an event producing income or loss differ from the tax-law requirements for reporting the same event on tax returns. The two systems' different depreciation and amortization rules are common causes of timing differences. These differences in reporting for the two systems—particularly with respect to the timing of tax liabilities — are reflected on an organization’s financial statements.
For example, the total US tax liability for a 2022 event resulting in income of $300, determined using the 2022 corporate federal income tax rate of 21%, is $63. GAAP generally provides that 100% of the $300 in income from an event, as well as the total corporate tax liability of $63, must be recognized in the organization’s income statement for the year when the event occurred, i.e., 2022.
The tax law, however, may spread recognition of income or a tax liability, over, say, three years. This timing difference will be reflected in the financial statements. For the example, if $300 of GAAP income for 2022 is spread over three years for tax purposes, the 2022 balance sheet will treat the taxes due the IRS for 2022 as a current liability, i.e., a current income tax payable of $21. The remaining amount due the IRS in the future will be reported as a deferred tax liability of $42. Thus, a deferred tax liability arises when there is a difference between the current income tax liability reported on an organization’s balance sheet and the income tax expense reported on its income statement.
Income Tax Payable vs. Income Tax Expense
Balance sheets report the actual amount of taxes owed to the IRS, categorized either as
current tax liabilities, i.e., income tax payable, or deferred income tax liabilities, which are noncurrent, longer-term liabilities. However, income tax expense is reported on an organization’s income statements. This amount usually appears as the last expense item and is a deduction taken from pre-tax profit in determining net income, or profit. For a US corporate taxpayer, GAAP determines the amount of income tax expense for financial reporting purposes by applying the current corporate tax rate, 21% in 2022, to the amount designated as profit before income taxes on the income statement.
Taxes other than income taxes, such as payroll taxes, property taxes, and sales taxes, may
be identified on financial statements as separate tax categories. Or, they may be included in a comprehensive tally of tax expense on an income statement and of tax liabilities on a balance sheet.
Upon completing its federal income tax return, an organization knows the actual amount of taxes owed to the US government with respect to its tax year. The taxes actually owed for the year are reflected as liabilities on the balance sheet as current income tax liabilities. Taxes due in future years are listed as deferred income tax liabilities. If the corporation also owes state, local and foreign income taxes, its balance sheet will reflect those liabilities as well.
What Does the Term Income Tax Payable Mean?
“Income tax payable” is a financial accounting term for the current liability reported on an organization’s balance sheet. It indicates the taxes that the organization expects to pay within 12 months.
What Does Income Tax Expense Represent?
“Income tax expense” is the financial accounting term for the taxes that an organization
owes with respect to its pre-tax profit. The amount is determined in accordance with GAAP by applying to the organization’s pre-tax profit the tax rate applicable under relevant laws. It appears on an organization’s income statement.
Why Do Taxes Owed to the IRS and Tax Amounts on Financial Statements Differ?
The rules determining these amounts and their purposes differ. The amount of taxes to be paid to the IRS (or to the appropriate state, local or foreign tax agency) is determined by the tax laws applicable to a taxpayer’s income. These actual tax liabilities are determined annually.
The tax amounts reported on financial statements are determined in accordance with GAAP. On an income statement, they constitute an expense in the calculation of profit or loss for a specific period. On balance sheets, the tax amounts indicate liabilities that affect the organization’s value. Taxes due within 12 months are current liabilities and are designated as income tax payable; taxes to be paid in the later periods are designated as deferred tax liabilities.
The Bottom Line
Financial accounting rules for reporting tax liabilities and the tax code’s rules for determining the amount of taxes actually owed to the IRS with respect to the same event can differ. GAAP accounting principles and the US tax code do not treat all items in the same way in calculating the tax amounts reported on financial statements and the tax liabilities reported on tax returns, respectively. Accordingly, the amount of taxes owed on an organization’s tax return may not match the tax expense on its income statement. Moreover, for financial statements, the variation in the accounting rules and purposes for determining tax expense and tax liabilities can result in differences in those amounts on income statements and balance sheets.
"Income tax payable" refers specifically to an amount reported on financial statements: a liability reported in the current liabilities section of a company's balance sheet that indicates the amount that an organization expects to pay in income taxes within 12 months.