What Is Income Taxes Payable?
Income taxes payable is a current liability account involving money that an employer has deducted from an employee's paycheck. This money is held by the employer, then submitted to the proper governmental agency. The area of income taxes, involving all levels of government, is highly regulated with strict guidelines.
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Facts
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Every employer involved in an employer-employee relationship will have income taxes payable. Income taxes payable are withheld from the employee's paycheck by the employer. The payables are considered a liability since the firm is holding onto these funds until they are submitted to the appropriate governmental agency. The firm is acting as a collection agency for the governmental agency. Employers are required to maintain a fiduciary trust relationship regarding these funds.
Identification
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Income taxes payable are easily identifiable. On the balance sheet, they will be classified as a current liability since they are expected to be paid within the current operating cycle. On the Income Statement, they will be identified as payroll tax expense. The income taxes payable come in different forms, depending upon the governmental agency they apply to. There are federal, state and local income taxes that must be accounted for. On an employee's paycheck, the amounts will be deducted from the gross pay to arrive at net pay.
Time Frame
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The area of income taxes payable is strictly regulated and controlled by the involved governmental agencies (usually Department of Revenue). The governmental agencies have time frames involving specific filing dates that must be met in order to avoid punitive damages of any kind. The employer's payroll processing period (such as daily, weekly, biweekly or monthly) determines when the taxes will be withheld from the paychecks. Based on the payroll date, governmental agencies will determine what dates the funds are required to be submitted.
Benefits
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By abiding with the stipulated dates set by the governmental agencies to submit the withheld income taxes, the employer can benefit by developing a positive relationship with the entity, sometimes resulting in payer discounts. Employers also benefit by avoiding penalties, interest, late fees and audits. By maintaining a good payroll system, the employer will be complying with IRS regulations. Employees benefit by being able to adjust their exemptions, which affects their income taxes withheld.
Significance
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For successful operations, one needs to be aware of income tax rules affecting the federal, state and local governments where the business is operated. Income taxes are usually the major source of revenue that the government relies upon to operate successfully. Not paying the proper amounts, not meeting tax filing deadlines and avoiding paying income taxes can result in severe repercussions. The most serious repercussion, according to the Internal Revenue Service, is business closure.
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