How to Calculate Taxes Payable

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Every company and business must pay its share of taxes if it is in business to make a profit. The amount of tax the business must pay depends on several factors, but ultimately it is a percentage of net income. Net income can be adjusted and manipulated downward by tax credits and write downs such as depreciation. Interest is also tax-deductible. Taxes payable is an estimate of the total taxes a company must pay on net income. It is listed on the net income statement as a provision for income taxes.

  • Gather your data. You will need to obtain total sales, the cost of goods sold, operating expenses, any amount paid toward interest on debt and the historical tax rate. You can find this information by requesting the chart of accounts from your accountant or financial analyst.

  • Subtract the cost of goods sold from sales. This is referred to as gross profit. Assume sales are $100,000 and the cost of goods sold is $20,000. The gross profit is $80,000.

  • Calculate operating profit. Subtract operating expenses from gross profit. If operating expenses are $10,000, operating profit is $70,000.

  • Subtract interest expense. The IRS allows companies to deduct interest expense from net income before calculating taxes payable. If interest expense is $5,000, the total net income before taxes is $65,000.

  • Calculate taxes payable. Multiply the historical tax rate by the total net income. If the historical tax rate is 30 percent, then taxes payable for this example is $19,500.

Tips & Warnings

  • Always consult your tax accountant first. There may be additional deductions specific to your tax situation to take advantage of.

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