What Are Taxes Payable? An Accounting Definition

Taxes payable represent a financial concept, specifically a liability that businesses or individuals owe to a taxing authority but have not yet paid. Understanding taxes payable is fundamental for comprehending a company’s financial position and obligations.

What Taxes Payable Mean

Taxes payable are an accrued liability. This liability arises from the timing between when a tax obligation becomes due and when the payment is remitted to the government. For example, a business might earn revenue in one month, incurring a sales tax obligation, but the payment to the tax authority is not due until the following month. This obligation is considered a current liability, meaning it is expected to be paid within one year.

Different Types of Taxes Payable

Several common types of taxes fall under the umbrella of taxes payable for businesses and individuals. Income tax payable originates from a company’s or individual’s taxable income, representing the portion of earnings owed to federal, state, and local governments. This obligation accrues as income is earned throughout an accounting period. Sales tax payable refers to taxes collected from customers on sales of goods or services. Businesses act as intermediaries, collecting these taxes and then remitting them to the appropriate governmental body.

Payroll tax payable includes both the employer’s portion and the employee’s portion withheld from wages. The employer’s share includes contributions for Social Security and Medicare (FICA taxes), as well as federal and state unemployment taxes. The employee’s portion, which the employer withholds from their pay, includes federal income tax, state income tax, and their share of Social Security and Medicare taxes. Employers must remit these withheld amounts, along with their own contributions, to the respective tax authorities by specific due dates.

Reporting Taxes Payable

Taxes payable are reported on a company’s balance sheet. They are listed under the current liabilities section. This classification indicates that these tax obligations are expected to be settled within one year from the balance sheet date. The presence of taxes payable on the balance sheet reflects a company’s short-term financial commitments to various taxing authorities.

How Taxes Payable are Settled

The settlement of taxes payable involves payment of the owed amounts to the relevant taxing authority. Once the payment is made, the liability is extinguished, and the taxes payable account on the balance sheet is reduced. This process results in a cash outflow for the business or individual. For instance, when a company remits its accumulated sales tax collections to the state, the sales tax payable liability is removed.