Are taxes a business expense?

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Recording Taxes in QuickBooks

Taxes can be a tricky subject, especially when it comes to figuring out how to handle them in QuickBooks. When are taxes a business expense? In this article I’ll break it down for you in plain and simple terms, focusing on sales tax, payroll taxes, and other tax payments, so you can keep your financial records in tip-top shape.

  1. Sales Tax. When your business collects sales tax from customers, payment of those taxes to the taxing authority are not a business expense. When the customer pays you, the sales tax is set aside in a special liability account called something like “Sales Tax Liability”. This keeps it separate from your regular revenues and expenses, making it easier to track and pay to the taxman when the time comes. So, when you do send off that sales tax to the taxing authority, the payment gets recorded in the same sales tax liability account.
  2. Payroll Taxes. These are the taxes that get taken out of your employees’ paychecks, like Federal income tax and Social Security, and Medicare. When it comes to accounting for these taxes, we divide them into two categories: (1) Taxes you pay on behalf of your employees and (2) taxes you pay directly as the employer. The taxes you withhold from your employees’ paychecks are treated just like sales tax – they go into a payroll tax liability account. This keeps track of what you owe and what you’ve already paid to the tax folks. But the taxes you pay directly, like your share of Social Security, get recorded as a payroll tax expense. This way, they show up as a regular business expense on your financial statements, and reduce the business profit you have to pay tax on later.
  3. Other Taxes and Expenses. Aside from sales and payroll taxes, there are other tax-related expenses you might encounter, like business license fees and annual filing fees for the business. We lump all of these together into a “catch-all” tax expense account.

And finally, what about paying your personal income taxes from your business account? Yep, totally doable! But here’s the thing – when you do, it’s not considered a business expense. Instead, it’s categorized as an owner’s draw. Think of it as dipping into your business profits for your personal taxes.

Now, the way you handle personal income taxes from your business account depends on what type of business you have. If you’re a sole proprietor, LLC, partnership, or S Corporation, your business profits flow through to your personal tax return. That’s why any personal income taxes you pay from your business account are treated as owner’s draws. But if you’re a big-shot C Corporation, your business pays its own taxes separate from your personal taxes. In other words, your company is the one footing the bill for its own taxes. (Stockholders in your corporation pay personal income tax on any dividends they receive on their stock, and that’s where the phrase “double taxation” applies, which is a different topic.)

And there you have it – the lowdown on recording taxes in QuickBooks. By keeping things organized and following these simple guidelines, you’ll be well on your way to making sure you remit or pay all the taxes you owe, so you don’t run into difficulties later with any local, state, or Federal governments.

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Gwen Harrison President

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