- Withholding Tax in the Australian version — Business Central
- WHT for Suppliers Without an ABN
- WHT for Foreign Suppliers
- See Also
- Withholding Tax
- Basic Instructions for Household Employers
- How to File and Pay
- Qualified Employers and Employees
- Who Should Register
- Filing and Payment
- Withholding tax (налог у источника) в международном IT бизнесе
- Получаете доход от иностранной компании? Как правильно это сделать.
- Для каждого вида дохода свои правила игры.
- А как же избежание двойного налогообложения?
- Что такое роялти?
- Какие же тонкости налогообложенияwithholding tax роялти?
- Withholding Tax (Meaning, Types) | Step by Step Calculation
- #1 – Withholding Tax on Payments to Foreign Persons
- #2 – Wages Withholding tax
- #3 – Backup Withholding on Dividends and Interest
- How to Calculate Withholding Tax?
- Why is Withholding Tax Charged?
- Difference between the Withholding Tax and Tax Deducted at Source (TDS)
- Withholding Tax Rates
- Recommended Articles
- How FICA Tax and Tax Withholding Work in 2020
- What is FICA tax?
- What is tax withholding?
- What are these other payroll taxes I hear about?
- How does my employer calculate my FICA or withholding tax?
- Why do I have to pay FICA tax?
- Why you really need to manage your withholding tax
- Account for withholding tax (tax withheld at source)
- Sales invoice process
- Purchase invoice process
Withholding Tax in the Australian version — Business Central
- Чтение занимает 2 мин
Withholding Tax (WHT) is tax withheld by a company when making a payment to a vendor, in which the full amount owed to that vendor is reduced by the tax withheld. The withheld tax is then remitted to the Australian Taxation Office (ATO) during the next Business Activity Statement (BAS) submission.
The Australian government requires taxes to be withheld from payment to vendors under the following circumstances:
- The vendor is a local supplier who has not supplied an Australian Business Number (ABN) before the payment is processed, and the individual transaction amount is greater than the specified threshold amount.
- The vendor is a nonresident supplier, and the payment is to be made to this nonresident entity in the form of interest, royalty, or dividend payments. Currently, there is no minimum threshold amount. Withholding rates can vary due to payment or international tax treaties existing between Australia and the vendor's country.
Fields within WHT Business Posting Groups and WHT Product Posting Groups must be set up on the WHT Posting Setup page so that the correct WHT calculations are made for each vendor.
- WHT Calculation Rule – This field controls how calculation applies to the WHT Minimum Invoice Amount, or the invoice threshold amount. The following options exist:
- Less than
- Less than or equal to
- Equal to
- Greater than
- Greater than or equal to
In Australia, WHT is not calculated if the individual invoice amount is less than or equal to the threshold amount. Australian companies should select Less than or equal to.
- WHT Minimum Invoice Amount – Enter the invoice threshold amount.
- WHT % – Enter the relevant WHT rate for the particular combination of WHT Business Posting Group and WHT Product Posting Group. If you do not want to calculate any withholding amount, enter 0.00.
- Realized WHT Type – Select Payment to calculate only the withholding amount at the time of payment. The other options of Invoice and Earliest do not apply to Australia.
- Payable WHT Account Code – Enter the number of the G/L account to which you want to post Purchase WHT for the particular combination of WHT Business Posting Group and WHT Product Posting Group.
- Purch. WHT Adjustment Account No. – Select an account number for Purchase CR/Adj Note adjustments.
- Revenue Types – Drill down to the WHT Revenue Types page. These values determine how the combination of WHT Business Posting Group and WHT Product Posting Group are displayed in reports. You must enter a value in order for this combination to appear in the WHT reports.
WHT for Suppliers Without an ABN
Ensure that there is a valid combination of General Business and General Product Posting Groups with the correct threshold. For example, in Australia today the minimum threshold is $75 with a rate of 46.50%.
The percentage withheld is specified in WHT Posting Setup. The amount to be withheld is calculated automatically at the time of payment. The WHT certificate is printed automatically, and then sent to the vendor with payment. The WHT certificate explains the reasons for not sending the full invoiced amount.
WHT for Foreign Suppliers
Ensure that a valid combination of General Business and General Product PostingGroups has been established for vendors for whom you need to withhold tax, other than for non-ABN.
Set Up Withholding Tax
Set Up Vendors Without ABN for Calculating the Withholding Tax
Set Up Revenue Types for Withholding Tax
Calculate and Post Withholding Tax Settlements
View Withholding Tax Entries
Australia Local Functionality
Employers of certain household employees have the option of reporting and paying the Virginia income tax withheld from those employees on an annual basis. For the employer to qualify, the employment must consist exclusively of domestic service in the private home of the employer, as defined in the Federal Employment Tax Regulations.
The annual filing provision is a filing option for qualified employers. It does not establish a new requirement for withholding. Un the federal «nanny tax,» the Virginia household employer's withholding tax is filed on a separate return, and is not included in the employer's personal income tax filing.
If you choose to register for this annual filing option, you will be required to file Form VA-6H, the Virginia Household Employer's Annual Summary of Income Tax Withheld, by Jan. 31 each year to report and pay the Virginia income tax withheld for the preceding calendar year.
You must file Form VA-6H online, either through your online services account or through eForms.
Basic Instructions for Household Employers
Before you begin, make sure you are liable to withhold Virginia income tax from the wages of your household employee(s). If the wages are not subject to federal withholding, they are not subject to Virginia withholding.
Complete instructions for withholding Virginia income tax from wages, salaries, and other payments are contained in the Virginia Employer Withholding Instructions. Information on corresponding federal requirements is available from the IRS, and unemployment tax information, including an annual filing option, is provided by the Virginia Employment Commission.
To register for a household employer's withholding tax account, complete Form R-1H, or register online.
If you are already filing for a domestic employee under a regular quarterly or monthly withholding tax account, be sure to close that account when you register for your new household employer's account, and request that any payments made for the current year be transferred to the new account. For assistance, contact us at 804.367.8037.
Once you register for a household employer's withholding tax account, you must file a Form VA-6H for each year that you keep the account open, even if you have no tax to report. Failure to file could result in penalties of up to 30% of the tax due.
How to File and Pay
Form VA-6H must be filed by Jan. 31 each year, with copies of each W-2 issued to a household employee during the previous calendar year and payment for the tax due.
To file W-2 information and pay the tax due, file Form VA-6H through your online services account.
If you don't have an account, you can file using eForms:
To compute the withholding tax, use the Virginia Employer Withholding Tables.
Qualified Employers and Employees
What is a household employer? What does it mean to have household employer status?
A household employer is an individual who employs 1 or more people solely for the purpose of domestic service in the home of the employer.
For Virginia purposes, «household employer status» means that you meet this requirement and have registered for a Virginia household employer's withholding tax account.
This registration allows you to file your withholding tax on an annual basis, rather than using the quarterly or monthly filing status required for most other employers.
How do I know if an employee qualifies as a household employee?
The employee must be classified as an employee performing domestic service under federal definitions. This category includes employees such as nannies, babysitters, housekeepers, gardeners, elder-care workers, in-home nursing care providers, and others who provide domestic services. For details, refer to the Federal Employment Tax Regulations, which are available at www.irs.gov.
If I have a household employee and other business employees, can I include tax for all of them on my annual Virginia Household Employer's return?
No. You must report information on non-household employees under a separate withholding tax account for your business.
I have a small business that I run from my home with only 1 or 2 employees. Can I sign up for household employer status?
No. The household employer annual filing option is available only to employers whose employees provide domestic service in the home. You should register for an employer withholding tax account to report the taxes for your business employees.
Who Should Register
Federal law allows me to file my «nanny tax» on an annual basis, and I would to do that for Virginia. Should I register for a household employer's withholding account?
As long as you meet the federal requirements, you may register as a household employer for Virginia purposes. Keep in mind, however, that the reporting and payment is done on a separate return, Form VA-6H.
I just hired a nanny. Do I have to register for a household employer's withholding tax account?
Not necessarily. As described under Basic Instructions for Household Employers, you need to determine whether you are required to withhold Virginia income tax from your employee's wages.
If withholding is required, you may register for a household employer's account, which allows you to file annually, or you may register for an employer withholding tax account, which will require quarterly filing.
I have a gardener who has always handled his own taxes, because the wage amounts are too low for withholding to be required. Do I need to sign up for a household employer's account?
No. You don't need to register for an account unless you are actually required to withhold Virginia income tax from your employee's wages.
I already file withholding taxes for my household employees on a quarterly basis, and I prefer to keep my books that way. Am I required to register for a household employer's account?
No. The household employer status offers an annual filing option for qualifying employers. You may continue to file on a quarterly basis under your existing account.
Filing and Payment
How do I file and pay the tax due for my household employees?
You may file Form VA-6H through your online services account to report the tax due and remit your tax payment, as well as copies of the W-2s for your employees. You can also file using eForms.
When are the return and payment due?
Form VA-6H must be filed online by Jan. 31 of each year, along with payment for the tax due and copies of any W-2s issued to your household employees for the preceding year.
Can I report and pay the tax due with my individual income tax return?
No. You must make a separate filing on Form VA-6-H by Jan. 31.
I registered for a household employer withholding tax account, but I didn't have any employees this year. Do I still need to file a return?
Yes. You will still need to file your annual return, Form VA-6H, by Jan. 31. If you don't anticipate hiring household employees in the future, you should request that your account be closed. Otherwise, you will need to file annual returns as long as the account remains open.
What should I do if I stop having employees during the year?
You will still need to file your annual return, Form VA-6H, by Jan. 31 of the following year, along with copies of the W-2s issued to your employees. If you don't anticipate hiring household employees in the future, you should request that your account be closed. Otherwise, you will need to file annual returns as long as the account remains open.
What will happen if I file Form VA-6H or pay the tax due after Jan. 31?
Late filing or late payment of the tax may result in the assessment of penalties and interest. The minimum penalty is $10, and the maximum penalty is 30% of the tax due. Interest accrues on the tax due until the tax is paid.
Can payroll service providers file the annual returns (Form VA-6H) for household employers?
Yes. The service providers need to be sure to reference the proper account number, particularly the suffix. Although many accounts will carry a suffix of F001, this will not always be the case.
For example, if you have accounts for both business and household employees, or if you switched to the annual filing status from a previously existing quarterly account, your household employer account may carry a suffix of F002, F003, etc. It is important to use the correct suffix to make sure that payments are applied correctly.
To avoid errors, check both the name and the account number of the return being submitted. For faster processing, the provider may wish to use our Web Upload service.
Withholding tax (налог у источника) в международном IT бизнесе
У этого налога много имен – подоходный налог нерезидентов, налог у источника, налог на репатриацию.
Получаете доход от иностранной компании? Как правильно это сделать.
При работе с иностранным заказчиком, вне зависимости от страны, всегда есть обязанность уплаты налогов. Получаете доход, будьте добры, — заплатите налоги. Как это правильно сделать чтобы в итоге не остаться в убытке? Банковские комиссии, агентские вознаграждения, налоги и платежи – все необходимо учесть.
Foreign withholding tax – маленькая деталь, которая может «съесть» около 30% от Вашего дохода.
Перечень доходов, которые подлежат обложению данным налогом, ставки и ограничения прописаны в национальном законодательстве каждой из стран и в международных договорах об избежании двойного налогообложения (Double taxation treaties).
Международные договоры об избежании двойного налогообложения хоть и не одинаковы, но имеют схожую структуру и правовую природу.
Если вы работаете directly с заказчиком IT-услуг, не пугайтесь если вас попросят предоставить справку из налоговой вашей страны с подтверждением того, что ваша компания – честный налогоплательщик, который обязательно уплатит все необходимые налоги.
Прибыль от коммерческой деятельности – активный доход в данном случае, налогооблагается только в государстве, резидентом которой является получатель прибыли.
Такое государство, накладывает неограниченное налоговое обязательство – «полную налоговую ответственность» по всем доходам из всех источников, включая и зарубежные.
То есть withholding tax в таком случае не удерживается в стране-источнике дохода, но вам все равно придется заплатить все налоги и сборы согласно ставкам вашей страны в зависимости от системы налогообложения.
Для каждого вида дохода свои правила игры.
IT-сфера всегда в поисках новых рынков и выгодных условий. Ведение IT-бизнеса в Европе или США из Украины давно уже стало обыденностью. Правила налогообложения withholding tax в таком случае будут отличаться, поскольку тут возникают пассивные доходы в виде процентов, дивидендов или роялти.
Возьмем, например, компанию типа C-corporation, зарегистрированную в США с 2-мя акционерами-резидентами Украины.
Компания успешна, по результатам отчетного года получила прибыль, заплатила все необходимые налоги и на общем собрании акционеров было принято решение распределить данную прибыль в виде дивидендов.
Согласно законодательству США, выплата дивидендов лицам, не являющимся гражданами США, рассматривается как налогооблагаемый доход из источника в США и облагается withholding tax в размере 30%.
Тут в игру вступает Конвенция, подписанная Правительством Украины и Правительством США об избежании двойного налогообложения и предотвращении налоговых уклонений относительно налогов на доходы и имущество.
В ней сказано, что при выплате дивидендов налогооблагать такие доходы имеет право, как страна резидентом которой является фактический получатель дивидендов, так и страна, в которой этот доход возник.
Такое право страны-источника дохода ограничено конкретными ставками.
Например, правительство США должно удерживать withholding tax по ставке не более чем 15% из дивидендов, выплачиваемых американской компанией украинцу-акционеру.
Правительство Украины, в свою очередь, в нашем примере имеет право применить ставку налога на доходы физических лиц в 9% + военный сбор в 1,5%.
После подсчета – 15% в США против 10,5% в Украине, кажется, что выгоднее заплатить в Украине и даже сэкономить 4,5%.
Но, права выбора, в какой из стран выгоднее или удобнее платить налоги, у налогоплатещика, к сожалению, нет.
Обе страны, как США, так и Украина, имеют право налогооблагать такой вид дохода.
А как же избежание двойного налогообложения?
Избежание двойного налогообложения состоит в том, что страна, в которой акционер является резидентом (Украина) имеет право на налогообложение таких дивидендов с учетом налога, уплаченного в стране, которая является источником дохода (США).
То есть можно сделать «взаимозачет» налогов? Можно, но для этого нужно приложить немного усилий и учесть нюансы:
- Для получения права на зачисление налогов и сборов, уплаченных за пределами Украины, необходимо получить от государственного органа страны-источника дохода оформленную должным образом справку о сумме уплаченного налога, а также о базе налогообложения;
- В Украине Конвенция распространяется на налог на прибыль предприятий и налог на доходы физических лиц. Если withholding tax и налог на доходы физических лиц идентичны по своей сути и здесь возможен «взаимозачет», то с военным сбором это правило не работает.
Таким образом, у акционера-резидента Украины на этапе выплаты ему дивидендов с C-corporation, зарегистрированной в США возникает следующая структура налогообложения:
- на уровне компании налогооблагатеся прибыль по ставке 21%;
- в момент выплаты компанией дивидендов физическому лицу-нерезиденту налоговый агент (С-corporation) удерживает 15% withholding tax. На этом этапе акционер должен позаботиться о получении справки о сумме удержанного налога и базе налогообложения;
- в Украине у такого акционера в любом случае остается обязанность подать годовую налоговую декларацию об имущественном состоянии и доходах, приложить с полученную справку об уже уплаченных налогах в США, а также доплатить в бюджет Украины военный сбор по ставке 1,5%.
Если на первый уровень налогообложения повлиять вы не сможете, то на втором и третьем уровне в зависимости от условий международных договоров вы имеете право не платить дважды.
Давайте рассмотрим еще один пример налогообложения withholding tax пассивных доходов.
Вы являетесь автором-разработчиком компьютерной игры. Уже знаете дату выпуска, но до сих пор не разобрались с юридическими тонкостями работы с платформами.
Перечитали контракт и обнаружили, что платформа выплачивает доход в виде роялти.
Что такое роялти?
Какие же тонкости налогообложения withholding tax роялти?
В нашем случае автором-разработчиком является физическое лицо-резидент Украины.
А платформа которая будет выплачивать роялти, зарегистрирована, например, во Франции.
Во Франции ставка withholding tax для роялти составляет 33,33%.
Но, как мы знаем нужно обязательно проверить действует (подписана) ли Конвенция об избежании двойного налогообложения и предотвращении налоговых уклонений относительно налогов на доходы и имущество между страной-источником дохода и страной, резидентом которой является получатель такого дохода.
Между Правительством Украины и Правительством Французской республики такая Конвенция подписана и действует.
Так, статьей 12 данной Конвенции предусмотрено, что роялти могут облагаться налогом в стране, резидентом которой является получатель такого дохода, так и в стране возникновения такого дохода.
Ставка налога withholding tax, которая может быть взыскана во Франции с роялти не может превышать 10%.
В Украине такие доходы подлежат налогообложению по ставкам налога на доходы физических лиц — 18% и военного сбора — 1,5%.
Как превратить 33,33% в 10% и какой порядок действий автора-разработчика компьютерной игры:
- скорее всего платформа потребует от Вас заполнения документов, которые подтверждают, что Вы являетесь резидентом Украины и, соответственно, имеете право на применение пониженной ставки в 10% вместо 33,33%;
- после выплаты Вам дохода наступает Ваша очередь просить платформу помощи в оформлении справки удержанного во Франции withholding tax и базы налогообложения;
- важный этап — заполнение годовой налоговой декларации и уплата налогов в Украине.
Поскольку налогооблагать доходы в виде роялти могут и тут, и там, то при наличии справки об уплаченных 10% withholding tax во Франции, к оплате в бюджет Украины подлежит 9,5% налогов (8% доплата по налогу на доходы физических лиц и 1,5% военный сбор).
Важно понимать, что порядок налогообложения роялти может отличаться, поскольку у игры может быть несколько авторов, доходы может получать как ООО, так и ФЛП.
При общем расчете налоговой нагрузки обязательно нужно учитывать систему налогообложения и наличия, например, постоянного представительства Вашей компании в другой стране.
Кроме этого, Конвенциями предусматривается особый порядок для налогообложения доходов от эксплуатации недвижимого имущества, международного транспорта, доходов от отчуждения имущества, независимых и зависимых личных услуг и многого другого интересного.
Очень многое зависит от договоренностей двух стран – страны-источника дохода и страны – резидента-получателя дохода. Ставки налогообложения для каждого из вида доходов установлены в конкретной Конвенции.
Платить налоги – обязанность, не переплачивать – право.
Но не забывайте, каждая операция, выплата и транзакция – индивидуальна и эта статья не является налоговой консультацией.
Мы с радостью поможем Вам разобраться с withholding tax в Вашем кейсе.
Withholding Tax (Meaning, Types) | Step by Step Calculation
Withholding tax, also known as retention tax, is the tax usually deducted at source on income by the payer including people resident of another country, on an employee of the domestic company as well as on interest income and dividend income as per the tax laws of the country charging withholding tax and remitted to the government of the country.
- From the above definition, it is clear that retention tax is a tax deducted at source on interest, dividend and other income of the recipient by the payer of such income and then remitted to the government directly.
- Further, the receiver on which it is applied can be a person, either Resident or Non-resident of that country. For the purpose of residential status, the country’s tax norms are taken into consideration. Also, retention tax is deducted from the income having its source in the deducting country itself.
Following are the various types of withholding tax imposed on numerous persons as per the tax norms of country charging such tax:
#1 – Withholding Tax on Payments to Foreign Persons
- Retention taxes on the income of the foreign person is deducted at source at a fixed rate of 30% on the Gross amount of income.
- These are the retention taxes which are deducted at source by the federal government of the USA on the foreign person on their certain kinds of receipts.
- Also, partnership firms pay the taxes off on the incomes earned by the foreign partners from the partnership firms.
- Interest income of the non-residents, dividends from domestic companies, and compensation for services, rent receipts, royalties, and annuities are certain kinds of payments that are subject to withholding taxes on the non-residents of the country deducting the retention taxes.
#2 – Wages Withholding tax
- Wages withholding taxes are the graduated tax rates, and hence higher wages will be liable for higher withholding taxes. In contrast, the lower retention tax will be responsible for lower withholding tax, and therefore there is fair treatment of every class of employees.
- The employers are deducting it on the salary and wages of the employee.
- Further, there are withholding allowances on the retention taxes are a part of the calculation of retention taxes since the withholding allowances are the tax exemptions on withheld no retention taxes are deducted.
#3 – Backup Withholding on Dividends and Interest
- Backup withholding taxes, as the name suggests, are deducted on the dividend and interest of the recipient.
- Here, federal income tax is being deducted at source on such interest dividends and other kinds of incomes at the time of payment to the stocks and other instrument holders.
- Applicability: Backup retention taxes are applied if the recipient is a foreign person as well as either the person does not provide the Tax Identification Number under form W9, or the person has been notified by the Indian revenue service as the person on whole retention tax is required to be deducted.
How to Calculate Withholding Tax?
These are calculated and deducted two things, the amount of income earned and the details provided by the employee to the employer in term W-4.
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For each category of recipients, it is calculated differently. For example, the retention tax on wages is calculated as per the withholding table and publication 15. In contrast, retention tax on an individual is calculated on various regular income as well as lottery, betting, etc. using the withholding estimator and expected income.
Suppose Mr. X earns a salary of $ 36,000 per year. With the yearly salary of $ 36,000 his monthly income comes to $ 3,000 ($ 36,000 / 12).
However, a 10% withholding tax is deducted from the same, and hence he takes home only $ 27,000 ($ 30,000 – $ 3,000) and balance $ 3,000 is deducted at source as retention tax.
Why is Withholding Tax Charged?
- The most crucial reason for charging the retention tax is that it relieves a person from paying massive amounts all together in a single month. Hence, it is a type of advance tax that is deducted and paid by the payer to the government every month, etc.
- Thus an insurance policy where a smaller amount is paid periodically for a considerable shelter in the future, retention tax works the same way.
- Also, for the government, it becomes a huge relief since their day to day expenses can be made such periodic payments instead of waiting for so long.
Difference between the Withholding Tax and Tax Deducted at Source (TDS)
There is a thin line difference between withholding tax and tax deducted at source (TDS) where the retention tax term is usually more prevalent in case of country payment or the payment made to non-residents.
The same is the amount that is deducted well in advance by the payer before the actual payment and then deposited to the government as per the due date.
At the same time, tax deducted at source is the amount deducted at the time of making payment and paid to the government on behalf of the deductee.
Withholding Tax Rates
In the United States of America, withholding tax is generally deducted at 30% on various income of non-residents interest, royalty, etc.
Thus most of the payments to foreign persons are deducted @30% with certain exemptions.
But there are specific reduced rates depending upon those exemptions, including exemptions by internal revenue code or the tax treaties between governments of various countries.
Withholding tax is usually deducted at source on income by the payer on various parties including people resident of another country and the same is very important from the perspective of both the government as well as the general public in terms of property tax management and early collection of taxes from residents and non-residents as well as salaried employees.
This article has been a guide to what is withholding tax. Here we discuss the types and how to calculate retention tax along with a practical example. You can learn more about financing from the following articles –
How FICA Tax and Tax Withholding Work in 2020
Payroll taxes, including FICA tax or withholding tax, are what your employer deducts from your pay and sends to the IRS, state or other tax authority on your behalf. Here are the key factors, and why your tax withholding is important to monitor.
What is FICA tax?
FICA tax is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax the IRS imposes on employee earnings. For 2020, only the first $137,700 of earnings is subject to the Social Security part of the tax. A 0.
9% additional Medicare tax may also apply if earnings exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Typically, employers deduct FICA tax from employee paychecks and remit the money to the IRS on behalf of the employee.
FICA stands for Federal Insurance Contributions Act.
|Social Security tax (aka OASDI)||6.2% (only the first $132,900 of earnings in 2019; $137,700 in 2020)||6.2% (only the first $132,900 of earnings in 2019; $137,700 in 2020)|
|0.9% (on earnings over $200,000 for single filers; $250,000 for joint filers)|
What is tax withholding?
Withholding tax is an income tax that a payer (typically an employer) remits to a government on behalf of a payee (typically an employee). The payer deducts the tax from the income due to the payee.
When people talk about “withholding,” they’re often referring to Social Security and Medicare (which together make up FICA tax), plus a few other types of taxes that also might come your pay. Here's a breakdown.
- Social Security: 6.2%. Frequently labeled as OASDI (it stands for old-age, survivors and disability insurance), this tax typically is withheld on the first $137,700 of your wages in 2020. Paying this tax is how you earn credits for Social Security benefits later.
- Medicare: 1.45%. Sometimes referred to as the “hospital insurance tax,” this pays for health insurance for people who are 65 or older, younger people with disabilities and people with certain conditions. Employers typically have to withhold an extra 0.9% on money you earn over $200,000.
- Federal income tax. This is income tax withheld from your pay and sent to the IRS by your employer on your behalf. The amount largely depends on what you put on your W-4.
- State tax: This is income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live and other factors, such as your W-4 (and some states don’t have an income tax).
- Local income or wage tax: Your city or county may also have an income tax. This money might go toward such expenses as the bus system or emergency services.
What are these other payroll taxes I hear about?
- FUTA tax: This stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay it.
- SUTA tax: The same general idea as FUTA, but the money funds a state program. Employers pay the tax.
- Self-employment tax: If you work for yourself, you may also have to pay self-employment taxes, which are essentially extra Social Security and Medicare taxes. That’s because the IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on your net earnings. Typically, employees and their employers split that bill. But self-employed people pay the whole thing. (For 2020, only the first $137,700 of earnings is subject to the Social Security portion.) A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Because you may not be receiving a traditional paycheck, you may need to file estimated quarterly taxes in lieu of withholdings.
|Together known as FICA tax:||Social Security tax (aka OASDI)||6.2% (only the first $137,700 of earnings in 2020)||6.2% (only the first $137,700 of earnings in 2020)|
|0.9% (on earnings over $200,000 for single filers; $250,000 for joint filers)|
|State tax, local income or wage tax|
|Federal unemployment tax (FUTA)|
|State unemployment tax (SUTA)|
How does my employer calculate my FICA or withholding tax?
The amount of tax your employer withholds from your check largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things to know:
- Form W-4 asks about your marital status, dependents and other factors to help you calculate the number of withholding allowances to claim. The more allowances you claim, the less tax will be taken your paycheck.
- What you put on your W-4 then gets funneled through something called withholding tables, which your company’s payroll department uses to calculate exactly how much federal and state income tax to withhold.
Why do I have to pay FICA tax?
Employers have to withhold taxes from employee paychecks because taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible.
Some people are “exempt workers,” which means they elect not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come their checks, though.
Typically, you become exempt from withholding only if two things are true:
- You got a refund of all your federal income tax withheld last year because you had no tax liability.
- You expect the same thing to happen this year.
Why you really need to manage your withholding tax
Remember, one of the big reasons you file a tax return in April is to:
- Calculate the income tax on all of your taxable income for the year.
- See how much of that tax you’ve already paid via withholding tax.
If it turns out you’ve overpaid, you’ll probably get a tax refund. If it turns out you’ve underpaid, you’ll have a tax bill to pay.
If you ended up with a huge tax bill this year and don’t want another, you can use Form W-4 to increase your tax withholding. That’ll help you owe less (or nothing) next April.
If you got a huge tax refund, consider using Form W-4 to reduce your tax withholding. You’re giving the government a free loan and — even worse — you might be needlessly living on less of your paycheck all year.
It may feel great to get a tax refund from the IRS, but think of how life might’ve been last year if you’d had that extra money when you needed it for groceries, overdue bills, getting the car fixed, paying off a credit card or investing.
Account for withholding tax (tax withheld at source)
Some tax authorities require withholding tax (also called tax withheld at the source) to increase tax law compliance and secure earlier receipt of tax revenues.
In simple terms, buyers are required to withhold a portion of the balance due on invoices and pay that portion directly to the tax authority. Then, either the buyer or the tax authority provides certification of payment of withheld amounts to the seller.
The seller reduces subsequent payments of its tax liabilities by amounts already paid on its behalf by buyers.
Withholding tax may be a form of advance payment of income taxes, value added taxes, goods and service taxes, or some combination of these and other types of tax. Because the entire process involves both buyers and sellers, Manager supports withholding tax accounting through both its sales invoice and purchase invoice processes, though procedures are somewhat different.
Sales invoice process
The sales invoice process applies when your business is the seller and you send sales invoices to your customers.
Activating withholding tax accounts
Withholding tax functionality for sales invoices does not require activation of any new tabs. Nor do you need to create any new accounts. All necessary accounts are added automatically to your chart of accounts the first time you check the Deduct withholding tax box on a sales invoice:
Two accounts are created in the Assets group, because the money they represent technically belongs to the business until it is eventually used to pay taxes owed. They are:
- Withholding tax — This account records amounts your customers have paid to the tax authority that are available to offset your tax bill.
- Withholding tax receivable — This account records amounts your customers owe to the tax authority on your behalf but have not yet paid. If withholding tax had not been deducted from sales invoice balances, amounts in this account would be included in Accounts receivable.
Applying withholding tax
When the Deduct withholding tax box is checked on a sales invoice, two options appear in a dropdown box, Rate and Amount:
Because withholding tax is independent of any other tax code that may be applied, percentage amounts are calculated on the total due, including other taxes. (Remember, withholding tax is not an additional tax, only a way for the tax authority to collect prospective taxes earlier.)
Recording customer remittance
When the customer remits the withheld tax, either the customer or the tax authority will send you some form of “proof” of the remittance (a certificate, account statement, voucher, etc.). This “proof” can be recorded in Manager by clicking on the Withholding tax receivable figure in the Customers tab, then on New Receipt:
Enter Date and Amount of the customer’s remittance. A Description is optional:
Click Create to record the transaction. The transaction amount will move from Withholding tax receivable to Withholding tax .
Using Withholding tax to pay tax bill
When a tax filing is made, the balance of Withholding tax is available to offset your tax due. Indicate the amount being applied on the appropriate forms of the tax authority and submit with your filing. This step in the process does not occur in Manager, only in your tax filing.
To record your application of available withholding tax credits in Manager, use a journal entry. Credit Withholding tax and debit either:
- An appropriate expense account, such as Taxes paid, if the tax is an obligation of the business, or
- An equity account, such as Owner’s equity or Capital accounts, depending on your form of organization, if the tax is an obligation of the owner or partners.
Purchase invoice process
The purchase invoice process is simpler, and no automatic accounts are involved, because there is no need to transfer withholding tax amounts between accounts actions outside the company. When your business is a buyer, you need only withhold tax, remit it to the tax authority, and possibly provide notification (if required by local law) to the supplier.
Setting up a Withholding tax payable account
Tax you withhold from payments to suppliers is a liability of your company, because you owe that tax to the tax authority. So you must add a Withholding tax payable account to the Liabilities group of your chart of accounts. Follow procedures in another Guide to add the account:
Recording withheld tax
When entering a purchase invoice to which tax withholding applies, you have two concerns:
- Posting the full amount of purchases to the appropriate asset or expense accounts. This ensures fixed assets, inventory, and operating expenses are reflected at their actual costs. (Remember, withholding tax is not an expense of your company, so it should not affect other financial results. You are only acting as collection agent for the tax authority of amounts that will eventually be due from the supplier.)
- Recording tax withheld for later remittance.
These two goals mean you need at least two line items on the purchase invoice. First, record purchased line items at their full costs, using as many lines as necessary, just as though no withholding tax was involved. Post these line items to the same accounts you normally would.
Second, add a line item for withholding tax at the amount indicated on your supplier’s sales invoice. Enter the withholding tax as a negative quantity so it reduces the balance due on the purchase invoice. Post this line item to Withholding tax payable, the account you created for this purpose.
Remitting withheld tax
When withheld tax is remitted to the tax authority, a payment is posted to the Withholding tax payable account.
Comply with local procedures when remitting withheld tax:
- File necessary information with the tax authority to indicate which suppliers’ withheld tax you are remitting.
- Notify suppliers of your remittance if required by law.
For assistance preparing notifications, drill down on the balance (or dash, if the balance is zero) of Withholding tax payable. All relevant transactions will be listed.