Income Tax Payable

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Income Tax Payable

Key takeaways

  • Income tax payable is a current liability on the balance sheet representing taxes expected to be paid within 12 months.
  • Financial accounting (GAAP) and tax law can treat the same transactions differently, producing timing differences.
  • Taxes that will be paid in later periods are reported as deferred tax liabilities.
  • Income tax expense is reported on the income statement and may differ from taxes payable on the balance sheet.

What it means

Income tax payable is the amount a company expects to remit to tax authorities within the next 12 months. It appears in the current liabilities section of the balance sheet and can include federal, state, local, and foreign income taxes.

How it works

  • GAAP determines when income and related tax expense are recognized for financial reporting.
  • Tax law determines when income is taxable on a tax return. Differences in rules (for example, depreciation or amortization) create timing differences between financial reporting and tax reporting.
  • Timing differences produce two separate balance-sheet items:
  • Income tax payable — taxes due within 12 months (current liability).
  • Deferred tax liabilities — taxes that are expected to be paid in future periods (noncurrent liability).

Example of deferring tax liability

Assume GAAP income of $300 and a corporate tax rate of 21%:
* Total tax liability based on GAAP income: $300 × 21% = $63.
If tax law allows spreading recognition of that $300 over three years for tax purposes:
* Current income tax payable for the year = $63 ÷ 3 = $21.
* Remaining $42 is a deferred tax liability to be recognized in future periods.

Income tax payable vs. income tax expense

  • Income tax payable (balance sheet): actual amount due to tax authorities within 12 months.
  • Income tax expense (income statement): the tax charge for the reporting period, calculated under GAAP by applying applicable tax rates to pre-tax profit.
    Because of timing and rule differences between GAAP and tax law, the tax expense on the income statement often differs from taxes payable shown on the balance sheet.

Other tax categories

Taxes such as payroll, property, and sales taxes may appear separately on financial statements or be included in overall tax expense and tax liabilities.

Bottom line

Income tax payable is a financial-accounting current liability that shows the taxes a company expects to pay within a year. Differences between GAAP and tax-law timing and recognition create deferred tax liabilities and can cause the tax amounts on financial statements to differ from the amounts reported on tax returns.