What Is Income Tax Payable?

What Is Income Tax Payable?

Let me explain income tax payable directly to you—it's a liability I report for financial accounting purposes, showing the amount an organization like yours expects to pay in income taxes within 12 months. You'll find it in the current liabilities section on a company's balance sheet.

I calculate income tax payable using generally accepted accounting principles (GAAP), applying the current tax rates in the jurisdictions where the organization operates. If you're a business in the United States, you're subject to federal, state, and local tax laws, and you must also follow the tax laws of any other countries where you operate and generate income.

Key Takeaways

Income tax payable is a financial accounting term for a current tax liability you report on a company's balance sheet. The rules for calculating how much tax is owed and for reporting taxes on financial statements can differ. On a balance sheet, income tax payable equals the total tax due to government agencies within 12 months. Income taxes to be paid in a future year are reported as deferred income tax liabilities. Taxes on financial statements can include federal, state, local, and foreign taxes.

Understanding Income Tax Payable

Generally, the taxes an organization owes are included in the 'income tax payable' line on its balance sheet. I show income tax payable as a current liability to the extent it will be paid within 12 months.

GAAP has rules for reporting events that produce income or loss, but these differ from tax-law requirements for the same events on tax returns. Common causes of timing differences are the two systems' different depreciation and amortization rules. These differences in timing of tax liabilities are reflected in an organization's financial statements.

Remember, tax liabilities that accrue during the year but will be paid later are shown as deferred income tax liabilities on the balance sheet. For example, if a 2025 event results in $300 of income, the total US tax liability at the 21% corporate federal rate is $63. GAAP requires recognizing all $300 in income and the full $63 tax liability in the income statement for that year.

Deferring Tax Liability

Tax liability might be calculated one way under GAAP but reported differently for tax purposes. Tax law could spread recognition of income or liability over multiple years, and this timing difference appears in financial statements.

Using the same example, if $300 of GAAP income for 2025 is spread over three years for tax purposes, the 2025 balance sheet treats the taxes due to the IRS for 2025 as a current liability of $21 ($300 x 0.21 = $63 / 3 = $21). That $21 is reported as income tax payable in current liabilities. The remaining $42, due in the future, is a deferred tax liability.

A deferred tax liability arises when there's a difference between the current income tax liability on the balance sheet and the income tax expense on the income statement.

Income Tax Payable vs. Income Tax Expense

Balance sheets report the actual taxes owed to the IRS, categorized as current (income tax payable) or deferred (noncurrent). Income tax expense, however, is on the income statement, usually as the last expense deducted from pre-tax profit to determine net income.

For a US corporate taxpayer, GAAP determines income tax expense by applying the current 21% rate to profit before income taxes on the income statement. Taxes other than income taxes, like payroll, property, or sales taxes, might be separate categories or included in a comprehensive tally on statements.

Once the federal income tax return is completed, the organization knows the actual taxes due for that year. Taxes payable within a year are current liabilities; those due later are deferred. The balance sheet also reflects any state, local, or foreign income taxes owed.

What Does the Term 'Income Tax Payable' Mean?

Income tax payable is the financial accounting term for the current liability on an organization's balance sheet, indicating taxes expected to be paid within 12 months.

What Does Income Tax Expense Represent?

Income tax expense is the term for taxes owed on pre-tax profit, determined under GAAP by applying the applicable tax rate to pre-tax profit. It appears on the income statement.

Why Do Taxes Owed to the IRS and Tax Amounts on Financial Statements Differ?

On balance sheets, tax amounts are liabilities affecting the organization's value. Taxes due within 12 months are current liabilities called income tax payable; those due later are deferred tax liabilities.

The Bottom Line

Income tax payable is specifically an amount on financial statements, a liability in the current liabilities section of the balance sheet, showing what an organization expects to pay in income taxes within 12 months. Financial accounting rules for tax liabilities differ from the tax code's rules, so taxes on tax returns may not match the tax expense on income statements.