If you’re like many small business owners, you’ve learned the perils of not making your estimated tax payments throughout the year. This lesson generally comes in the form of a huge tax due bill at the end of your first profitable year. “Yikes!! I owe how much??”
To make Uncle Sam happy, you’ve started to make estimated tax payments. But how do you keep track of these payments, especially if you’re making them out of business funds? If you’re operating as a sole proprietor, partnership, or Sub-S corporation, your personal estimated tax payments are NOT deductible business expenses. So how do you record them?? Create a new “equity-type” account in your Chart of Accounts (Ctrl+A in QuickBooks, then Ctrl=N to create the new account).
By creating this account as an equity-type account, several things are happening:
- Your tax payments are not going to show up as expenses on your Profit-&-Loss statement. If they did, they would artificially reduce your net profit — making you think you had made less money than you really have, and making you underestimate your taxable profit!
- Your tax payments are going to show up as reductions in your equity on your balance sheet. These payments represent withdrawals of your equity in the business. By putting them as a separate line item in QuickBooks, you’ll make it easy to report your tax payments when it’s time to start pulling together your tax return.
There. You’ve properly accounted for your tax payments, you’ve made Uncle Sam happy, and tax preparation will be a breeze next April. Isn’t accounting fun?!?
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
Manoj Aggarwal says
Thanks for the info, I had been searching for it for a while. I wanted to request a clarification – is the “equity-type” account method for keeping track of estimated tax payment applicable for single-member LLC’s as well ?
Deb Howard Greenleaf says
Yes, you would use an equity-type account for any expense that is really a personal expense, such as owner’s draws to pay estimated taxes, member’s draws, or partner’s draws.
Gloria Shaffner says
I have inherited a company where it paid $100k in est tax pmts, which was recorded as an asset. Taxes due were $56k, resulting in a refund of $43k. The refund was booked as a credit to the asset of $100k, leaving an asset on the BS of $56k. The year has come and gone, but the $56k should have been taken off the BS.
How do I correct? Your advice is appreciated.
Gloria: From a purely academic perspective, you simply need a journal entry. I would contact your tax preparer for specific tax advice, however! Assuming that the tax was a business tax (ie, not the owner’s or shareholder’s tax), then there should have been journal entry at year-end:
Debit Tax Expense $56k
Credit Estimated Tax (asset) $56k
When you received the refund, the entry which you’ve already entered would have been along the lines of:
Debit Checking $43k
Credit Estimated Tax (asset) $43k
This would bring the estimated tax account back down to zero. Please remember, however, that this only applies to taxes that were the responsibility of the business. If this was a partnership and those estimated taxes were paid on behalf of the partners … or this was a sub-s corporation and these taxes were paid on behalf of the shareholders … then these tax payments would have been recorded very differently.
Jan Tallent says
Could estimated tax payments also be recorded as “prepaid income taxes” under current assets? This would also come off the balance sheet. If yes, what is the best choice? Please email me at the above email address.
Thank you. DR prepaid taxes CR cash
Hi, Jan! That wouldn’t be my first choice, as it makes it looks like the business has assets that it doesn’t really have. If the business is a sole proprietorship, partnership or S-Corp, then the business doesn’t have a tax liability and those are not the business’s taxes that you’re paying … they are the owners/partners/members taxes.
I have an S corp, and my accountant had us send a payment to the IRS because we were filing an extension. I am learning that that may have been the wrong move by the accountant? Your thoughts?
So that I could balance my checkbook and based on what I read above I created an equity account called tax payment and that is how I recorded it in the checkbook.
Thanks for your help!
Mike: I would have an honest chat with your accountant, as there may be a very good reason for sending in the payment. In the event that you did not owe the money, you will just get a refund. But ask your accountant; maybe you sent in money for your personal tax liability as a shareholder and didn’t even realize it.
Thanks for the good tip. However, I faced a tiny problem trying to set it up as an Equity account in Quickbooks. When I picked Equity account, Quickbooks autoselected Tax-Line Mapping for it as Form 8825-A: Taxes. And when I tried to save it, this error message popped up:
“This account has been assigned an income tax line that is not compatible with the account type. We recommend that you change the account type or the income tax line.”
Am I doing it wrong?
(I have LLC partnership)
Thanks in advance.
Vicky: The tax-line mapping is fairly inconsequential. If you want to be a stickler, though, you should select an equity-type account in the tax-line mapping field instead of the auto-selected “Taxes” account.
I am a sole proprietor with a business account. When I make a regular tax payment (not an estimated one), what account do I put it in? Is it an equity account?
For the purposes of recording our LLC’s estimated tax payments, I added the equity account to the Chart of Accounts, however while I’m on the “Recording an Expense” screen the new account does not show up.
I am only offered a standard list of accounts which offers options such as:
Payroll Liabilities: Other Current Liability
Retained Earnings: Equity
Payroll Expenses: Expenses
Which do I choose?
Thanks in advance!
Michelle: If you setup your new account as an equity-type account, it should show up in that list very close to the Retained Earnings account. I’m not sure what version/year of QB you’re using, but you should be able to see your new account if you scroll up or down far enough!
I have New York State and NY City based S-Corp. and we have to pay corporate income taxes to state and city prior to making income tax payment from the corporate income carried as personal income.
How do I record prepayments made to NYS and NYC during the year and what transactions should be made at the end of the year?
I know that business taxes are not expenses and at the year end they cannot stay on my Assets and/or Liability account. So what account(s) besides Bank (Cash) account would be affected?
Hi, Lana! Corporate income taxes that are taxed to the corporation (like franchise taxes, personal property taxes, corporate stock tax and such) are actually expenses of the business and can be recorded as Tax Expense on the books. If you are making estimated tax payments, simply book them under Tax Expense. At the end of the year, your tax preparer may adjust them against Accrued Taxes or Prepaid Taxes, but leaving them in Tax Expense during the year is a safe place to track them.
I understand why we record this to equity for IRS purposes. However, I sent estimated tax liability money only to the state (DC does not recognize S-Corp for business income taxes). Should I still record this to equity in the same way as you outline above?
Thanks for your help.