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Hi, thanks for tuning in for another episode of ask [inaudible] CPA. Uh, today we’re talking about corporate tax payable and expense. So the difference between corporate tax payable and expense that got me here with me again. Uh, so maybe this is one. It was like paying taxes,
Huh? Uh,
so helping them understand what a mouth they have to pay it. You know, it can be a little beneficial. The quote that we have for you today, Jim Collins, you know, author of six business books, including good degree, that’s one of my favorites is faultless reliance on technology is a liability. Thoughtless reliance on technology is, oh, I ability the Fraser Institute, you know, uh, calculates that the average Canadian pays 43% of their income in tax a, CVP, e I g s t fuel tax and et cetera. My comparison, we’re only spending 37% of our income on shelter, food, clothing, you know, basic necessities. So no tax is going to be the biggest expense of our life. Whether we realize it or not, it’s probably going to dwarf the cost of our homes and our cars several times over. Uh, and the story that we have or you know, the financial statements of business owners make their decisions on how significant errors and a lot of those errors has to do with their tax accounts. And often it’s because of the accounting software is automatically posting one or one or another tax balance to a particular account. And the business owner is just completely relying on it without truly understanding what these tax accounts mean. So, uh, me, what are the questions that these business owners should be asking?
Well, the first one is what is the difference between tax payable accounts and tax expense account?
So a tax payable account is something that you use to, you know, make it installment or books to balance all that. So you know, you have a balance on your tax at year end was calculated. As you know, I owe $10,000 in corporate tax. It’s then added to a tax payable account on your balance sheet. And as you pay that balance down, it starts to decrease. Okay. So the tax expense account happens, you know, a year end. And then what happens is as you pay it you, that that balance is out to the accounts payable. And as you pay it, that balance increases until it’s zero
in Alberta. Why should you have a federal tax and the provincial tax payables
solo, the separatism is alive and well in Alberta and a lot of people are very shocked by this when they start a business that there is, um, you know, cetera. There is separate a tax departments for a cra and Alberta Finance and you actually rate two separate checks to go to two separate buildings, uh, on your corporate tax, you know, in a lot of other provinces that, you know, when you sent it to cra and the cra disburses it to the province in Alberta. That’s how it happens for your personal taxes too. Uh, but your corporate taxes, nope. We have our own standalone tax department as usually the first time Albertans here of it are when they incorporated and they have to make a payment to Alberta Finance, uh, for their provincial corporate tax maths.
Why a tax payments generally posted to a payable account and not the expensive. Yeah.
Yeah. So when you’re paying it, you’re, you’re, that’s not when the expense occurred. And you know, the payment goes to a payable account. Um, you know, it’s, it’s just like paying on a, on a bill or on a mortgage, you know, is, that’s not the expense. We’re just making a payment and it goes raped. The payable council at $10,000 was booked when the expense occurred and then as you pay it $2,000 at a time, it’s going to knock down that payable amount so that the payment doesn’t necessarily mean the expense. Plus there’s a always installments to be mean to, so we should be prepaid tax. It’s not just, you know, what, doing five installments and knocked down that $10,000 balance. Once we’re done with that $10,000 balance, we should be making installments for next year. But those installments don’t relate to the actual expense account. They’re just prepayments on the anticipated in her mouth. So we can, uh, afford goal. Uh, any interest,
do payments to the payable accounts get reflected on the profit in that seat.
The, they don’t. Yeah. So the payments don’t get reflected on the profit and loss statements and the, and that’s a good thing because you know, we want to match this to the, the um, period that it occurred. So we don’t want to have a one month, a tax expense, you know, to occur and then all of a sudden all of these payments to the tax expense accounts, the one lump sum payment that occurs in the next month to make your income statement looked like he didn’t make any money. That’s not how it occurred. So that that payment goes to a tax payable account.
At what point in the year do you actually calculate and post the tax expense?
So it’s usually at year end you’re going to calculate this tax expense. Bigger companies, they might be making it a tax provision each and every month. Uh, but that’s complete overkill for a small business. So small business is only going to actually know what that tax bill is, what the tax and what’s going to be calculated at the end of the year when they do their corporate tax return. So that’s when that tax entries going to occur. Normally on the year end date and the entry is basically going to book an expense and it’s going to book an offsetting payable. So the tax expense was 10,000. It gets put in there only at year end and then the payable, you know, also shows up as 10,000 and then slowly we’re going to knock those payments over time. Um, so we’re looking at the average business owner. You shouldn’t ever be posting anything into your tactic expense account because you’re not the one who does the corporate tax return and they won’t, they don’t know what the tax bill is, but yet they know very well what payments they’re making every month. And those payments should be going to a tax payable account. Then in Alberta it’s going to be a federal tax payable account and, and provincial tax payable account. Um, we’ll start provinces. That’s not the case. It’s just going to be one, uh, federal tax payable account. Um, but the payments are separate.
So should see or a GST payments be posted to a separate camera?
Uh, yes, I have a separate account all the time and this is a very, very common era where we’re going to have a corporate tax payable account and we’ve got a corporate tax expense account and we have a GST payable account and all of the payments are going indiscriminately to one account or the other and often they just create the check and see area. Remember, remembers whatever the bookkeeping software remembers. What’s your count you posted to last time, which might have nothing to do with this time. So remember the tax expense account is, you know, it should be put in there once a year when the accountant does the corporate tax return and it doesn’t deal with an actual payment. It just deals with the tax is calculated at your, uh, at your corporate year end with a tax return is done. And then the payments to the corporate tax account go to, you know, federal corporate tax payable, maybe provincial corporate tax payable. If you’re an Alberta and then the GST payable is a separate account. Right now we’re dealing with four counts, you know, uh, tax expense, federal corporate tax payable, provincial court where tax payable, GST payable and we, you’ve got to make sure that we’re not comingling these payments from one account to the other.
Do Cra payroll payments get posted to a separate account.
We got another one now we got number five. So we have these accounts here. We have a tax expense account and we have the payments to the payroll account. They’re different. Okay. So the payroll accounts should have its own, you know, a payroll tax payable account or payroll remittances payable account. And that’s always being offset with wages, Solos, tax expense that, you know, they’re not tax fest. There are wage expense when we’re talking about payroll and remittances and source deductions on payroll. Finding someone to Edmonton Bookkeeping for your business will help you stal afloat. Um, so there’s two components to the payroll or is that the payroll components that you did ducked off of the employees checks that you got to stand in. Um, once you deduct them, they go in your, your, your payroll tax payable and then once you send them in, you eliminate that payable balance. Um, and then there’s the amounts that you know, you have to pay the employer contributions of CPP and AI.
So if we deduct a dollar off of the employee’s check proceeding be the employer has to kick in another dollar and then send two bucks a cra, um, and Eei, it’s, you know, a dollar 40 for every dollar you take off. Edmonton Bookkeeping is extremely important for your business
So, um, those are separate accounts. So we’ve got to make sure we understand, you know, what they are. So we have a corporate tax expense account. This is on your profit and loss statement and that’s the only, the only time anything’s going to get entered into that is that the corporate year end when the accountant actually calculates the corporate tax expense. Then we have the federal corporate tax payable account. Every time you make an installment Toro’s federal corporate tax payable, it goes, there you go. The provincial corporate tax payable account. Every time we make it install it, the pharyngeal corporate tax, a goal is there.
And we’re going to have GST payable. Every time you make a payment for GST, it goes there. And then we have a, uh, um, payroll withholding account and every time you make a source deduction payment, the Syria, it’s going to go there. And it’s important to understand those different accounts and we’re posting them to the correct account because it’s, it’s extremely, um, uh, common for business owners to post these cross. Don’t fall prone to common mistakes, hire a Edmonton Bookkeeping to stay proactive. Paul sees a different accounts and the balances are ultimately just meaningless because you have GST and payroll and payroll and corporate tax. And if you want to know how much you owe at any given time, you have no idea.
And did you ever see tax payroll or GST amount in accounts payable?
Yeah, absolutely not. We should not move. And sometimes accounting software will automatically move the GST bill in there. If you don’t, you know, select cancel and it’s like that. You don’t want that. Finding Edmonton Bookkeeping is important. Um, so yeah, same with the, I, I’ve seen it on source deductions. You know, you withholding tax, it’s going to add it to the accounts payable. It doesn’t belong there. It already has its own account. We want that, the convenience of having that one balance, you know, we have to create this account because it’s a balance that has to be reported at year end. Why are we gonna commingle it with accounts payable? Um, it doesn’t make any sense at any given time. We want to know, okay, where am I in terms of my corporate tax payable of I paid off my balance from last year, have I started, you know, created a payments for next year. At this point we are have separate accounts for them so they should never get mixed in with cows panel.
And why should profits generally be higher than the corporate tax installments?
So we have to remember that we’re not calculating the corporate tax expense on a monthly basis. You’re looking at your monthly reports. It’s impractical to calculate that on a monthly basis. For most business owners, for most small business owners, it’s too cumbersome. So, uh, you know, what we need to think about are what are the installments we need to make. So we’ve got to make an install at 1000 bucks a month. That corporate tax payable, well we better be making at least a thousand dollars a month from the business. And then normally it’s, you know, we’re also thinking about the, the draws that are being made as well. So we’re, we’re generally looking at, you know, the business makes, say the business makes 6,000 and the owner takes 4,000 a month in the loan payment, there’s a thousand and the tax installment does a thousand. We’re okay, you know, but if the business only makes 5,000 and we don’t have enough to cover the draws in the loan payments and the tax installments, we’re going to start bleeding cash. We’re going to start going through our cash very quickly. So we’ve got to make sure that our profits are higher than that intended tax installment.
And why do profits not have to exceed the CRA payroll? NGSC remittances.
Those are different because let’s remember that, you know, the corporate tax that’s paid at a profit that’s paid out of net income, but the, uh, CEO role, the Siri payroll tax, those remittances, they’re already in your employment expense. So we don’t need to be able to deduct them again. So whatever we have, whatever we’ve put two, that CRA payroll, payroll payable account, it’s already in the employment expense account on your income statements. So we don’t have to worry that the business needs to make at least that. Again, same with GST. Gst just completely bypasses the income statement altogether. And every time you collect GST, it just increases your GST payable and every time you paid GST out, it just decreases your GST payable. So it’s not the same. Edmonton Bookkeeping is important for proactividy Um, in terms of do I need, you know, enough, uh, income to cover my cra payroll and GST remittances, uh, because we’d always be double counting them corporate taxes that won’t, we got to make sure that those profits on the income profit and loss statement, or at least as high as their acquired corporate tax installments because they have to be covered from profits. So that’s what we have here. Again, thanks so much again for tuning in. Um, you know, as always, please hit that like him subscribe button so we can get you to deliver you tips on how to beat the odds at business. And if you have any questions, please leave them in the comments below. We’ll do our best to address them quickly in a future video. Thanks very much.
