How should I categorise funds set aside for future taxes?

tomorrowtomorrow Member Posts: 2

I'm a freelancer in Belgium, and the general take here is that for every paid invoice I should set aside 50% of it, that will end up in state taxes and national security/pension funds.

I opened at my bank a checkings and a savings account, and every time I get paid I transfer 50% of the sum to the savings. Once tax season comes up, I use those funds to pay the due taxes. Now, how should I categorise this in Wave?

At the moment I have my savings account under Assets/Cash and Bank. But is it actually a liability? If so, under which sub-category should it go, just "Other Short-Term Liability"?

Final related question: How do I register and categorise a tax payment when the time comes?

Thank you!

Comments

  • MikegMikeg Member Posts: 132 ✭✭

    Greetings from the US
    You are fine to leave it as an asset, which that what it is. There is no offsetting liability by merely setting aside cash for taxes. If you do want to post a liability for anticipated taxes then you would debit tax expense (income statement) and credit Income Taxes Payable (liability). Example: You have earned 200 and have a 50% rate. No other activity and no expenses. Your entry would be Debit Tax expense 100 credit taxes payable. Debit Savings 100 credit Cash 100. Your financials would look like:
    Assets
    Cash 100
    Savings 100
    Total 200
    Liabilities
    Taxes Payable 100
    Equity
    Current earnings 100
    Total 200
    Income
    Sales 200
    Expenses
    Tax expense 100

    If you are required to pay estimated taxes to the government then instead of a savings account, you would have a prepaid tax account (short term asset). This is accrual accounting.
    Mike G, CPA

  • tomorrowtomorrow Member Posts: 2

    Thank you @Mikeg, super clear!

  • MikegMikeg Member Posts: 132 ✭✭

    Your welcome

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