Account for withholding tax payments for contractors
If you're a contractor, or you pay contractors, you may need to account for deductions of withholding tax. These examples are for people using invoices and bills in Xero. If you're using Xero Cashbook, the same logic applies to the account code splits, but you use spend money transactions instead.
You're the employer, paying a contractor
Let's say you hired an independent contractor for a 1000 job and you're required to deduct 20% in withholding tax.
- Create a withholding tax current liability account in your chart of accounts.
- Enter the bill you've received from the contractor:
- Record 1000 in the contractor fees expense account on the first line.
- On the second line, record a 200 negative value in your newly created current liability account.
When you pay the 200 withholding tax to your tax authority, code the payment in your bank reconciliation to the withholding tax liability account. This clears out the liability.
You're the contractor, invoicing your employer
Let's say you're a contractor and you've invoiced your employer 1000 for a contract. Your employer will deduct 200 withholding tax from their payment to you.
- Create a withholding tax current asset account in your chart of accounts.
- Enter the invoice for your employer:
- Record 1000 in the contract income account on the first line.
- On the second line, record a 200 negative value in your newly created current asset account.
When you receive payment from your employer, reconcile the receipt as normal on your bank reconciliation.
Your Withholding tax paid account will be cleared out when you settle your obligation with your tax authority.