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 can also use payroll to account for deductions of withholding tax from a contractor.

You're the employer, paying a contractor by invoice

Let's say you hired an independent contractor for a 1000 job and you're required to deduct 20% in withholding tax.

  1. Create a withholding tax current liability account in your chart of accounts.
  2. 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.
  3. Withholding tax in a separate line, No GST, on invoice. Other line for consulting fees.

  4. 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.

    Image showing withholding tax payment.

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.

  1. Create a withholding tax current asset account in your chart of accounts.
  2. 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.
  3. Image showing invoice fields for contractor.

  4. When you receive payment from your employer, reconcile the receipt as normal on your bank reconciliation.

    Image showing payment received on bank reconciliation.

Your withholding tax paid account will be cleared out when you settle your obligation with your tax authority.