What Is Income Tax Payable?

Income tax payable is a liability reported for financial accounting purposes. It shows the amount that an organization expects to pay in income taxes within 12 months. It is reported in the current liabilities section on a company's balance sheet.

Income tax payable is calculated using generally accepted accounting principles (GAAP), using the current tax rates in the jurisdictions where the organization is subject to tax.  Businesses operating in the United States are subject to federal, state, and local tax laws. They must also follow the tax laws of any other countries where they operate and realize income. 

Understanding Income Tax Payable

Generally, the taxes an organization owes are included in the line "income tax payable" on the organization’s balance sheet. Income tax payable is shown as a current liability to the extent of the amount that will be resolved (i.e., paid) within 12 months.

The generally accepted accounting principles (GAAP) have rules for reporting an event producing income or loss. However, these differ from the tax-law requirements for reporting the same event on tax returns. The two systems' different depreciation and amortization rules are common causes of timing differences. These differences in reporting for the two systems—particularly for the timing of tax liabilities — are reflected in an organization’s financial statements.

For example, the total US tax liability for a 2023 event resulting in income of $300, determined using the 2023 corporate federal income tax rate of 21%, is $63.

$300 x 0.21 = $63

GAAP generally requires that all of the $300 in income from an event, as well as the total corporate tax liability of $63, must be recognized in the organization’s income statement for the year when the event occurred, i.e., 2023.

Deferring Tax Liability

Tax liability may be calculated one way using GAAP but reported differently for tax purposes. Tax law may spread recognition of income or a tax liability, over, multiple years. This timing difference will be reflected in the financial statements. For the same example, if $300 of GAAP income for 2023 is spread over three years for tax purposes, the 2023 balance sheet will treat the taxes due the IRS for 2023 as a current liability, i.e., a current income tax payable of $21.

$300 x .21 = $63 / 3 = $21

That $21 would be reported as income tax payable on the current liabilities section of the balance sheet. The remaining $42, which will be due to the IRS in the future, would be reported as a deferred tax liability.

Thus, a deferred tax liability arises when there is a difference between the current income tax liability reported on an organization’s balance sheet and the income tax expense reported on its income statement.

Income Tax Payable vs. Income Tax Expense

Balance sheets report the actual amount of taxes owed to the IRS, categorized either as current tax liabilities (income tax payable) or deferred income tax liabilities (noncurrent, longer-term liabilities). However, income tax expense is reported on an organization’s income statements. This amount usually appears as the last expense item and is a deduction taken from pre-tax profit in determining net income, or profit.

For a US corporate taxpayer, GAAP determines the amount of income tax expense for financial reporting purposes by applying the current corporate tax rate, 21% in 2023, to the amount designated as profit before income taxes on the income statement. Upon completing its federal income tax return, an organization knows the actual amount of taxes due to the US government for that tax year. The taxes payable within a year are reflected on the balance sheet as current income tax liabilities. Taxes due in future years are listed as deferred income tax liabilities. If the corporation also owes state, local, or foreign income taxes, its balance sheet will reflect those liabilities as well.

The Bottom Line

"Income tax payable" refers specifically to an amount reported on financial statements: a liability reported in the current liabilities section of a company's balance sheet that indicates the amount that an organization expects to pay in income taxes within 12 months. Financial accounting rules for reporting tax liabilities and the tax code’s rules for determining the amount of taxes owed to the IRS for the same event can differ. GAAP accounting principles and the US tax code do not treat all items in the same way when calculating the tax amounts reported on financial statements and the tax liabilities reported on tax returns. As a result, the amount of taxes owed on an organization’s tax return may not match the tax expense on its income statement.

For financial statements, the variation in the accounting rules and reasons for determining tax expense and tax liabilities can create different amounts on income statements and balance sheets.