Journal Entry for Withholding Tax on Rental

Withholding tax on rental is the amount of cash that the company withholds from the property owner and makes payment to the tax authority.

Rental is the expense that company spends to use the other property such as offices, buildings, warehouses, and vehicles. The company has the obligation to pay the monthly or annual fee to the property owners in order to use these assets.

The company who require to make payment to the landlord has the obligation to withhold a part of the payment as the withholding tax.

The withholding tax on rental incurs due to the tax law in each country. The rate of withholding tax is also different from one country to another country as well. The government requires the company to withhold the tax as the landlord is not the registry company. It is easy to collect the tax from the company that pays the tax.

When making payment to the landlord, company has to withhold the amount base on the tax rate. The withholding tax amount will not impact the rental expense of the company. The rental expense is the same as the contract amount. The cash payment is less than the contract amount due to the withholding tax. The withheld amount is recorded as the current liability.

When company makes a payment to the tax authority, it will not increase the company’s expenses as well. It will reverse the current liability.

Journal Entry for Withholding Tax on Rental

When the company makes the payment for the rental fees, they have to exclude the withholding tax amount. This amount will be withheld and paid to the tax authority later.

The journal entry is debiting rental expense and credit cash paid, withholding tax liability.

Account	Debit	Credit
Rental Expense	XXX
Cash		XXX
Withholding Tax Liability		XXX

The rental expense is recorded on the income statement as normal. The amount is equal to the rental fee that the landlord and customer agree on the rental contract. The withholding tax liability is the current liability that a company has to pay to the tax authority base on the tax rate. Cash paid is the balancing figure. It is the amount that remains after reducing withholding tax. It means that the landlord receives cash less than the agreed amount on the rental contract.

At some point, the company has to pay the withholding tax to the government (tax authority). The company has to reverse the withholding tax liability and make payment.

The journal entry is debiting withholding tax liability and credit cash.

Account	Debit	Credit
Withholding Tax Liability	XXX
Cash		XXX

Example

Company ABC has rented the office building from the owner. The rental fee is $ 5,000 per month. Based on the tax law, company has to withhold 20% of the rental fee and paid to the tax authority in the next month. Please prepare a journal entry for the withholding tax on rental.

Based on the tax law, ABC has to withhold a tax of 20% when making payments to the building owner.

Withholding tax = $ 5,000 * 20% = $ 1,000

So company needs to pay only $ 4,000 to the landlord.

The journal entry is debiting rental expense $ 5,000 and credit cash $ 4,000, Withholding tax liability $ 1,000.

Account	Debit	Credit
Rental Expense	5,000
Cash		4,000
Withholding Tax Liability		1,000

When the company makes a payment to the tax authority, it will reduce the liability and cash.

The journal entry is debiting withholding tax liability $ 1,000 and credit cash $ 1,000.

Account	Debit	Credit
Withholding Tax Liability	1,000
Cash		1,000