Consider the following scenario:
- 1st Dec 2023:
A client pays $400 for 1 year of access to my service. I set aside $100 (25%) for taxes and take $300 (75%) for my business. - 15th Jan 2024:
I pay the $100 in estimated taxes to the IRS. - 15th Apr 2024:
Taxes are finalized for 2023. - 31st May 2024:
The client cancels their service and requests a refund for the unused 6 months. I oblige and refund them $200.
Ideally, $150 (75%) of the refund is from my business and $50 (25%) is from the taxes I’ve set aside; however, since the $50 was already paid to the IRS in my 2023 taxes, my business would now have a $50 deficit.
How do I document this in my books? How and when can my business recover the $50?
It all evens up when you file next years income taxes and get a refund.
If you need, you can show taxes payable as a credit, not a debit.