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How do I record tax withheld by my customer?

SOLVEDby QuickBooksQuickBooks Online34Updated May 12, 2022

Learn how to account for a withholding tax deduction on a customer invoice.

Some customers are required to deduct tax from their invoice payment and then pay that tax to the government. This is sometimes called "withholding tax."

If your customer pays their invoice but withholds tax, use a credit memo to charge off the withholding tax as an expense. This also marks their invoice as paid in full. We'll show you how to get this done.

Step 1: Set up a withholding tax expense account

  1. From the Gear menu, select Chart of Accounts.
  2. Select New.
  3. From Account Type drop-down, select Other Expense.
  4. From Detail Type drop-down, select Other Miscellaneous Expense.
  5. Name the account "Withholding Tax Expense," then Save.

Step 2: Set up a withholding tax expense item

  1. From the Gear menu, select Products and Services.
  2. Select New, then choose Service.
  3. Name the item "Withholding Tax."
  4. From Income account drop-down, select the withholding tax expense account that you’ve just created.
  5. Save and close.

Step 3: Create a credit memo

Note: Just to make sure you can apply the credit on the right invoice, you might have to turn off the "Automatically apply credits" setting temporarily.

  1. From the Gear menu, select Account and Settings.
  2. Select Advanced from the left.
  3. Select the pencil icon in the Automation section.
  4. Uncheck Automatically apply credits.
  5. Select Save, and then Done.

To create the credit memo:

  1. Select + New.
  2. Select Credit Memo.
  3. Under Product/Service column, select the withholding tax item.
  4. Add the tax amount withheld by your customer.
  5. Add other important info including your customer’s name, and then Save and close.

Step 4: Use the credit memo on the invoice payment

  1. Select + New.
  2. Select Receive Payment.
  3. Select the customer’s name.
  4. Under the Outstanding Transactions section, select your customer’s invoice.
  5. Under the Credits section, find and select the credit memo you created.
  6. Save and close.
Tip: You only need to set up the withholding tax account and item once. The next time you have to charge off withholding tax, just use your existing withholding tax item.

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