What is the withholding tax?

A withholding tax, also called a retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment and pay that tax to the government. Typically the withholding tax is treated as a payment on account of the recipient's final tax liability when the withholding is made in advance.

The amount of withholding tax on income payments other than employment income is usually a fixed percentage. In the case of employment income, the amount of withholding tax is often based on an estimate of the employee's final tax liability, determined either by the employee or by the government.

Therefore, the need arises to distinguish the total value of an invoice from the amount actually payable by your client.

Add a withholding tax in Elorus

In order to create documents including a withholding tax, you need to create the tax through the "Taxes" menu. From the main menu select Settings -> Taxes -> Add.

  1. In the Title field, you indicate the name of the retention

  2. Select "Withholding tax" in the type field. The operand field will automatically be assigned with a "minus" (see example below).

  3. Type in the appropriate rate in the percentage field.

4. Save, so the withholding tax is available for use in your documents.

Applying withholding taxes on documents

When creating documents and after you have added all the products/services, you can apply the withholding tax from the relevant field.

As you can see in the picture above, the total value of the document is different from the amount payable, which is shown in a separate field below. The amount of the retention is calculated on the net total amount (before taxes) of goods or services, based on the tax rate you have set as a percentage. This amount is deducted from the final value of the document to produce the amount your customer owes you.

Pressing Save, the printable document will be similar to the image below.

Finally, as with all taxes, you can see customized reports about your withholding taxes, per period, by using the Reports menu.

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