When a customer purchases goods or services from a vendor, the customer may need to withhold some or all of either the selling price or the tax amount for the transaction, and then remit the withheld amount to a tax authority on behalf of the vendor. A tax that must be remitted in this way is called a withholding tax.
You may find yourself in either position:
- Customer. You'll withhold an amount from your vendor and then remit this amount to a tax authority on behalf of the vendor.
- Vendor. Your customer will withhold an amount from you and then remit this amount to a tax authority on your behalf.
Until a payment is made on an invoice, the amount to withhold is considered an estimate, because until the moment of payment the amount to withhold can be changed. When a payment is made, the withheld amount is finalized and posted in General Ledger.
Prepayments
Prepayments are not automatically applied to invoices that use withholding taxes. To apply a prepayment to an invoice that uses withholding taxes, you must create an Apply Document transaction in the A/P Payment Entry or A/R Payment Entry screen. For more information, see the Accounts Payable or Accounts Receivable help.