Withholding Tax

Withholding tax is a direct tax deducted at source by the payer on certain types of payments, such as interest, dividends, royalties and management fees, made to residents or non-residents. The payer remits the withheld amount directly to the Kenya Revenue Authority (KRA) on behalf of the payee.

In Zoho Books, you can enable withholding tax, apply it to invoices and bills at the line-item level and record payments that account for the withheld amount.

Scenario: Patricia runs a consulting firm. She creates an invoice for KES 170 with a withholding tax of KES 22 applied across two line items. Her customer deducts the withholding tax at the time of payment and remits it directly to the KRA. Amara uses the withholding tax feature in Zoho Books to track the tax deducted, record the net payment received, and ensure her records stay compliant with KRA requirements.

Enable Withholding Tax

Before applying withholding tax to your transactions, you need to enable it. Here’s how:

Go to Settings.
Select Withholding Tax under Taxes and Compliance.
Navigate to Withholding Tax Settings.
Slide the toggle to enable Withholding Tax.
Select for whom you want to enable withholding tax in the Enable Withholding Tax Settings For field. You can choose Customers, Vendors or both.
Click Save.

Withholding tax will now be enabled for your organisation.

Create a Withholding Tax Rate

To create a new Withholding tax rate:

Go to Settings.
Select Withholding Tax under Taxes and Compliance.
Navigate to Withholding Tax Settings.
Click + New Rate and in the pop-up that appears:
- Enter the Withholding Tax Name and Withholding Tax Rate.
- Select the Tax Type.
- Click Save.

You can now use the newly created withholding tax rate in your transactions.

Note: For a complete list of applicable withholding tax types, refer to the KRA’s official website.

Enable Withholding Tax for Customers and Vendors

To enable withholding tax for a customer:

Go to Sales on the left sidebar and select Customers.
Create or edit a customer.
In the Other Details section, check the Enable Withholding Tax for this Customer option.

Click Save.

Now, withholding tax will be enabled for the customer.

To enable withholding tax for a vendor:

Go to Purchases on the left sidebar and select Vendors.
Create or edit a vendor.
In the Other Details section, check the Enable Withholding Tax for this Vendor option.

Click Save.

Now, withholding tax will be enabled for the vendor.

Apply Withholding Tax to Invoices

When you create an invoice for a customer for whom you have enabled withholding tax, you can apply the applicable withholding tax rate to each line item. The customer will deduct the withholding tax from the payment and remit it to the KRA.

To apply withholding tax for invoices:

Go to Sales on the left sidebar and select Invoices.
Create or edit an invoice.
In the Items table, select the applicable Withholding Tax rate for each line item from the withholding tax dropdown.

The Withholding Tax section below the total displays each applicable withholding tax type with the rate and amount, the total withholding tax deducted and the adjusted Balance Due.

Click Save and Send or Save as Draft to send it later.

The invoice will be created and sent to your customer. The customer will deduct the withholding tax amount from the payment and remit it to the KRA.

Apply Withholding Tax to Bills

If you are a withholding agent, you can create a bill for your vendor in Zoho Books and apply withholding tax at the line-item level. When you record payment for the bill, you deduct the withholding tax amount and remit it to the KRA.

To apply withholding tax for bills:

Go to Purchases on the left sidebar and select Bills.
Create or edit a Bill.
In the Items table, select the applicable Withholding Tax rate for each line item from the withholding tax dropdown.

The Withholding Tax section below the total displays each applicable withholding tax type with the rate and amount, the total withholding tax deducted, and the adjusted Balance Due.

Click Save as Draft or Save as Open.

The bill will be created with the withholding tax applied.

Note: Applying withholding tax to an invoice or bill does not create a journal entry, alter the total transaction amount, or appear on the printed PDF. The withheld amount is displayed in the Balance Due section for reference only. The actual deduction and journal entry are recorded only when withholding tax is selected at the time of recording payment.

Record Withholding Tax Payment

After applying withholding tax to your invoices or bills, you need to record the withheld amount during payment. This ensures that the correct net amount is recorded and the withholding tax is posted to the appropriate account.

Record Invoice Payment with Withholding Tax

When recording payment for an invoice with withholding tax, you can also record the deducted withholding tax.

Here’s how:

Go to Sales on the left sidebar and select Invoices.
Select the invoice for which you want to record payment.
Click Record Payment at the top of the invoice’s Details page, and select Record Payment from the dropdown.
Enter the required details in the payment page.
Select Yes next to Withholding Tax Deducted? The Withholding Tax Amount will be displayed based on the withholding tax applied to the invoice.

Click Save as Paid.

The payment will be recorded for the invoice, accounting for the withholding tax deduction.

Record Bill Payment with Withholding Tax

When recording a payment for a bill with withholding tax, you can also record the deducted withholding tax.

Here’s how:

Go to Purchases on the left sidebar and select Bills.
Select the bill for which you want to record payment.
Click Record Payment at the top of the bill’s Details page.
Enter the required details in the payment page.
Select Yes next to Withholding Tax Deducted? The Withholding Tax Amount will be displayed based on the withholding tax applied to the bill.

Click Save as Paid.

The payment will be recorded for the bill, accounting for the withholding tax deduction. Once you remit the withheld amount to the KRA, your vendor will receive confirmation of the payment.

Apply Withholding Tax to Bulk Customer Payments

When a customer makes a single payment against multiple invoices, you can apply the applicable withholding tax for each invoice within the payment.

Here’s how:

Go to Sales on the left sidebar and select Payments Received.
Click + New in the top right corner, or select an existing payment and click Edit.
Enter the required details in the payment page.
Under the Unpaid Invoices section, the Withholding Tax Due is displayed for each invoice in the Withholding Tax column.
Click Add Withholding Tax to include the withholding tax deduction.
Click Clear Withholding Tax to remove a withholding tax entry.
Enter the Payment amount for each invoice.