Step-by-Step Guide to Recording Withholding Tax Entries in Saudi Arabia
Published By
Umar Shariff
Finance - general accounting
Nov 4, 2025
Handling taxes can feel complicated, especially when you need to manage withholding tax for your business in Saudi Arabia. You should know that the domestic withholding tax applies at 5%on dividends, 5% on interest, and 15% on royalties, which makes accurate accounting essential. As Saudi Arabia moves toward its Vision 2030 goals, financial transparency and digital compliance have become key priorities for businesses.
In this blog, you’ll see exactly what withholding tax is, why it matters for your accounting, and how to record it correctly with simple steps and journal entries. You’ll also get practical tips to avoid common mistakes.
Key Takeaways
Know What Needs Withholding: Understand which payments to non-residents require tax deductions and the applicable rates in Saudi Arabia.
Keep Your Records Accurate: Record gross payments, withholding tax, and net payments properly to stay compliant and avoid mistakes.
Watch Out for Common Pitfalls: Misclassifying workers, missing deductions, or delaying payments can lead to fines and accounting headaches.
Follow Smart Practices: Classify payments correctly, reconcile regularly, use good accounting software, and stay updated on tax rules.
Make Work Easier with HAL: Automate entries, reconcile bank records effortlessly, generate reports, and save time while staying fully compliant.
What Is Withholding Tax?
Withholding tax is a government-mandated deduction applied to certain payments, such as salaries, contractor fees, or service charges, before the funds reach the recipient. In Saudi Arabia, this ensures that non-resident vendors or service providers meet tax obligations, while domestic businesses remain compliant with ZATCA, income tax, or VAT regulations. Essentially, it acts as a prepayment of tax, reducing the risk of non-compliance or penalties for both payers and recipients.
Grasping the concept of withholding tax is important, but seeing its significance in accounting helps you manage compliance and financial reporting effectively.
Why Does Withholding Tax Matter in Accounting?
Knowing withholding tax is essential for accurate accounting and smooth business operations. Proper management ensures compliance, avoids penalties, and strengthens your financial control. Here is why it matters:
Ensures Compliance with Tax Laws: You must deduct and remit the correct withholding tax on payments to non-resident vendors, ensuring your business stays fully compliant with Saudi regulations.
Reduces the Risk of Tax Evasion: Collecting tax at the source helps authorities prevent evasion and ensures foreign entities contribute fairly, protecting your business from legal issues.
Simplifies International Payments: Following Saudi withholding tax rules aligns your transactions with global standards, making it easier to work transparently with overseas partners.
Supports Cash Flow Planning: Withholding tax affects the net amount paid to vendors or received from clients, so accurate accounting helps you manage budgets and cash flow efficiently.
Strengthens Vendor Relationships: Proper handling of withholding tax avoids disputes and builds trust with foreign suppliers or service providers.
Improves Financial Reporting: Recording withholding tax entries accurately ensures your accounting books reflect true liabilities, helping you file precise returns with ZATCA.
Encourages Digital Compliance: Saudi regulations promote the use of e-systems like the ZATCA portal, making tax submission and recordkeeping faster and more reliable.
Contributes to Economic Growth: Effective withholding tax management encourages foreign investment and innovation, indirectly benefiting your business and the broader Saudi economy.
Streamline these processes using HAL ERP to automate deductions, record entries accurately, and stay compliant effortlessly. Reserve Your Free Demo.
With the basics covered, it’s time to explore the practical steps for recording withholding tax entries accurately.
10 Steps to Record Withholding Tax Accounting Entries
Recording withholding tax entries correctly is essential for staying compliant with Saudi regulations and keeping your accounting accurate. Follow these steps carefully:
Step 1: Identify Payments Subject to Withholding Tax
Check if the payment is made to a non-resident.
Common examples include:
Royalties
Management fees
Technical services
Ensure the payment type falls under Saudi withholding tax rules.
Step 2: Calculate the Withholding Tax Amount
Determine the correct rate based on payment type:
Management fees: 20%
Royalties: 15%
Technical services: 5–15%
Multiply the payment by the applicable rate to calculate the tax to withhold.
Step 3: Record Gross Payment and Withholding Tax Separately
Enter the total invoice amount as the gross payment.
Record the withholding tax separately to show:
Deducted tax amount
Net amount payable to the supplier
Step 4: Debit Expense or Asset Accounts for Gross Amount
Record the full payment (before tax deduction) as an expense or asset.
Reflects the total financial obligation or asset acquisition in your accounting system.
Step 5: Credit Accounts Payable for Net Payment
Credit the amount you will actually pay the vendor.
Formula: Invoice amount – Withholding tax = Net payment
Step 6: Credit Withholding Tax Payable Account
Set up a dedicated withholding tax payable account.
Credit the account with the tax amount to show the obligation to remit to ZATCA.
Step 7: Remit Withholding Tax to ZATCA on Time
Submit the withheld tax within the statutory deadline.
Deadline: Usually 10 days after the month in which payment was made.
Avoid penalties by remitting on time.
Step 8: Record the Tax Remittance
Debit the withholding tax payable account.
Credit the cash/bank account to confirm the payment is settled with ZATCA.
Step 9: Obtain and Retain Withholding Tax Certificate
Request a certificate from ZATCA for every remitted tax. Keep it safe for audits and tax filing purposes.
Step 10: Apply Withholding Tax Credits When Filing Returns
Use the withheld tax as a credit against your total tax liability. Ensures you pay only the net tax due.
Once you’ve understood the steps to record withholding tax, it’s time to see how these transactions are reflected in your accounting system through journal entries.
Journal Entries for Withholding Tax
Recording withholding tax entries correctly ensures compliance with Saudi tax laws and maintains accurate financial records. Below is an explanation with an example:
Example Scenario
Your company pays a non-resident consultant SAR 50,000 for management services. Saudi withholding tax for management fees is 20%, so SAR 10,000 must be withheld. The net payment to the consultant is SAR 40,000.
Journal Entries
1. Record Gross Payment (Invoice Amount)
Debit: Consulting Expense – SAR 50,000
Credit: Accounts Payable – SAR 50,000
This records the total obligation before withholding tax.
2. Record Withholding Tax Deduction
Debit: Accounts Payable – SAR 10,000
Credit: Withholding Tax Payable – SAR 10,000
Reflects the tax deducted at source and your liability to ZATCA.
3. Record Net Payment to Vendor
Debit: Accounts Payable – SAR 40,000
Credit: Cash/Bank – SAR 40,000
Shows the actual payment made to the consultant after tax deduction.
4. Remit Withholding Tax to ZATCA
Debit: Withholding Tax Payable – SAR 10,000
Credit: Cash/Bank – SAR 10,000
Confirms the payment of withheld tax to the Saudi tax authority.
5. Maintain Withholding Tax Certificate
Keep the ZATCA certificate for records and audits.
No journal entry is needed, but it proves compliance and helps with tax filings.
With your journal entries in place, the next step is to adopt practices that make withholding tax recording efficient, accurate, and easy to manage.
Best Practices for Accurate Withholding Tax Recording
Recording withholding tax accurately is crucial for keeping your business compliant with Saudi regulations, avoiding penalties, and maintaining clear financial records. Here are some practical tips to help you stay on track:
1. Classify Payments Correctly
Identify the type of payment clearly: consulting, technical services, rent, or royalties.
Different payment types attract different withholding tax rates, so accurate classification ensures correct calculations.
Proper categorization also helps you track expenses and simplifies reporting during audits.
2. Maintain Complete Documentation
Keep all contracts, invoices, and payment receipts in an organized manner.
Documentation acts as proof if ZATCA requests verification during an audit.
It also makes reconciling accounts faster and easier for your finance team.
3. Use Reliable Accounting Software
Choose systems that automate withholding tax calculations to reduce manual mistakes.
Ensure the software update rates according to Saudi tax regulations.
Automation saves time and provides consistency across all entries.
4. Deduct and Remit Tax Promptly
Always withhold tax at the time of payment and remit it to ZATCA on schedule.
Delays can lead to penalties, interest, or compliance issues.
Timely action also keeps your accounts accurate and up-to-date.
5. Reconcile Entries Regularly
Periodically match withholding tax records against invoices and bank payments.
Regular reconciliation helps detect errors early and prevents discrepancies in your accounts.
It ensures that your reported tax liability aligns perfectly with actual deductions.
6. Stay Updated on Regulations
Keep track of changes in Saudi withholding tax rules and rates.
Update your accounting practices promptly to remain compliant.
Staying informed reduces the risk of unintentional mistakes or missed obligations.
7. Train Your Team
Educate finance and IT staff about proper withholding tax procedures.
Make sure your team knows the correct way to record, reconcile, and remit tax.
Well-informed staff helps prevent errors and strengthens your overall compliance process.
For payments to foreign entities, check if a DTT reduces the withholding tax rate.
Record the reduced rate properly to save costs and avoid disputes.
Ensure all entries reflect the correct tax amount according to international agreements.
Staying compliant becomes much easier when your systems work as smart as your team. After all, accuracy in withholding tax recording depends on how efficiently your accounting tools perform. HAL ERP simplifies this by automating entries, managing ledgers, and keeping your books fully aligned with ZATCA requirements. Book Your Free Demo!
Even when you apply best practices, certain pitfalls can sneak in. Knowing the most common mistakes helps you stay compliant and error-free.
Common Withholding Tax Mistakes & How to Avoid Them
Even the most careful businesses can face challenges with withholding tax. Here is how you can recognize common pitfalls, understand their impact, and take practical steps to stay compliant:
Challenge 1: Getting Worker Classification Wrong
The Problem: You might mistakenly classify employees as independent contractors, especially freelancers or project-based workers.
The Impact: This can result in fines, unexpected payroll taxes, and legal issues with Saudi labor authorities.
The Solution: Take the time to review each worker’s role carefully, document classifications clearly, and follow Saudi labor rules.
Challenge 2: Skipping Job Cost Tracking
The Problem: If you don’t track project costs properly, labor, materials, and overhead can get mixed up.
The Impact: Expenses may be misallocated, tax deductions missed, and your financial reports could become unreliable.
The Solution: Track all project costs meticulously using job costing tools or detailed records to avoid errors and missed deductions.
Challenge 3: Forgetting Withholding Tax on Non-Residents
The Problem: Payments to foreign suppliers or consultants sometimes go out without the proper tax withholding.
The Impact: Missing these deductions can lead to penalties, interest from ZATCA, and cash flow issues.
The Solution: Always double-check the applicable rates for each payment type and remit the tax to ZATCA on time.
Challenge 4: Missing Legitimate Deductions
The Problem: You might overlook valid deductions such as equipment depreciation, vehicle costs, or office expenses.
The Impact: This increases your taxable income, which could mean paying more taxes than necessary.
The Solution: Keep receipts organized, categorize expenses correctly, and review tax-deductible items regularly.
Challenge 5: Delaying Payroll Tax Payments
The Problem: Payroll tax deadlines can be missed or miscalculated if you rely on manual processes.
The Impact: Late or inaccurate payments can result in fines and disrupt your cash flow.
The Solution: Set automated reminders, review payroll calculations regularly, and consider using software to ensure accurate, on-time payments.
Challenge 6: Neglecting Tax Planning
The Problem: Reacting to taxes instead of planning proactively can leave you unprepared.
The Impact: Unexpected liabilities and missed savings opportunities can hurt your business financially.
The Solution: Conduct regular tax reviews, consult with experts, and stay updated on Saudi tax regulations to plan ahead effectively.
Avoiding these mistakes is crucial, but managing withholding tax smoothly requires a solution that simplifies your daily accounting tasks.
Now, let’s explore how you can control your accounting with Hal ERP.
Take Control of Your Accounting with HAL ERP
Handling accounting can be time-consuming and full of small errors that add up. Reconciling bank statements, managing journal entries, and keeping your books compliant often feels overwhelming. HAL ERP is designed to make accounting easier, faster, and more accurate, giving you complete control over your finances.
Automated Journal Entries: Record transactions automatically while keeping full control over your ledgers, eliminating repetitive manual work.
Effortless Bank Reconciliation: Upload your bank statements and let HAL AI match transactions accurately, saving time and reducing errors.
Insightful Dashboards: Get a clear, real-time view of your finances. Easy-to-read dashboards help you make informed business decisions.
Cloud-Based & Secure: Access your accounts from anywhere with bank-level security. Complete user access control ensures your data is always safe.
Bulk Actions Processing: Handle multiple journals, transfers, or expenses in one go, getting more done in less time.
End-to-End Accounting Control: Manage your complete business cycle, from accounts receivable and payable to supplier payments, with automated reminders and reconciliations.
Custom Reports Anywhere: Schedule reports to reach you via email or messaging apps. Focus on the metrics that matter most and take timely action.
Why Choose a Saudi-Ready ERP Solution?
Fully compliant with ZATCA e-invoicing and withholding tax rules.
Automates journal entries, bank reconciliation, and reporting.
Cloud-based and secure, accessible from anywhere.
Saves time, reduces errors, and improves financial decision-making.
Ideal for SMEs, construction businesses, and enterprises following Vision 2030 initiatives.
Conclusion
Accurate withholding tax accounting is vital for staying compliant, avoiding penalties, and keeping your business finances organized. Recording payments correctly, calculating taxes precisely, and maintaining proper documentation ensure smooth audits and reliable financial reporting.
Instead of spending hours on manual entries, you can let HAL take care of the heavy lifting. Automate withholding tax entries, reconcile your bank records effortlessly, and generate accurate reports, all while staying fully compliant with Saudi regulations. HAL gives you control, saves time, and makes your accounting process smoother and more reliable.
Make your accounting easier today. Book your demo and experience how simple, accurate, and efficient managing withholding tax can be.
Frequently Asked Questions (FAQ)
1. Can SMEs automate withholding tax accounting in Saudi Arabia?
Yes, SMEs can automate withholding tax accounting using software like HAL. Automation helps reduce errors, speeds up journal entries, and ensures timely compliance with ZATCA regulations. It also allows businesses to reconcile payments, track liabilities, and generate accurate tax reports without manual calculations.
2. What records should I keep for withholding tax audits?
For audits, maintain detailed documentation, including contracts, invoices, bank statements, and withholding tax certificates from ZATCA. Proper records help validate deductions, demonstrate compliance, and simplify reconciliation. Digital records are recommended for easier access and secure long-term storage.
3. How does withholding tax affect cash flow planning?
Withholding tax reduces the net payment you make to vendors or receive from clients. Accurate accounting of these deductions is essential for cash flow planning. By factoring in withholding tax, you can manage liquidity, plan payments effectively, and avoid unexpected shortfalls in working capital.
Umar Shariff
Umar Shariff is a serial entrepreneur and CEO of HAL Simplify, celebrated for making ERP platforms seamless and intuitive for Middle Eastern organizations. With extensive experience scaling teams and driving digital transformation projects in Saudi Arabia with accelerated deployment, Umar excels at operational management, team leadership, and delivering future-ready ERP systems that elevate regional business performance.
