What is a Payment on Account?

A payment on account is a payment tendered to partially or completely offset the current active balance of a consumer account. The term is commonly employed in business circles, but is also often used when referring to a taxpayer tendering payments on an outstanding balance associated with a tax account. In both scenarios, a payment on account helps to reduce the overall balance owed and makes it possible to reduce the amount of fees and penalties that apply to that balance.

As it relates to business settings, this type of payment takes place when a customer remits a payment to a vendor that helps to reduce or eliminate the balance in that customer’s account. This convenience is often provided when the vendor is willing to defer receipt of full payment at the time the goods and services are rendered, effectively extending a sort of revolving credit to the customer. In this scenario, the customer makes periodic payments until the balance is settled in full. Depending on the terms of the working agreement between the vendor and the client, finance charges may be applied to the account balance at regular intervals, such as monthly until the balance is retired in full.

With tax situations, the income tax payment on account is normally structured to require the taxpayer to remit a minimum amount per calendar month, until the balance is paid in full. A payment arrangement of this type is often created when a taxpayer finds that he or she owes additional taxes for the most recently completed tax year. In this situation, the taxpayer works with the revenue agency to establish a series of payments that make it possible to settle the tax debt over a period of several months. In the interim, the balance of taxes owed are still subject to fines and penalties, a circumstance that encourages the taxpayer to pay more than the minimum monthly amount when and as possible. One of the benefits of this type of payment on account arrangement is that as long as the payments are remitted on time, the tax agency does not attempt to obtain a lien against the taxpayer’s wages or seize bank account balances as a means of settling the debt.

Another application of a payment on account relates to the advance payment of taxes before the actual due date for the submission of a tax return. For example, if a taxpayer prepares his or her tax return prior to the due date and finds that the taxes already withheld do not cover the actual tax burden for the year, it is possible to submit a payment on account in advance of filing the return. Most tax agencies will require that the payment be received by a certain date in order to be applied to the balance. This can aid in minimizing any late fees or penalties that would be applied otherwise. Even if it is not possible to pay the total tax debt by that date, doing so reduces the outstanding amount that is determined once the return is processed and makes it easier to arrange a payment schedule for the remaining amount due.