The retention or retention is usually a specific percentage, for example, 10%, of the total contract that the project owner holds in reserve to protect the interests of the owners. The withholding is not maintained in a lump sum, but is maintained at the percentage established by the amount requested in each payment request. Your contract should state the terms, including the percentage and when the withholding will be paid.
Contractors using QuickBooks often have a hard time handling withholding / withholding; simply because the software does not have a means to deal with it automatically.
Because QuickBooks does not have a built-in retention feature, like many of the more expensive construction-specific software programs, QuickBooks users must initiate solutions and have QuickBooks track the retention that is maintained on each progress invoice.
Over the years, I have seen various solutions that have been implemented by various contractors, their accountants, and even their accountants, such as:
- Simply leaving the withholding amount for each invoice in your open A / R.
- Bill only the amounts for each line item that will be paid for.
- Create a customer called Holds Receivable and then do some fancy journal entries in each billing period to move the hold from the originating customer to the Holds Receivable customer.
- Use a QuickBooks discount item to deduct withholding on individual invoices and assign it to the chart of accounts as an income account or an expense account.
- The creation of an account of another current asset, called Withholding (retention) receivable and through the use of “Items”, automatically moves money to this account on each invoice that is generated.
- By creating an Accounts Receivable Subaccount called Retention (Retention) Receivable and then, using additional Items and Invoices, move the withheld amounts to this newly created Accounts Receivable subaccount.
Each of these methods has its own drawbacks, however the first three (4) methods outlined cause the most problems with contractors’ accounting records and are methods that I recommend that you avoid.
The easiest method I know of is to track the withholding as another current asset account in your chart of accounts – balance sheet section; however, you MUST talk to your accountant and ask them to teach you how to make a journal entry that eliminates the Income amount.
To implement this system:
- Add an Other Current Asset account to your chart of accounts called Withholding or Withholding Receivable.
- Create an Other Charge OR Service item in your Item List called “Less Withholding”, assign this to the account you created in Step 1 and in the Omitted box enter -10.0%.
- Create another Other Charge or Service item in your Item List called “Withholding Due”, and reassign it to the account you created in Step 1.
- Make sure you have a Subtotal item in your Item List.
- Create your Invoice or Billing Progress Invoice for the total amount before any withholding is withheld. On the first blank line at the bottom of the invoice, select your Subtotal article and then you Less retention Item: The balance of the invoice going to debtors is now the amount after withholding, and the withholding dollars are moved to the other current assets account.
- You can generate reports on the withholding receivable account showing who owes you what, by going to your chart of accounts, click on the account created in step 1 to highlight it, click the Report button at the bottom of the window and select Quick Report.
- When you are ready to bill withholding, create a “regular or regular” invoice using the Withholding Due line item and entering the appropriate dollar amount from the report.
As I said earlier in this article, this is the easiest method, because you just add two extra items to the bottom of your invoice and all the math and work is done for you; however, the withholding amount you deducted appears on your Profit and Loss Report in your Income Account (even if you run the reports in cash), requiring a Journal Entry to be created to remove this from your Income. You must check your account for the correct entry.