Setting Up Sales Tax in QuickBooks
I see a lot of questions about sales tax in the Intuit Community forums, so I’ll give a quick overview of how to set it up in QuickBooks.
Some Concepts
If you are going to charge sales tax on an invoice, several things must be set up:
- The sales tax preference must be enabled.
- You need one or more sales tax items and possibly some sales tax groups in your Item List.
- When you create an invoice, you must have a taxable customer tax code selected, a sales tax item or sales tax group selected for the tax, and any taxable charges must be set as being taxable on the detail line.
Enable Sales Tax
To start, you need to enable the sales tax preference. Select Edit then Preferences and select the Sales Tax prefence. Click on “Yes” for the question “Do you charge sales tax”.
In the lower half of this screen there are several options to review to make sure they are set properly for your business (how often you pay sales tax, and so forth).
Sales Tax Items
As you probably know, all charges that you add to an invoice must have an entry in the item list. Sales tax is the same. You will create one or more sales tax items in the item list. You can do this by clicking on the add sales tax item button in the preferences screen, or by adding an item to the item list in the normal way.
Enter the percentage for the sales tax, and a vendor for who you pay that sales tax to (typically your state sales tax agency).
Multiple Jurisdictions
So what do you do if you have multiple jurisdictions? You could have a situation where you have a state tax, a county tax, a city tax or even more. When you file your reports to the state tax agency you need to split out the amounts by jurisdiction, usually.
To manage this, create a sales tax item for each jurisdiction. One for the state, one for each county you work with, one for each city. However you need to break it down for your reporting. Then, create a sales tax group item and add each of the jurisdiction taxes:
If you use this sales tax group in an invoice the rate will be 8.1%, but the program will report each tax separately.
Please note that if you have a large number of taxable jurisdictions this can become very complex. You need to have a sales tax item for each jurisdiction, and a sales tax group for each “nexus” or location that has different combinations. There are third party add-on products that help with sales tax tracking, but these usually are reasonable only if you have a large number of invoices to process.
Back in the preferences section, in the dropdown list Your most common sales tax item you can select the sales tax item or group that you most commonly use.
Customers and Items
Now, let’s look at your customers and items. Some customers are taxable, others are not. Some items and services are taxable, others are not. We will set up both to have the usual value for taxation, although you can always override this when needed.
Edit your customer, you can specify which sales tax item or group to use for this customer. Also, the tax code needs to be set – it should be set to tax.
Edit your items to specify if they are taxable or not – select the tax code of tax.
Putting It All Together
Let’s create an invoice for this customer. The default values for the tax related questions are taken from the customer record and item records used. Three things must be set to have sales tax calculate: The customer tax code must be taxable, the tax item or group must be selected, and the tax setting on the item must be selected. If this all happens, sales tax is calculated properly.
Remember, you can override these if you need to change something for a specific situation. If one line isn’t to be taxable for some reason, change the tax setting on that line to non taxable. If the customer should get a different tax rate, change the tax item or group for the invoice. You can also change the customer tax code.
Reporting
I’ll talk about sales tax reporting in a future article. Note that to get the most efficiency out of your QuickBooks program you want to set up and use your sales tax items properly.
Let me know if this helps!
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Category: QuickBooks Tips/Tricks, Working with QuickBooks
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70′s, and remembers releasing his first commercial accounting software product when you had a one-floppy disk drive system, loading the program from one floppy and then replacing that with the other floppy to hold the data. He has a special interest in inventory and manufacturing software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor and participates extensively in the QuickBooks Community user forums under the ID of CCRussell. Visit his CCRSoftware web site for information about his QuickBooks add-on products. Charlie can be reached at charlie.russell@sleeter.com
He is also the author of the California Wildflower Hikes blog and a regular blog contributor to the Intuit Inner Circle.
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Charlie: Has a bug newly developed in 2011? Seems the sales tax payments are not being adjusted due to a tax credit as has been the case before now. In other words, tax for individual jurisdictions are not adjusted for, example, a sales tax collection credit. Any idea what has happened?
Jerry, I’m not aware of a problem in the latest revision – there were some sales tax issues in earlier revisions, I believe, but I don’t think it related to this. Can you give me a specific example?
Charlie: In the Pay Sales Tax window, the list of Sales Tax items and jurisdictions appear along with the amount due. When adjusting the total tax amount because, in the case of ny, a sales tax collection credit is due, the individual amounts are adjusted. For the first time I can remember, these adjustments aren’t made and the inial amounts remain the same. Paying the new net amount can be done, but company records will show a balance sales tax due because the adjustments weren’t made.
I thought I would repare the company file but wanted to hear your opinion on what may have happened.
Think I found the problem. Will advise. Thanks.
Jerry, What is the answer because I can’t find how to adjust the sales tax. I am paying later so the state is charging me more but I don’t know how to add to the final amount. Ready to pull my hair out.
Good article, thanks. And remember, always make new sales tax items when your sales tax rate changes. Just changing the old rate can confuse the relational database that is QuickBooks and corrupt the file. (I just went through this with a client).
Okay, here is 1 for you because I’ve exhausted myself trying to find the answer…
I have a client I am trying to input data from a different software & he MUST have the invoices look identical to what his customers have been receiving. So with that said…I have invoice’s that have multiple state’s on 1 invoice with different tax rates….any idea how I can acheive putting this on a quickbooks invoice???
For example: customer is being billed at his home off in California but has leased products in MA, GA and IL. All three states are invoiced on 1 invoice.
HELP!lol
Kathy, if you have just one sales tax applying to a particular item (or several items), then take a look at my article at http://www.sleeter.com/blog/2011/02/quickbooks-sales-tax-different-rates-for-different-items/
If you have multiple sales taxes applying to the SAME item, you can’t easily break it out without doing a lot of rearranging of the charges.
Cat, you are right. I have an article in my older blog that I haven’t moved over to this blog, which talks about that very issue. See it at http://qbblog.ccrsoftware.info/2009/04/changing-quickbooks-sales-tax-rates-mid-year/
Charlie:
Can you clarify…I am pretty good with dealing with sales tax. My question is why doesn’t the sales tax show up on an A/P report…do I have it setup incorrectly or is this just the way it is?
Linda, Sales Tax doesn’t post to Accounts Payable, so it won’t show on the A/P report. It posts to Sales Tax Payable instead. You would see that amount in your chart of accounts, as well as in the Sales Tax Liability report.
Sales Tax Items & Sales Tax Groups have been working like a charm when I followed Doug Sleeter’s instructions years ago. Now I have a dilemma because every quarter up till now has had different sales tax in California. Since I use several jurisdictions this can be a nightmare to set up sales tax for each quarter for that jurisdiction. Also, how to keep history in case of a sales tax audit. Does anybody have suggestions?
Neelima – if you are talking about changing sales tax rates mid year – take a look at this article, let me know if that addresses your situation: http://qbblog.ccrsoftware.info/2009/04/changing-quickbooks-sales-tax-rates-mid-year/
I have been trying to account for tax in my quick books file , so far i have had no problems with accounting for sales tax , as demonstrated by your kind self. But i ma still not able to account for purchase tax in the system when entering the bills.
any help with this ,
Thanks
Hussain, that depends on the accounting regulations of where you live, and what you are purchasing. Tax on items may be something that you have to incorporate into the “landed cost” of the item, or it may be an expense, depending on many factors. In any case, it is not a “tax” that you have to report usually, if the items you are purchasing are items that you are using in your business.
Jerry,
How do I change an account that is associated with an item on my item list? For example – if I create an invoice for work I did in New Jersey the invoice is booked against my New Jersey Sales but the account on my item list says New York State Sales Tax Payable.
Nicole, are you talking about a “sales tax item”? Because if it is a regular item (service, inventory part, etc.) you shouldn’t be using the sales tax payable account normally.
If you are using a sales tax item you would want to create a separate sales tax item for the other state.
If you can be more specific as to what you are doing that would be helpful.
Sorry Charlie (also sorry for calling you Jerry).
Yes, I am talking about a “Sales Tax Item”.
Let me see if I can better explain this.
I perform work in NJ, CT and NY. Therefore I have 3 separate “service” items set up for each state. I also have multiple “sales tax items” set up as each state has its own sales tax rate (along with some jurisdictions have their own rates within New York). According to my item list each “sales tax item” is associated with my New York State Sales Tax Payable account. To see if my New Jersey sales were being incorrectly booked against my New York State Sales, I looked at an invoice I recently sent to one of my NJ clients. Under the “Item” on the invoice I have NJ and under the sales tax I have NJ. So I then looked at my sales tax liability to make sure the services were calculated under NJ and they are. However, the New Jersey Sales Tax item on my item list says account – NYS Sales Tax Payable. Shouldn’t it say NJ Sales Tax Payable?
I hope I was able to clarify things.
Nicole, when you look at the sales tax item, what “field” are you referring to? The “Tax Agency” field? Each sales tax item should identify the taxing agency using the Tax Agency field – that is what is used to separate things in the Sales Tax reports.
Look at the screen shot higher in this article, you see a “sales tax item” window – there isn’t an “account” field there. All sales tax items post to one account, Sales Tax Payable. You don’t have different payable accounts.
Just to check, are we talking about the Windows Desktop version of QuickBooks here?
Each “Tax Agency” Field is correct within each item which is why the sales tax and sales are showing up in the correct state on the sales tax reports.
On my chart of accounts, I have 3 Sales Tax Payable accounts – NY, NJ & CT. NY is the first account listed which is probably why the anything associated with as a “Sales Tax Item” is going to that “account”.
If I open the “Item List” I see the following Name, Description, Type, Account & Price and that is where I am asking about changing the “account”. Not in the “Sales Tax Item” window.
Because you said “All sales tax items post to one account” – Maybe I just need to adjust my settings to remove the “Account” Field column as maybe that is what is confusing me.
My current version of QB is Enterprise Solutions Contractors Edition 8.0
Nicole, I’m sorry, but you are not using the sales tax feature in QuickBooks the way it is intended to be used, from what I can tell. It is difficult to be specific without being able to actually see your data file. Review the article above. It sounds like you are putting your “sales tax payable” accounts in the individual item records, rather than using a “sales tax item” specifically. As you can see above, there is no “account” field in the sales tax item record.
I recommend that you contact a consultant who is familiar with Quickbooks and how it manages sales tax. You can use the “Find a Consultant” link at the top right of this page. Or if you wish, you can send me an email with your contact information and I can refer you to someone in your area.
Nicole,
Maybe I can add a few key points here just to make sure you’re undertanding QuickBooks items.
There are several TYPES of items, Inventory, Non-inventory, Services, … a few more… and then Sales Tax Items. As described in this article, Sales Tax items are used to calculate the amount of sales tax to charge when selling “taxable” items (That is, when selling services, inventory, or non-inventory items that are marked as TAXABLE). So each sales receipt or invoice lists which items are sold as well as which sales tax item(s) are used to calculate and accrue sales tax payable on that sale.
All sales tax items use the SAME general ledger account to accure the tax. By default that account is a liability account called “Sales Tax Payable.” You should NEVER attempt to set up multiple Sales Tax Payable accounts because there is no way to make your sales tax items point to any other account than that default account. So to separately track the sales taxes you’re collecting for each state, you can set up multiple sales tax items (e.g NY tax, NJ Tax, CT Tax) and set their respective rates and “tax agencies” so that the taxes will be tracked separately according to who you PAY the tax to (i.e. the tax agencies).
So since you’re trying to fix a file that evidently was set up by someone else, you might have a mess on your hands. The ITEMS should point to revenue accounts (don’t try to point them to sales tax payable!). The sales tax items will always use Sales Tax Payable to hold the calculated tax. The sales tax reports will list the amounts in Sales Tax payable, separated by “tax agency”. That is how you know how much is owed to each agency (or state in your case).
I hope this helps…
Well that is a bummer. I was just trying to fix the way QB is currently set up. More of a reason to start with a new fresh version. Thank you for trying to help me. I appreciate it.
Thanks for the article. One question…is it possible to have multiple Sales Tax Payable Liability accounts? In Utah we pay monthly sales tax but for special events we have to pay that sales tax separately. I do not want them to lump together under one GL account, I would like to have a sub account for the special events.
Any help there?
Never mind…just read your response to Nicole! THANKS
Yup, only one Sales Tax Payable account, if you want the tax to show in the Sales Tax reports. If you want to treat it totally differently, you can create your own Other Charge item for a percentage, but then you lose the special handling that you get from the sales tax system in QuickBooks.
Hi Charlie,
I have a dilemma that I am hoping you can solve….I have a client that paid sales tax via credit card, but it looks like you can only pay sales tax via a bank account in the Pay Sales Tax screen. Any advice on how I can handle this?
Kristie, I don’t usually give very specific answers to specific questions like that, as I don’t have access to your company file AND I am not an accountant.
In general, I would think that you could generate the sales tax payment in the normal way, changing the check number to something other than a real number (like “DB” or something), but then do some adjusting entries to balance out the checking account and the credit card (which should NOT have been using “sales tax payable” as the account). That would work, but I’m not sure if that would be the best way. You should talk to your financial advisor about this (as long as they understand that you MUST use “Pay Sales Tax” from the Vendor menu to make this payment in QB), or you can find a local advisor who could help by using the “Find a Consultant” widget at the top right of this page.
I have a client that charges tax on every item she sells. Can sales tax be calculated in the aggregate as one line on the bottom of the invoice?
Thanks in advance.
Mike
Michael, that is the normal way that you see it, as one sales tax charge at the bottom of the invoice. Are you not seeing that?
Here is the question from my client: “I do have one Quickbooks question for you regarding the sales tax. I have to add the sales tax for each item, isn’t there a way I can add the sales at the bottom of the invoice so it applies to all of the items?”
I guess that depends on what exactly your client is trying to accomplish. Are they concerned about how rounding is done? sales tax is applied item by item, and that might give you a slighly different calculated value than if you apply it to the total taxable value. If that is a concern, you can put a “subtotal” item after the last detail line, and under that put a “sales tax” item to apply the rate to that subtotal. You hav eto set the “tax rate” in the footer of the invoice to be a zero rate. However, that isn’t as flexible. It won’t print the sales tax in the footer of the invoice, it will just be another line item. It won’t let you use “sales tax group” items.
Hi Charlie,
Here’s my dilemma…in the ‘pay sales tax’ window there is a line item which has no item name or vendor name but it has an amount due. I can’t seem to find where the amount is being calculated. QB will not record a payment for this item because there is no vendor to pay. Tried clearing with a Gen Journal entry but QB has to have a vendor. How can I track where the amount is coming from and how can I get a vendor name in the item? Unfortunately, I inherited this problem. Any advice would be GREATLY appreciated.
Chris, I’ve not seen that myself. Journal entries won’t do the job. Do you see this in the Sales Tax Liability report? If so, you can drill down to it from there. If you don’t see it there, sounds like a damaged file. You can try doing a “rebuild” of the company file – but you may need to talk to a consultant who can look at your file. ProAdvisors have a version of the software that provides better diagnostic tools.
Hi Charlie,
Our Sales Tax is 3.5% on the first $1000 dollars and then the remainder of the purchase is at 3%. Anyway of doing this without subtotals and then spiliting up an item over $1000 dollars which confuses the customer and can mess up inventory.
Mark, off the top of my head I don’t have a great answer for you, although I’ve seen this discussed in other forums before.
You can add a sales tax item as a line item and enter a specific amount – but you have to do the calculations yourself. There are some cascading issues if you do this, as it affects your reports and how tax shows on the invoice. It is something that you should play with in a test company to see if you like it or not. I’m not necessarily endorsing that approach at this time, as I haven’t fully tested this.
I have a county showing up on sales tax liability report but when I go to “pay tax” it is not showing up? What do I do to fix this?
Christy, hard to say. I would look at the date of the report to make sure it matches the date of the Pay Sales Tax window, to start. You might want to talk to a ProAdvisor to have someone look at the file if you can’t figure it out – people who have the Accountant versions of QuickBooks have special tools that let us look at the inner workings of the file (the “Client Data Review” function).
This may not be a good place to ask this question.. I am a graphic designer. I design business cards and I order them from an out of state printer that does not apply sales tax. I sale the business cards for the same price I purchase them, but I charge for the design and not the card. Do I have to apply sales tax to the sale of the cards? Or do I have to apply the sales tax to the sale as a whole? Hopefully I wasn’t to confusing..
Thanks in advance.
I am trying to figure this out so I can have Quickbooks organized in the legal fashion.
Courtney, every state has different tax laws, and I’m not familiar with Louisiana (other than to know that some legal issues are treated VERY different down there!). You need to talk to your state tax agency to get that answer, or your local financial advisor.
Off the top of my head I would say that in general you would be required to charge the sales tax on the entire amount. However, I’m not a CPA, so don’t make your decision on that. Check with local advisors and officials.
Thanks Charlie… for taking out time to give some kind of answer. I will find out and if you don’t mind, I will post something for other designers to go off of.
Hi Charlie – I own a very small business of 3 people and we use QB Premeier 2011. We’ve been on QB for nine years total, taking paid upgrades every couple of years to keep the application from Intuit current. We’ve had 4 people as aour accouting manager doing our books over that time period. Some of my accounting managers did not always use the sales tax module and instead just entered a bill to p[ay our state 7% sales tax in Indiana. As you might suspect, our sales tax module is way, way off and we cannot figure out how to adjust it to “start fresh” in 2012. Any ideas you might have would be greatly appreciated! Take care – Jeff
Jeff, that is a complicated situation. You would be better off working directly with a ProAdvisor (you can use the “find a consultant” search box on this page) who can look at your specific company file. There are several ways to deal with this and the proper choice depends on a number of factors. You definately have some issues in the sales tax reports if you have been making payments through regular checks.
Hello!
Here is my issue…
Our business is based in Idaho where we do not charge sales tax, but we do a lot of business in Washington 7 miles away. We charge a sales tax and it shows up on all of our Sales Tax Payable reports. My question is about deposits.
When we take the deposits to the bank, we take the amount of the sales tax and put it into a seperate bank account to pay the taxes with. Often we are depositing multiple checks at a time. This becomes a big pain when we are reconciling the deposits because our main business account is always off balance because it includes the sales tax. Is there a way for QB to automatically funnel the sales tax amount from the deposits straight into our sales tax account so everything balances out?
Thanks!
Jill
Jill, I’m not sure what exact steps you are taking. You have an invoice for $101.00, and $1.00 of that is tax. You are paid with one check. You have to deposit that check into one bank account because it is one check. So how do you move the $1.00 into the other bank account? You need to do something (an adjustment, transfer or some other transaction) to move the tax from the one account to the other. However, that doesn’t affect the sales tax payable – that doesn’t care where the money is UNTIL you “pay sales tax”, which should then be directed to that separate account.
Hello, I have a client that creates an Estimate, then creates several invoices off the estimate. when does the sales tax turn into a “sales tax liability” when the estimate is created or when the invoice is created? what if invoices are created in different Quarters? then is the sales tax liability spread across the quarters as well. All sales are in CA.
Chris, an Estimate is not a “posting” transaction. It has no effect on your financial statements. It is an offer you make to someone, essentially.
Sales tax won’t be a liability until you create the invoice. That is the “posting” transaction. So that is when the sales tax liability is updated, and the invoice date is the date used for the liability. Only the sales tax amount in the invoice is posted.
Señor Russel, saludos
Soy de Costa Rica. Tengo un cliente que en algunos artículos paga el 0.13% y en otros el 13%. Como hago para personalizar esto, ya que al asignar el Tax Code al cliente me lo aplica a todas las líneas de la factura?
My apologies, unfortunately I don’t understand Spanish.
Dear Charlie,
Excuse my poor English.
Here in Argentina, we have Sales Taxes for about 21% (called IVA).
When I Sell Services or Goods, I Charge this Sell Tax Items in the Invoice, generating an Increment in the Sales Tax Payable Account.
But when I Buy goods or service, I can discharge (or assume as a credit) the same amount of taxes of my Providers Bill.
At the end of the month, I pay to the State the diference between Sell Tax – Buyed Tax.
Let me Explain with an example:
I create an Invoice for USD 1000 + IVA (1210 USD). For this Invoice I will pay to the state 210 USD at the end of the month.
If I Buy Goods for 800 USD + IVA (968 USD), I Can use this billed IVA to reduce the tax liability. So, I Will Pay to the state only the IVA Sell – IVA Buyed, only 42 USD.
At the present, I Use the Adjust Tax Liability function to adjust this issues… The Liability decreases and the diference are increment an Income account called Taxes Credit.
My quetions are:
1) How can I do to enter my Bills with this IVA Credit for QuickBooks automatically reduces the Tax Liability and Showme how much I will pay at the end of the month?
Thank You Very Much,
Regards
Matias
Your English is better than my Spanish by a long shot…
I’ll assume that you are using the US version of QuickBooks. If you are using a different national version, this might not be the best approach.
Note that I am not a CPA or accountant. Also note that you should check on your local tax laws to make sure that this works for you. I don’t know your specific requirements for how things are reported.
In general, you can set up an OTHER CURRENT ASSET or OTHER ASSET account in your chart of accounts that you call something like “Prepaid Sales Tax”. When you create a bill or check, enter the sales tax amount on the Expenses tab using that account. This will help you track the amount of sales tax that you have paid. Then you would use the Adjust Sales Tax Due function, select that account, select “Reduce Sales Tax By” and enter the amount of sales tax you paid for the appropriate period of time.. Later when you pay your sales tax you would see both a positive and a negative amount, I believe, and you would select that.
You should test this on a trial company before actually implementing it.
Charlie,
I have the problem that my customers are used to specific amounts for each product.
Now switching to quickbooks, these amounts will change and become “ugly”.
For example, I always charge my customers $560 for an item. That is the price they see on the invoice, and I have a small line saying (of which 10% VAT or $50.90).
Now switching to quickbooks is it possible to have such a line? Because the way it describes in this article, I would have to sell the item for $509.09 and add another $50.90 for VAT.
Please advise?
THANK YOU!
Peter, are you using a non-US version of QuickBooks? If so, I’m not sure how they handle VAT.
No I am using a US version of Quickbooks.
Peter, I’m not an expert on VAT, so I don’t know if that is suited to using the sales tax feature in QuickBooks, or to use another method. However, if you have a limited number of items, you can use “group” items to handle this. Create a group item, include the product in the group AND include a sales tax item in the group. The group will be the total amount, it will show (if you set the group up correctly) just one line for the item, and you get the proper calculation of tax for the item. This would work even if you have a large number of items, although it gets a bit tedious to set that up.
Hi Charlie,
Thanks alot this does solve my problem.
Hello Charlie,
We collect the actual sales tax from the customer. However, when submitting the sales tax to the state, the state requires rounding. What is the best way to account for the difference in the amount collected and the amount paid?
Thanks.
Trish,
For the rounding issue, use the “Adjust Sales Tax Due” menu item under the Vendor Menu > Sales Tax.
In the adjustment, put a positive or negative amount to round to the nearest whole dollar, and code the difference to some expense account such as Miscellaneous Expense.
I invoice several clients that have multiple locations and the locations are in different cities throughtout California, thus the sales tax are different depending on the cities. How do I get QuickBooks to report the sales taxes on the sales tax liability report correctly.
Tracy, you could set up a different sales tax item for each different location. Then make sure that the invoice uses the proper item. Then each will be tracked properly in the reports.
Hi, im trying to get the tax codes to obtain the subtotal or from a subtotal to get a total. i know that last year was 1.13925… but this is no longer good. if anybody could help me out
thanks
Mel, I’m sorry, but your question isn’t very clear…