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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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.
They can also, in the make deposit screen (they need to be using undep funds), add a line item posting to the sales tax account.
Say the total is $10.60, and $0.60 is sales tax.
One line item will be the 10.60 posting from Undep funds
the next line will be -.60, posting to the other bank account
Making the net deposit 10.00
That will take care of deposits to both accounts at one time.
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.
Señor Mena al igual que lo explica Mr,Russell en sus graficas ,usted solo tiene que agregar los distintos porcentajes de impuestos que paga su cliente y cuando usted haga la entrada de sus jornadas tendra a su disposicion las distintas opciones .Comiense con el primer cuadro en donde tax (impuestos) luego Vea el cuadro en donde dice new item(nuevos articulos)ahi agregue los diferentes porcentaje s con los que o su clientes pagan .Luego si quiere hacer su trabajo super facil ,busque el nombre de su cliente y agregue los diferentes porcentajes que pagan su cliente.Despues de eso cada vez que usted entre informacion d e su cliente aparacera las dos opciones de porcentaje,
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.
QuickBooks Online UK handles VAT
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.
Why does my sales tax report not show total sales for the month?
I pay tax on PAID BASIS not on Accural. ?
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…
Charlie,
on my sales tax liability report, why is there a difference in the amount between my tax collected column and the sales tax payable column? I tried to trace the amount from the report but there was no way, it just kept reverting to the same report.
So, Im not sure how much to actually pay the IRS, the amount figured from the sales or the sales tax payable amount in which it (QB) added 931.23 to the “North Carolina Dept. of Revenue – Other” line? (p.s.: where did this come from?) If I do include it in my payment, what do I categorize it as? T
Thanks in advance!
Marianne, it is tough to give specific answers without seeing your file. You may want to work with a ProAdvisor (you can use the “find a consultant” link on this page) to work with you – people with the Accountant editions have additional tools for sorting out sales tax issues.
Usually discrepancies come from making journal entries to Sales Tax Payable, or paying sales tax with a regular check, etc. But there are other possibilities. Including file damage (don’t worry at this point, that is not high on the list of possibilities here). In any case, without seeing.
Two things I’ll point out to look for in the Sales Tax Liability report. First, you can double click on a specific figure in the report (in the columns you refer to) to get a detailed report. That may show you where the figures come from. Second, note that the “collected” figure will be the sales in the period you have selected. The “Payable” figure will include not only those sales, but any unpaid liability you have carrying over from prior periods.
In general, when you see the “other” notation anywhere in QuickBooks, that means that you have accounts and subaccounts, and you have some payments to both the subaccounts as well as to the account that is the “parent” account – that is the “other” account. Again, you can double click on the line to start to drill down to the details.
Thanks so much, Charlie! It’s probably from some “corrections” I recently made from incorrect Journal Entries from the past. I’ll check it out…
Thanks again,
Marianne
You never want to make journal entries to the Sales Tax Payable account…
can i make that quickbooks should determine if the customer is from my state and if so make him taxable without me setting up each individal customer ? Is there such a option ? Thanks in advance
Sam, that’s not clear. If you don’t set up the customer, how would QB know what state they are from?
My customers are being imported from ebay with the address but they are always taxable, How do i make that the customers who there addressses is outside of NY state shouldent be taxable ?
Sam, you don’t mention how you are importing from eBay, so I can’t say much. There isn’t a way to deal with that in QuickBooks itself, if you are importing transactions. It is something you would have to look at on the import side of things.
I was talking to Karen Magno of Baystate Consulting about this. They have an excellent transaction import tool. There is an article on their website that relates to importing from eBay, although it doesn’t address this particular issue (http://support.baystateconsulting.com/KB/a15/ebay-imports-into-quickbooks-using-transaction-pro-importer.aspx ). Essentially, she says that due to the way that eBay presents the data, it would take a bit of manipulation by you, but she did think that it would be something that might be possible. But it wouldn’t be an automated solution.
I am having a problem with Sales Taxes.
We have a Self Storage Unit facility.
We invoice our clients every month at the 1st.
Some customers pay early therefore placing their payment in the previous months income.
I find the sales taxes followes the invoice date not the tax period the taxes were collected.
I changed sale tax preferences to “cash basis” but this no effect as to the date the taxes were actually collected.
I’m I going to have to report the sales tax to go with the date of the invoicing?
I am pulling my hair out. If I can’t figure this out, I’ll be bald in a week!!!
Brenda
Charlie,
Are you there?
Sorry, Brenda, sometimes it takes a bit of time to get around to all the blog comments.
I’ve not use the sales tax preference setting to change it to “cash basis”. However, I would guess (not sure) that if you change it that would only affect new transactions going forward. It is something I’ll have to dig into later on.
Also, note, that in some states you are required to collect tax based on an accrual basis
Doen’t the accrual basis report invoices that have been created but payment has not been received yet.
This is where my problem starts with sales taxes.
It is accruing sales tax figures that have not been collected.
What about sales tax I owe on purchase made online or out-of-state? How do I make a vendor purchase appear in my sales tax payable?
Cathy, that’s one that I haven’t dug into in detail yet. Here is a link to another blogger’s comments about how this might be done. Please note that I haven’t tested this out myself: http://onsale-apparel.com/Rustler/tag/use-tax-solved
Hi Charlie,
I’m about to open a Yogen Fruz store in Puerto Rico and already bought the quickbooks program. I’ve been playing around with the program so I can have a better understading of it. My question is; Where should I register daily gross sales(Sales + Sales Tax Payable) so I can differenciate Sales from Sales Tax? Because I look in the customer tab and didnt see anything I could use to register Sales. The only way I could think of was to enter them via deposit, but then again didnt know how to separate sales from sales tax.
Thank You
Luis, you have to enable sales tax in your company preferences. Then you have to enter your sales via a transaction like a sales receipt. You can enter the sales tax as a separate item in the sales receipt.
Take a look at this article, it may address what you are looking for: http://www.sleeter.com/blog/2011/04/quickbooks-for-restaurants/
Hi Charlie,
I am currently reviewing how my company records sales tax. One of the requirements we have to meet is designating the amount of tax dollars collected per income type (labor, materials, rentals..etc). Currently we use the item column to designate each line of an invoice as a certain type of income and from there calculate the sales tax per type.
This, I feel, is not the best approach, but unfortunately, tax groups seem only designed to be for tax jurisdictions, and does not accept a tax group designed to split taxes between labor, materials and so on.
Would you be able to point me in a direction I could take to learn more about how I could set up sales taxes in Quick Books to accommodate this requirement?
Calvin, I don’t know that I have an answer for you. I’ve not seen a requirement to report sales tax the way that you talk about – usually the primary issue is to calculate the correct amount of tax and accrue it by taxing agency. I’d have to learn a lot more about your requirements, why you need to report this way, and how you create your invoices before I could give you much help.
Hi Charlie,
The problem I am experiencing is when I select the tax item when rasing an invoice, the letter ‘T’ appears next to the amount when the invoice is printed on paper; btw the letter ‘N’ does not appear when ‘Non Taxable Sales’ item is selected on the invoice – can you help?
Many thanks
Josephine
Josephine, that is a preference setting. If you go to your sales tax preferences you will see a check box, “Identify taxable amounts as “T” for “Taxable” when printing”. You can uncheck that box if you don’t want the items to be marked that way
I sit on the board of a non-profit organization and have been asked to review and correct some bookkeeping issues with QB 2011. I need to create some invoices to off-set some credit memos that were previously randomly created. The organization does not collect sales tax. When I try to create the invoice, I get a popup message that says I must assign a sales tax code to the line item. When I go to the item list, there is no option for setting a tax rate; I assume because in the company preferences it is set up that we do not collect sales tax. I am unable to create the invoices because of this. Any assistance as to how to fix this issue would be greatly appreciated. Thank you.
Becky, I’ve not run across that message myself, and I’ve not been able to set up a test situation that creates that message. I would start by double checking that the sales tax preference is indeed turned off.
If that isn’t the issue, feel free to contact me directly through the email address in my author profile (at the end of the article), I can take a look at the file and let you know what the issue is.
Thank you for your response to my query. I have checked the company preferences and it is set up that we do not collect sales tax, thus getting the message regarding sales tax makes no sense whatsoever. I’m no expert, but I have been using QB for a number of years and can usually figure out what’s going on, but this has me stumped. I was going to attach the file to an email and send you, but the file is too large. Any suggestions would be greatly appreciated.
Becky, don’t attempt to send me the file, just send me an email message so we can discuss details.
Ah, now I see it (with your file) – the “sales tax” preference is stuck on internally. Essentially what you need to do is to turn the sales tax preference on, save preferences, then turn the sales tax preference off. That resolves this issue. When you turn the preference on you’ll need to create a sales tax item, you can create one with a 0% rate. You don’t need to set your items and customers to “taxable”.
Thank you SO MUCH!!! I’ll try that later, or perhaps tomorrow. I’ll let you know if it works.
That totally fixed the issue. I am forever in your debt. Thank you so very much!!!
Glad it worked, sorry I didn’t think of trying that sooner!
How do I get QuickBooks to charge sales tax on finance charge please? It appears that State of MS requires it. Thanks.
I’ve not come across a situation where a finance charge would be taxable, Very odd!
There isn’t a simple way, at least not that I’ve found. You can create your own invoices for the finance charge, avoiding using the automatic system, to manually assess a charge using a taxable item. You can also find the finance charge invoice after it is added and manuall enter a sales tax item as a line item – you have to enter the amount of the tax, as it won’t calculate it for you.
Best I can come up with.
FYI excerpt from State of MS website:
Title 35 Mississippi State Tax Commission
Part IV Sales and Use Tax
Page 16
“103 Finance or carrying charge income received by the retailer is subject to sales taxes regardless of when billed. …”
I saw the same question from someone in MS in another blog and there was never a reply.
…but thanks for the response!
Dear Mr Charles.
My problem is, we should charge 02 taxes based on our invoice amount, and 1 tax should charge based on invoice amount + other tax . That means tax on tax. Further we should show both taxes separately in invoices according to law.
In Eg : Invoice amount USD 1000
Tax A 10% = USD 100
Total = USD 1100
TAx B 6% = USD 66 ( 1100 x 6% )
Grand Total Should be USD 1166
How we adjust above two taxes in quick books invoice? Pls advice
Fernando: I assume that you are not in the U.S.? Perhaps the Maldives? And that you are using the US version of QuickBooks?
The US version doesn’t support that kind of tax structure as a part of the sales tax feature. We don’t have that kind of sales tax situation. You might look at the Canadian version – although I’m not up to date on the latest taxation laws in Canada these days. They do have a tax on tax situation, but I don’t know how well the Canadian version of QuickBooks deals with that. And, if you already have data in your company file with the US version, you can’t easily convert that to the Canadian version.
I would not use the “sales tax” feature. Instead I would work with subtotals and an “other charge” item with a percentage. Enter your items to be sold, add a subtotal item. Under that add an other charge item for the 10%. Then add another subtotal. Then add a last other charge item for 6%.
This gives you the correct amount on the invoice, and it posts the tax amounts to the account you select. What you don’t have is the reporting/payment tracking for sales tax that you get with the “sales tax” feature. But it is still manageable.
Thank you very much Mr Charles. Highly appreciate your answer and effort.
I work for a company located in NC that is in the business of reselling services, sometimes to a customer that also resells those services again and sometimes we resell the services to the end user. For example:Company A is contracted by McDonalds to install drive thru camers at 1000 different McDonalds located in various states all through out the country. Company A then contracts my company. We then locate and contract different vendors to perform the services. Currently, we collect company A’s resell certificates for each state that the McDonalds are located in because they are not the end user and do not have to pay the sales tax. However from what I have learned about reporting our sales and use tax, we need to report our total gross sales in each state not just our tax exempt sales. How would I track this with the quickbooks online version?
Ashley, my apologies, I don’t work with QuickBooks Online. I’ll see if I can get someone to look at your questions.
Ashley, I would use location tracking to track sales in QBO – that will enable you to pull reports that show gross sales for each state. Then you’ll be able to run a Taxable Sales Summary report, customize so that locations are displayed in separate columns and memorize. This will give you taxable sales per state.
thank you for your quick response. How do I use location tracking?
One more question (same person as above) I work for a company located in NC that is in the business of reselling services, sometimes to a customer that also resells those services again and sometimes we resell the services to the end user. When we resell to an end user, For example: We are contracted directly with Panda Express to install new POS machines at their various locations located through out the country. Currently, we are collecting sales tax for each different city and state that the corresponding Panda express restaurant is located in. This is creating quite a hardship on us for having to submit all the sales tax we have collected to each different city,county and state. Should we only be charging NC sales tax, since that is were we are located and Panda Express’s transaction is taking place with us in NC not with the vendors we have contracted?
As far as the reporting goes, I can only suggest you contact the local tax departments to ask how you are required to track it. If you need any help, please feel free to contact me directly. There may be some other solutions, other than QBO that will suit your needs better.