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!
For another approach to deal with sales tax in QuickBooks see my article on AvaTax Calc, and excellent add-on product that works with QuickBooks to manage sales tax information and reporting.
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 with additional certifications for QuickBooks Online and QuickBooks Enterprise. He also is a Xero Certified Partner. 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. Connect with Charlie at GoogleSubscribe
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On invoices in the bottom “memo” field we have a transaction ID entered. When I drill down on a sales tax report the memo column is pulling the item description. I need to have it populate with the bottom memo info. I have tried everything to make this happen. Any thoughts?
Laura, that is the way it works. They are not being careful with their terminology on fields (this kind of thing happens in several places. Have you tried putting your info in a “custom field” instead? I haven’t looked at that particular report to see if it will pull the custom field info or not – some reports do, some don’t.
Is there a way to upload all the tax entities from the states webfile into quickbook or do you have to enter all of them seperately when setting up Quickbooks?
Jami, do you mean the sales tax items to get the tax rates? I’m not aware that any states have a QB compatible listing. Sometimes you can get it in an Excel file, but you would have to reformat that and use an import tool like Transaction Pro Importer. I’ve seen some discussions where people claim to have a file already formatted, but I don’t have a specific reference for you.
If your sales volume warrants, you might look at the Avalara sales tax plugin for QuickBooks, which resolves that issue for you.
Ok, I know how to enter the sales tax items now and no…. downloading them is not an option. But, one of the 1rst ones I entered I need to edit. I have looked all over, how do I edit them? Is that even possible?
You can edit the sales tax item in the item list by double clicking on it. However, note that changing a tax rate mid year might not be the right thing to do – see this article: http://qbblog.ccrsoftware.info/2009/04/changing-quickbooks-sales-tax-rates-mid-year/
Does this article apply to QBs 2013 as well?
Sandra, yes, absolutely. QuickBooks 2013 isn’t that different from older versions as far as basic data management – most of the changes are just in the user interface.
I pay sales tax twice a year for my small business, yet Quickbooks has no option for that. Is there a way to get it to do that or should I just record it as an annual payment, which will not record my mid-year payment in my check register?
Brian, QuickBooks handles that very well. When you print your sales tax liability and sales tax revenue reports, you can specify the period to be the half of the year you are working with. When you click “pay sales tax” (and you should ALWAYS use this feature to pay your sales tax) there is a box “show sales tax due through…”, so you enter the same closing date and pay that amount. So you can pay the first half of the year, and at the end of the year pay the second half, no problem. As long as you use the “pay sales tax” feature to pay that tax, don’t just cut a normal check.
Thank you for your response. I’ve done exactly what you described in 2011 & 2012. I get both reports easily enough. I use the “pay sales tax” function; however, QB 2011 does not record a 1st half payment in my check register since I’ve got the “pay annually” option selected (there is no semi-annual option built in). When I go to pay the 2nd half, the “pay sales tax” dialog box has no record of the 1st half having been paid, it shows the full annual amount due. It does record the full annual amount when I pay the 2nd half, but there is no QB record of the actual 1st half payment I made. Just one more bug in this bug-laden application.
Brian, are you using the US version of QuickBooks 2011? Is this Pro, Premier or Enterprise?
I have the US version of QuickBooks Pro 2011.
Brian, I don’t know what to say – when I look at the sales tax preferences in Pro 2011 I see options for monthly, quarterly and annually. This is with the current release, R12. The only difference is that I’m using the Accountant edition toggled into Pro compatibility mode – it should show me the same that you have.
One would think that Intuit by now would have added a semi-annual option for those states like Ohio that allow it. Then again, if they’re not even smart enough by the 2011 release to have their log-in window open “activated” & on top, I’m not holding my breath that they’re ever going to fix all the other bugs. If I ever come across a different business accounting application, I’m switching. I’ve sorry for venting…I know you’re not responsible for Intuit’s programmers, & I truly appreciate you trying to help solve this issue.
The sales tax reports all pull from invoice dates and not payment dates. We invoice a customer in January for 45,000. He made two payments, one for 10,000 and one for 11,000. Yet Quickbooks shows the sales tax due for January on the 45,000. Anyway around this except to pull a customer transaction report and narrow it to just the payments received for January? That will make the sales tax reports always wrong.
Anne, have you tried customizing the sales tax reports to be on the “cash” basis instead of “accrual”? They generally default to accrual. Also check with your tax agency to be sure that they will let you use cash basis for sales tax reconciliation.
Yes, it’s set to cash basis, both for the company and for the sales tax reports. The tax agency allows cash basis. I have pulled the tax reports and the sales by customer reports, they all show it based on invoicing, not on date payment was received.
The difference between what Quickbooks says I owe and what I actually owe is 3800.00. Quite a difference. I’m thinking I’m going to have to redo about 7 years of sales taxes.
Anne, in my 2013 R5 installation, if I have an invoice for $250 dated February and a payment for that invoice dated March, my Accrual basis “sales tax revenue summary” report shows the item for February, my Cash basis version of the same report shows the item for March. This is a situation where the invoice was paid in full. I didn’t get into all the variations that can occur with partial payments, etc.
So in my test case, it seems to be working the way that I would expect…
I’m having trouble with the Sales Tax Option when downloading transactions from my shopping cart into a new QuickBooks file we created.
The problem is when the orders are imported into QB, a new Vendor “Sales Tax Agency” is created instead of using the existing one. All other fields (Sales Tax Item Name, Sales Tax Account) are correct, except Sales Tax Agency, which is not linking properly. This throws off the Sales Tax Liability Report in QB.
Any suggestions?
Vignesh, I would talk to the company that creates the shopping cart that is pushing out the data to QB. Or, if you are using a connecting program, talk to them. I can’t say much without knowing how you are doing the integration and what data they are sending over. It sounds like this is a problem on the source side, not on QB’s side.
Charlie,
Thanks for your reply. Well, my shopping cart allows me to export orders to an IIF file, which I import it into QuickBooks.
I will check with them.
That may be a part of the problem. IIF is a lousy way for products to use to import data. I never recommend anything that uses IIF, there is no error checking and it is easy to create bad data with it.
We use quickbooks for its general ledger purposes. It will not work for our invoicing so we don’t bother putting in any customer info or any invoice info. But I need to record sales tax payments. Is there a way to put what we owe (we track it using our invoicing software) in one lump sum so that we can then record the payment and it gets deducted from our total income? Currently we are reporting it under the tax line “Miscellaneous taxes” which is not proper. From what I understand, it shouldn’t even show up in the gross sales amount at all.
Tim, so how are you entering your sales figures? I would still consider using a transaction window – create one customer for “sales”, one service item for “sales”, and a sales tax item. Enter the info in a sales receipt as a summary. Then the sales tax system is going to work for you.
How do you code an item that is subject to additional tax because of its type, such as lodging? All sales take place in one location, so each customer can be set to pay the same state tax, but lodging-related items are subject to both the state tax and an additional lodging tax. It looks like items are only able to be specified as taxable or not — there is a tax code, but not a tax item. Can I set up an additional sales tax code to attach to these items to have them taxed at a different rate?
There are several ways, it depends on how you want to treat the taxes and see them show on reports. It is hard to go into detail in blog comments, you should talk to a qualified QuickBooks advisor who can sit down with you to go through the details. In summary, one way is to have the lodging tax set up as an “other charge” item and add that after each line that has that tax. This doesn’t put the numbers into the sales tax reports – which might be what you want, or might not be. Another approach is to have separate sales tax items for these kinds of situations, and insert them in the detail of the order, rather than using the tax at the bottom of the order. That has different advantages and disadvantages. But you should talk to an advisor who can look at your specific situation.
Hi: Nice article and series of articles. My question is if there is a way to show the amount of tax due for each entity on the balance sheet. That is to ask:
Sales Tax Payable = Account 2200
Florida State Tax 6% = Account 2210,
Sarasota County Tax 1% = Account 2220,
Manatee County Tax .5% = Account 2230,
and so on.
all sub accounts of 2200.
But the balance sheet shows only Sales Tax Payable 2200 with any dollar figures, so the payment/check has to be db Sales Tax Payble, cr cash in bank, and does not show the amount for each entity?
QuickBooks is set up to have only one “sales tax payable” account. You would see the amounts due in the “sales tax liability report” instead.
As I surmised. Strange that it does not track the amounts due for each “sub account”, but probably simpler for non-bookkeepers/accountants to understand.
Thanks for your quick response. Thought I was missing something.
How do I get non-taxable invoices to not hit the sales tax payable account? Its so frustrating seeing line after line of zeros. Most of our customers are non-taxable. Also, on the sales tax payable report some of the non-taxable invoices show up on a line called TX Sales Tax, in the total sales and in the non-taxable sales sections. But then there is a whole different line below that called No Tax Vendor, non-taxable. I can’t figure out how QB differenciates between invoices to determine which total to put them in. Suggestions?
Italics? Something is very wrong here. That isn’t something that can be diagnosed via blog comments, you need to contact Intuit tech support, OR talk to a local QuickBooks advisor who can help.
I’ve set up my sales tax group as Sales Tax Payable for my customer invoices. How should I label the accounts for paying those taxes to each jurisdiction (state & local, I currently have each listed as an expense)? Thanks.
Jennifer, review this article for the details. Your “sales tax group” item won’t point to any account. The detail sales tax items automatically send info to the proper Payables account. You track the different jurisdictions, if necessary, by creating a sales tax ITEM for each jurisdiction (and combining them in sales tax groups).
I’ve entered the new sales tax in the item list and made the old rate inactive. However, when creating an estimate, the old rate comes up, and the new one is not in the drop-down list. This only happens with estimates, not invoices. Any suggestions? Thanks.
I haven’t seen that, Mary. I’d have to have my hands on your file to be able to see what is going on…
Thanks for the reply. I’ll get someone in to check it out.
The new 1099k forms report total credit card transactions including sales tax to the IRS. How do I set up sales tax collected as income.
I found my answer. I don’t
Right, Luann, you don’t have to worry about that as far as I understand it.
Charlie,
We’ve changed over all of our customers to the new (old) British Columbia sales tax. We are running into a problem with the sales tax on specific items. For example, freight, which is not subject to Provincial Sales Tax, still shows up at 12%, despite our having changed the “freight” item to GST only at 5%. It seems that the customer tax code is overriding the item tax code. Is there a way to remedy this? Can a customer have one tax code and an item another without manually altering the freight tax code on every transaction?
Thanks
Mike, unfortunately I can’t help you with this, as I don’t have a copy of the Canadian product.
Oh well. Thanks for responding anyway.
I need to create an invoice totaling $63 that is taxable. So when I back out the sales tax, due to rounding, it totals either $62.99 or $63.01. Do you know how to adjust this? Thank you!
If you enter the sales tax item as a line in the invoice, you can enter the amount you want for tax directly.