Tracking Sales Tax in QuickBooks is done from the vendor menu. I find it interesting that remitting sales tax to the state is done from within the vendor menu, since sales tax is collected from Customers, but it makes sense when you consider that you are collecting sales tax on behalf of your state which is considered a vendor in QuickBooks. Your vendor list is a list of who your company pays whether it is for costs, expenses, or liabilities such as sales tax. Therefore, paying sales tax is done from the vendor menu.
Setting Up Sales Tax in QuickBooks
Before you can track sales tax in QuickBooks you need to set it up. This can be done from the EasyStep Interview when you first setup your company. If your company file is already set up, you can go to Company Preferences for Sales Tax in the preferences menu which is found under the edit menu. For instructions on doing it with the EasyStep Interview, visit this page.
If you are setting it up from the preferences menu, here is what you do. Once you have the Company Preferences tab open for Sales Tax preferences, Choose yes for the question ‘Do you charge sales tax?’ For right now, we will skip Set Up Sales Tax Item and move down to the ‘Assign Sales Tax Codes’ section. These codes are pre-populated with ‘Tax’ for taxable item code and ‘Non’ for non-taxable item code. I prefer to leave these as is, but you can add a new code you create by choosing the arrow for the drop down menu and choosing ‘Add New’.
Cash or Accrual Sales Tax Reporting
Moving down to the next section you will need to know whether your reporting basis is cash or accrual with your state revenue department. If you are on an accrual basis with them, then the sales tax you collect is owed as of the date you create an invoice or sales receipt. If you are on a cash basis, you owe the sales tax as of the day you actually receive the funds.
If you have a retail business and your customers pay at the point of sale, you will owe the tax to the state as of the date of the sale whether you are on a cash or accrual basis because you receive the funds at the time the sales receipt is created.
It gets a little more complicated if you invoice customers and they pay on terms. For example, let’s say you create an invoice on March 1st and you don’t receive payment from your customer until April 1st. If you are on an accrual basis with the state, then the tax is owed as of March 1st, if you are on a cash basis, it is owed as of April 1st.
How Often Do You Report Sales Tax to Your State?
The next section in setting up sales tax in QuickBooks allows you to choose how often you pay your sales tax. You will answer this question based on how often your state requires you to report and remit sales tax. Using the above example again, if you are on a monthly reporting accrual basis, the sales tax for the March 1st invoice is due in April when you report your March sales tax. If you are on a monthly reporting cash basis, then you will report the sales tax when you report your April Sales Tax collected.
If you are on a quarterly reporting accrual basis, you will report the sales tax from the March 1st invoice on the 1st quarter report. If you are on a quarterly reporting cash basis, you will report the sales tax on the 2nd quarter report.
Sales Tax Items and Groups in QuickBooks
Moving back up to the ‘Set Up Sales Tax Item’ section of your sales tax preferences, let’s set up a sales tax item. In QuickBooks, you have ‘Sales Tax Items’ and ‘Sales Tax Groups’. Sales Tax Items are for a single rate, and Sales Tax Groups are for combining Sales Tax Items. So if you only collect sales tax in one city at only one rate, you only need to create a sales tax item. Give it a name such as My City Sales Tax.
A description is helpful if you have a large sales tax item list in QuickBooks and need to be able to distinguish it from others. Otherwise, it isn’t necessary to have a description. Enter the sales tax rate and choose your states’ revenue department from your vendor list under ‘Tax Agency’. If you have not set them up in your vendor list you can do that now by choosing ‘Add New’.
If you collect sales tax in more than one city in your state you will need to work with Sales Tax Groups. Groups combine individual city rates with the state rate to give you the combined rate for a location. If the city has a rate of 2.0% and the state has a rate of 6.5%, they are combined into a group to show the 8.5% rate for that location. So you will need to create a Sales Tax Item for each city you do business in, entering that city’s sales tax rate. Then you create a sales tax item for your state entering the state rate.
The next step is to combine each city’s sales tax item with the state sales tax item to create Sales Tax Groups. If you set up all of your items before moving to groups, this part will be easy. Simply choose the state sales tax item and the city sales tax item. The combined rates will be displayed at the bottom of the rate column as group rate percentage.
For example you might have a Sales Tax Item named ‘Seattle’ and another Sales Tax Item named ‘State’. Put a checkmark next to each item and you will see the combined rate. You would then use a group name such as ‘Seattle 9.5%’ to distinguish the Seattle Group from the Seattle Item.
Setting up the items can be time consuming especially if you do business in many different cities, but it is well worth the time since you won’t have to manually calculate sales tax on invoices and receipts. QuickBooks uses this information to produce reports that will help you when completing your sales tax return for the state.
Sales Tax on Invoices and Receipts
Now that we have sales tax in QuickBooks set up, it is time to see how it works in Sales Receipts and Invoices. You will now have a tax column in your invoices and sales receipts. After you enter each line item of your invoice, this column is where you choose to apply tax or not. If you charge sales tax on all of your invoices for a particular customer, you can choose the customer tax code at either the bottom of an invoice or sales receipt you have created. This will automatically charge sales tax each time you create one for that customer in the future.
Sales Tax Reports
Every time you create a sales receipt or invoice with sales tax, QuickBooks tracks it for you. In order to see what your sales tax liability is for any period, go the reports menu and choose sales tax liability under vendors. This will show you how much sales tax you have collected for each city during that period. Be sure to modify your report to cash or accrual based on your reporting basis and select the correct dates.
The report of sales tax in QuickBooks will also show your total sales broken into two categories: Non-Taxable and Taxable. Take the time to look this report over and compare it with your profit and loss statement for the same period as well as your accounts receivable to be sure everything is correct. You can use this report to help you complete your state sales tax return. The amount of sales tax due on your return needs to match the Sales Tax Payable column of the report.
Paying the Sales Tax Liability
When you have completed your review of your sales tax liability and prepared your report it is time to pay the sales tax in QuickBooks. Go to Vendors, Sales Tax, Pay Sales Tax. Choose the account you will be paying the tax from and the date of the check. Be sure to choose the correct date in the box that says ‘Show sales tax due through’. If you are reporting for March, it should say March 31st.
If you are only paying specific items you can specify them by placing a check in the pay column next to those items and adjust the amount paid if necessary. If you are paying all the tax due, you can choose ‘Pay All Tax’. If you are paying all tax due, the total should equal the amount of your sales tax liability from the report. As long as you chose the correct reporting frequency and basis when setting up sales tax, the numbers should match exactly.
Adjustments to Sales Tax in QuickBooks
Adjustments are sometimes necessary when tracking sales tax in QuickBooks, especially if numbers are off by a few cents. You can make adjustments also, if your state charges a revenue or B&O tax on your sales that your remit at the same time as the sales tax. You will enter that amount as an adjustment to sales tax if you want to pay it along with the sales tax. If you do it this way the B&O will show up as a blank item in the pay sales tax window.
When making adjustments choose the date of the adjustment. The date should be within the period you are reporting so that it will affect the amount to pay for that period. Choose your state vendor from the vendor list and the adjustment account. If the adjustment is to the sales tax liability, then enter the name of the income account the sales tax is associated with. If it is for B&O tax, choose the expense account associated with that tax form the list.
You can increase or reduce the sales tax here as needed. I find it very helpful to make an entry in the memo field to record what the adjustment was for. This is good if you will have an accountant or auditor going over your books in the future.
Even though it does much of the work for you, tracking and paying your sales tax in QuickBooks can be challenging, especially if you don’t audit your work or get behind in entering your payments. Once you have done the process a few times, it will become easier.