There are a few pieces of information you will want to have on hand before setting up sales tax in your accounting system and filing sales tax returns.
Cash or Accrual In Your State?
One of the first things you must understand is the difference between cash and accrual reporting of sales tax if you invoice your customers and give them time to pay. Cash basis considers tax due when you have received payment from your customer. Accrual basis considers that tax due for the tax period in which you invoiced your customer, whether you have received payment or not. Accrual basis reporting is not ideal for most small business owners, and given the choice they will remit sales tax on a cash basis.
Not every state gives businesses a choice. It is very important that you contact the department that handles sales tax in your state to find out if you have the option of choosing between cash or accrual when reporting sales tax. Some states give you the option and others do not. Some states require you to report sales tax based on the time of the sale, whether or not you have received payment from your customers. Take a look at this article I found online for example: https://members.tinshingle.com/category/accounting/nys-sales-tax-accrue-or-not-accruepart-1.
Where To Find Sales Tax Rates
Another thing to know before getting started is where to find the sales tax rates in your state. Washington state, for example, updates this information online every quarter as well as leaving the historical rates where you can find them. You may also want to see if your state has an app or webpage where you can type in a customers address to find the rate for their location if you are unsure of which city they are in. This is especially helpful for locations in unincorporated areas. Having these tools handy will help you find the sales tax rates quickly and not take up too much of your time when creating sales receipts, estimates or invoices. Also be sure to check the rates every month or quarter to see if there have been any changes. It can be awkward to go back to a customer and tell them you didn’t charge enough sales tax, which is why businesses owners will take the loss on sales tax to avoid irritating their customers.
Learn How to File Sales Tax Returns
I highly recommend you learn as much as you can about how your state handles sales tax or hire a bookkeeper or accountant who can take care of reporting your sales tax for you. Filing returns can seem complicated because numerous kinds of businesses are filing through the same system and you will need to know which features and taxes apply to your business and where to report them on the return. State revenue departments collect other taxes through the same system such as business and occupation tax, litter tax and other excise taxes. If you pay B&O tax, you will want to know which business and occupation tax classification(s) are applicable to your business. Some business have to report under more than one classification.
Do a search online to find out which department in your state to talk to and give them a call so you can discuss your business type and learn form them which classifications you have to file under. It is really best to have all of the above information on hand before getting started so that you don’t find yourself trying to figure out things later when you are busy running your growing business.