Setting up Sales Taxes in QuickBooks, Part 1
Next to payroll, state sales taxes represent probably the most complex element of your accounting tasks. QuickBooks can help with the mechanics, but there is a lot you need to learn before you can start charging and paying them. Here is an example:
- Is your company located in a destination-based or origin-based state where taxes are concerned (do you charge sales tax based on where your customers are or where you are)?
- Certain types of items and services are exempt from sales tax. Are yours?
- What local taxes (city, county, etc.) must you collect, if any?
- How often must you submit what you owe, and to what agency?
If you don’t know your state’s rules, search for your Department of Revenue (sometimes called the Department of Taxation) on Google. It is a complicated process and if you need more detailed information you can always call and speak to someone in the office. After all, you can’t begin to work with sales taxes in QuickBooks until you first know the answers to many questions.
Once you know what your state’s rules are, you can start setting up the sales taxes you’re required to collect and pay. Open the Edit menu and select Preferences. Click on Sales Tax, then Company Preferences. Make sure the Yes button is highlighted next to Do you charge sales tax? , then click on Add sales tax item. You’ll see this window:
Figure 1: In states where it’s required, you may have to at least set up a state sales tax item in QuickBooks. You may also be responsible for local (city, county, etc.) taxes.
TYPE should already be set to Sales Tax Item. Enter a name for your tax in the Sales Tax Name field; the Description should automatically appear as Sales Tax. Type in the Tax Rate (%) and the name of the Tax Agency that will collect it (select if it’s not there already). Click OK to return to Company Preferences and continue to define additional tax rates. If there is a sales tax item you use frequently, you can select it from the Your most common sales tax item field.
Tip: Each sales tax rate is considered an Item in QuickBooks. When you have to edit or delete one, open the Lists menu and select Item List. Type sales tax in the Look for box, then Search. Right-click on your target and select your desired action from the local menu that appears.
Sales Tax Groups
When you want to combine multiple sales taxes as one item (state, county, etc.), click Add sales tax item again in Company Preferences and choose Sales Tax Group. Enter a Group Name/Number and Description. In the table below, click the down arrow in the field in the TAX ITEM column. Keep selecting individual tax rates until you’re finished, then click OK. When you use one of these groups in a transaction, the customer will only see the total tax, but reports will break them down into their individual parts.
Completing Your Preferences
The bottom half of the Company Preferences screen needs more information.
Figure 2: It’s important that all the entries at the bottom of the Company Preferences screen are correct before you start working with sales taxes in QuickBooks.
The first two items here are simply field labels that will appear in transactions to indicate whether or not a line item should be taxed. You should leave them as is; they’re automatically created by QuickBooks. If you want to Identify taxable amounts as “T” for Taxable when printing, click in that box to make a checkmark.
Is your QuickBooks company file set up on a cash or accrual basis? Click on the button in front of the correct choice. WHEN DO YOU PAY SALES TAX is a question that will be answered as you’re learning about your state’s sales tax requirements. When you’ve completed this section, click OK.
Assigning Tax Codes
As you create item and service records in QuickBooks, you’ll be asked to indicate whether or not they’re taxable. The Tax Code field appears at the bottom of the window, like in the image below.
Figure 3: You’ll need to designate every item or service you sell as taxable or non-taxable.
Because there is so much more you need to know about collecting and submitting sales taxes such as how to work with transactions and reports, you will be glad to hear that those topics will be covered next month. In the meantime, if you need help setting up your QuickBooks company file for this complex task, don’t hesitate to call.
Setting up Sales Tax in QuickBooks, Part 2
Last month, the focus was on the process of setting up sales taxes in QuickBooks. As you may recall, the first step is to go to Edit | Preferences | Sales Tax and make sure the software is set up correctly for this use. Before you do this, however, you will need to know what your state and local sales tax rules are. You can find this information on your state’s Department of Revenue or Department of Taxation website.
State sales taxes are considered Items in QuickBooks; you create them like you would create product records, and when local sales taxes are also required, you can set up Sales Tax Groups. You’ll be assigning these Items as well as Tax Codes to customers.
Using Sales Taxes
Once you have sales taxes set up, you can start using them in transactions. You can create them on the fly from within transactions, but we recommend taking care of this important housekeeping task before you start.
Figure 1: QuickBooks applies the Sales Tax Item or Sales Tax Group that you assigned to the customer on your invoices. You can see the others that are available.
Start by creating an invoice. When you reach the Tax column for your first line item, youâ??ll see that QuickBooks has already assigned Tax or Non to it based on the information in the item’s record. You can mix taxable and non-taxable items on the same invoice. You can also add a new sales tax on the fly from the invoice itself. Click the down arrow in the Tax column and select .
Be sure you’re not required to pay sales tax on an item when Non is selected. You may not have to charge sales tax on. For example:
- Nonprofit organizations
- Out-of state sales
- Items that your customers will resell
Tip: If you’d like, you can create more specific sales tax codes for these situations. You could use OOS for out-of-state sales, for example, LBR for labor, and NPO for nonprofit organization.
Figure 2: QuickBooks already includes Sales Tax Codes Tax and Non, but you can add additional ones that are more descriptive.
Be very careful with your sales tax classifications in QuickBooks. As was mentioned last month, such errors will be discovered in a sales tax audit, should you ever be subject to one.
Once you’ve entered all the line items in the invoice, look down toward the bottom of the screen, directly beneath the table containing invoiced items and above the Total. QuickBooks will have calculated the sales tax due using the Sales Tax Item or Group you assigned to that customer during setup, placing it in the Tax field.
Look to the left of those numbers, and you’ll see the actual rate that was applied. To the left of that is a drop-down list containing the correct Sales Tax Item or Sales Tax Group. Click the down arrow if you want to see the list of other options. And in the lower left of the screen, you’ll see the Customer Tax Code.
The Sales Tax Center
Figure 3: The Manage Sales Tax window.
When it’s time to pay sales taxes, you’ll open the Vendors menu and select Sales Tax | Manage Sales Tax. From the screen that opens, you’ll be able to:
- Access Sales Tax Preferences.
- Generate sales tax reports that help you fill out required forms.
- Visit related screens.
There are two reports you’ll need to run: Sales Tax Liability (displays total sales, amounts that are taxable and at what rates, taxes collected, and how much sales tax is due to each taxing agency) and the Sales Tax Revenue Summary (breaks down total sales into taxable and non-taxable). These reports are, of course, customizable, so you can filter them, for example, by Sales Tax Code.
A Delicate Balance
Collecting the correct amount of sales tax on taxable items and submitting the right tax totals to the right agencies takes vigilance. You don’t want to charge customers for unnecessary taxes, but you also don’t want to end up paying taxes you should have invoiced out of your own pocket. It’s much easier to spend a few minutes up front setting up sales tax accurately in QuickBooks than it is to go back and untangle inaccurate records. If you need assistance with this, don’t hesitate to call and set up a consultation.