Listen to this articleAlthough QuickBooks has made accounting easier for business owners, tax fillings are always a hassle. One of the toughest challenges for a small business owner is to learn how to calculate sales tax in QuickBooks and other accounting software.
Calculating sales tax accurately is essential to prevent disputes over tax charges, legal issues, and fines. E-commerce businesses and online retailers especially find calculating tax rates difficult due to the complicated tax landscape, which depends on numerous factors.
Therefore, most business owners need a comprehensive guide to sales tax calculation. In this guide, we will explore what sales tax is, which businesses should charge sales tax, and how to calculate sales tax in QuickBooks. We will also see how to set up, apply, and record sales tax so that you can prevent complications and maximize potential refunds.
A Quick Definition of Sales Tax
Sales tax is a charge levied on the sales of products and services the customer pays. It is collected by the governing authorities such as the state, local, or municipal governments. Sales tax is calculated based on the retail cost at the point of purchase.
For example, if you buy a product at a retail outlet, the sales tax is levied on the product and is already included in the MRP( maximum retail price). Thus, you pay for the product’s original cost before sales tax plus the applicable sales tax. The retailer collects and passes these taxes to the tax authority or governing body.
Implication of Taxes in the USA
When you begin to explore the tax landscape of the USA, you might wonder if there is a uniform tax rate at the federal level. Moreover, another question is on how many levels of sales taxes are applied.
Firstly, there is no uniform tax rate at the federal level. In the USA, taxes are applied at the state and local levels, and the rates vary from one state to another. Interestingly, states such as Alaska, Delaware, Montana, New Hampshire, and Oregon do not apply sales taxes.
Some states require you to have a permit to collect taxes. You can learn more about the breakdown of sales tax requirements by state on the Small Business Administration website.
Who Must Collect and Report Sales Tax
As a business, you are responsible for collecting sales taxes and reporting them to the governing body. When you collect sales taxes from customers, you must keep track of them to report them accurately to the local and state governments. However, there are a few catches to this story.
- Firstly, sales tax is only applied once between the business and consumer cycle at the final point of sale. Thus, you cannot apply sales tax on a wholesale transaction.
- Secondly, you only need to pay sales tax to a state or local government if you have a physical presence there.
- Moreover, sales taxes also depend on the products and services you provide. Each state has a comprehensive list of products that are tax-applicable and others that are tax-exempt.
Let’s examine how sales taxes work for businesses with a physical presence in the states and online businesses.
Difference in Sales Taxes for Brick and Mortar and Online Businesses
Sales tax works differently for brick-and-mortar and online businesses operating in the states. Let’s examine these two scenarios separately.
Scenario 1: You Have Physical Presence in the State
Most retail sales apply to sales taxes. If your small business sells a product, sales tax is applied every time it sells to the consumers. This sales tax is collected and passed on to the local and state governments. However, this is only when you are physically present in the state.
If you have an office, store, or similar facility where you operate, take orders, offer services, etc., your business will be considered to have a physical presence or nexus in the state.
Scenario 2: You Don’t Have Physical Presence in the State
Sales taxes are tricky when it comes to online businesses and transactions. The sales taxes here work based on three factors:
- The area where the seller is located
- The area where the sale is made, which is the area of the buyer,
- And if the seller is a remote entity and doesn’t have a physical presence
Let us look at these three situations in detail.
How Sales Taxes Work for Online Businesses
Sales taxes are calculated differently for the states where the online business is located and the states where it doesn’t have a nexus.
Where Seller is Located
In the state where you are located and have built a nexus, you must collect sales taxes on sales made to residents of that state. This is quite simple. Many states levy origin-based sales taxes, such as California, Illinois, Tennessee, Arizona, Mississippi, New Mexico, Ohio, Pennsylvania, Texas, Missouri, Utah, and Virginia.
Where Buyer is Located
Sales tax is also calculated on the destination of the sale, which means the address where the buyer is located. Thus, when calculating the sales taxes for online businesses, you must consider the applicable taxes based on the sales destination.
Remote Sellers
Sellers who operate remotely and do not have a nexus are termed remote sellers. Different state governments have various guidelines and thresholds for remote sellers.
Complimentary Use Tax
Sales tax has a companion – the use tax levied by many states in the USA. The use tax is reported by the buyer instead of the seller. It is levied on the product purchased through an online seller or catalog where the sales tax is not applicable. Often, the tax rate for the use tax is similar to sales tax.
To learn about your state’s specific tax rules, consult your state’s Department of Revenue.
Understanding How QuickBooks Calculates Sales Tax
QuickBooks and, for that matter, most accounting software calculate sales taxes based on several things, such as:
Whether the customer is tax-exempt or not
Remember, you will not need to collect sales taxes from all customers. Many customers, such as non-profit organizations, churches, schools, etc., can be tax-exempt. Thus, if you calculate sales taxes in QuickBooks, you should set these customers as tax-exempt.
However, the tax exemptions are different for each state. Thus, you may need to calculate sales taxes for these customers. QuickBooks will do that automatically if you use automated sales taxes. However, you will need to map the items to proper tax categories.
In the upcoming sections, we will explore how to categorize sales tax in QuickBooks.
The product you sell or the services you provide
QuickBooks calculates sales taxes depending on the tax category to which the products belong. You can also assign different tax categories to various products. This way, you can control how QuickBooks calculates sales taxes.
The address where you sell and ship to
The final sales tax applied to the products is the sum of the state sales taxes and local taxes applied by the city, town, or district. Therefore, when you enter the address where you ship the products, QuickBooks will automatically calculate the final sales tax.
Some states would require you to charge taxes on your address (seller’s address) even if you ship or sell to a different address in the same state. QuickBooks considers these tax rules and calculates sales taxes accordingly.
Note that sales tax can vary within the same ZIP code. Thus, you should have a complete street address ready to calculate sales tax in QuickBook and other accounting software.
Special Situations
Often, there are exemptions to a general rule, such as for products, borders, locations, etc. QuickBooks is well-equipped to calculate taxes for these situations.
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How to Calculate Sales Taxes in QuickBooks: Automatically and Manually
You can calculate sales taxes in QuickBooks in two ways – automatically and manually.
Automated Sales Tax
QuickBooks can automatically calculate the taxes for the invoices and receipts and help you file accurately. Moreover, it notifies you when the payment is due so that you can file your taxes within the deadlines and avoid tax penalties.
If you are new to automated sales taxes, you must make a switch and set it up. We will guide you on how to do that in the next section.
Manual Sales Tax
You can also calculate sales taxes manually on invoices and receipts. To do this, you will need to set up custom rates. The section on calculating taxes manually will explore how to set up, use, and remove the custom tax rates.
How to Switch to and Set Up Automated Sales Tax
Experts recommend the automated sales tax, one of the two ways to calculate and prepare sales tax in QuickBooks. This is because automated sales tax leverages Intuit’s tax table and rates, which helps ensure compliance. On the other hand, manual sales tax is only recommended when you are proficient in tax regulations.
Before You Switch to Automated Sales Taxes in QuickBooks
Remember: Once you switch to automated sales tax, you cannot switch back to the traditional way of calculating sales tax in QuickBooks. Therefore, before you change to automated sales tax, ensure it is what you want.
Know What Happens When You Make the Switch to Automated Sales Tax
When you switch to automated sales tax, you will need to match your existing tax rates to the official QB agency. Users with less than 20 tax rates must map all their tax rates. However, it is not mandatory for users with more than 20 tax rates to match all the tax rates.
Why Match All The Tax Rates
It is recommended that you match all your tax rates, as the rates you do not match will not be available on the sales form. You can check the previous data from Charts of Account Registers and Sales Tax Liability Reports. However, remember that the data for the rates that you do not match will not be visible in the Sales Tax tab.
Steps to Switch to Automated Sales Tax
After you have considered it and are ready to switch to automated sales tax, follow the steps listed below to do so.
- Head to Taxes. Click on Sales Tax.
- See if there is an option to switch to automated sales tax.
As this is a new feature that Intuit rolled out, there might still be time before the automated sales tax feature becomes available. If you don’t see the option to switch to automated sales tax, you must wait until it is available.
- If you can switch to automated sales tax, click Get Started or Use Automatic Sales Tax.
- If your business address is incorrect, click on the Pencil icon to edit it.
- Once you are done, click Next.
- Now, match all the tax rates with the official state agency. If you have only a few tax rates, match one by one. However, if you have several tax rates, match them in bulk.
- Matching One Rate at a Time: To match tax rates one by one, use the dropdown for Official Agency Name before each tax rate in Your Agency Name column and match it with the right tax rate.
- Matching Tax Rates in Bulk: If you need to match multiple tax rates in bulk, you must match multiple rates to a single official agency. Therefore, mark the checkboxes for these tax rates under Your Agency Name column and choose the applicable official agency.
- When you are done, apply to make the selected matches.
- Click Next and review the rates.
- Finally, click Save.
- To view an automated sales tax demo, click Continue; otherwise, close the window.
How to Check Previous Sales Taxes
You can still check the previous sales tax returns when you switch to automated sales taxes. Here is how you can check past sales tax returns:
- Click on Taxes and then Sales Tax.
- Now, choose History.
- To view more details, click on View Return.
You can view all the previous data from the chart of account registers and sales tax liability report.
How to Reconcile Past Returns for Unmatched Rates
You can reconcile previous sales tax data if you didn’t match all the tax rates when you switched to automated sales tax. Talk to your accountant about it and tell them to make a journal entry to move old or new liability accounts. In this case, the agency name will remain the same in the sales tax settings.
You can alternatively make a journal entry to zero out liability and start new in the sales tax center.
How to Calculate Sales Tax in QuickBooks: Manually Using Custom Rates
If you are proficient in tax regulations and wish to calculate sales tax manually, you can set up custom rates. This section will explore how to set up, use, and remove custom sales tax rates.
Setting Up Custom Sales Tax Rates
When you set up custom sales tax rates, you control the state and local tax rates, which you will use to calculate and keep track of sales tax. Therefore, you should be sure about the tax rates. You can check it on the tax authority’s official website if you are unsure.
Follow these steps to set up custom sales tax rates:
- Head to Taxes. Click on Sales Tax.
- Click on Sales Tax Settings.
- You will see a section for Custom rates. Click Add rate in that section.
- Choose between Single and Combined.
- Name your custom rate. When adding a combined rate, give a nickname to each rate included in the combined rate.
- Choose the agency to which you file your taxes. When adding a combined rate, choose the agency for each rate included in the combined rate.
- Fill in the rate.
- Once done, click on Save.
When Should You Add Combined Tax Rates?
Combined tax rates are a group of individual tax rates that you apply at the same time. For instance, there are three tax rates that you always apply together. Combining those three tax rates will save you the extra work of using them individually on invoices and receipts.
QuickBooks only allows you to use one custom tax rate in an invoice or receipt. To use multiple custom tax rates, set up a combined tax rate grouping those individual sales tax rates. The tax rates included in the combined tax rates will still be tracked individually in the report, so you have nothing to worry about.
Using Custom Sales Tax Rates
When you have set up custom sales tax rates, you can apply them to the next invoices or receipts you create. Here’s how to use custom sales tax rates.
- Create your invoice or sales tax like you generally do. However, before you save it, follow these steps to apply custom tax rates.
- You will see a Based on location dropdown in the Select tax rate section. Click on it.
- Now, choose the custom tax rate you want from the list. If you wish to add a tax rate, click on Add rate.
- QuickBooks only allows you to use one custom tax rate in an invoice or receipt. To use multiple custom tax rates in a transaction, set up a combined tax rate grouping those individual sales tax rates.
- Check the total tax amount and verify it.
- Once you’re done, click Save. Alternatively, you can click on Save and Send if you wish to email the invoices or receipts to your customers.
Changing or Removing Custom Sales Tax Rates
If you enter an incorrect tax rate or it is no longer of use, you can remove custom sales tax rates. However, once you make a custom sales tax rate inactive, you can’t reactivate it. You will then need to create the custom tax rate again.
Here is how you can remove custom sales tax rates.
- Head to Taxes. Click on Sales Tax.
- Click on Sales Tax Settings.
- Now, find the tax rate you want to remove.
- Now, from the Action dropdown, choose to make it inactive.
How to Disable Sales Tax in Automated or Manual Mode
Perhaps you don’t charge sales tax to your customer, but the sales tax setting is turned into QuickBooks. You can disable sales taxes entirely in an automated sales tax experience or manual.
Therefore, turn off the sales taxes before generating new invoices or receipts.
Before You Turn Off Sales Taxes, Remove Transactions with Sales Taxes
However, before you go ahead and disable the sales taxes completely, you will need to remove the transactions with sales tax if you wish to recreate them without sales tax.
Here is how you can delete those transactions:
- Log into the QuickBooks Online Accountant.
- Click on Reports.
- Find the Sales Tax Liability Report and open it.
- Expand the reporting period to All Dates.
- You can see all the agencies and tax items on the report.
- Now, click Select the Taxable Amount and filter all the transactions with that specific amount corresponding to global sales taxes.
- Make a note of these transaction details.
- Once you are done, delete these transactions. Don’t worry; you can see the deleted transactions in the audit log.
- Now, proceed to turn off the sales tax feature. The procedure is discussed in the next section.
- Once you have turned off the sales taxes, re-enter these transactions.
Turn Off Sales Tax
The ways to disable the sales tax option differ in manual and automated sales taxes. Here is how you can disable the sales taxes in both scenarios.
In Manual Sales Taxes
- Click on Taxes.
- Choose Sales Taxes.
- If you see the pop-up window to change to a new sales experience, click on Do It Later.
- Now, in the Related Tasks section, choose Edit sales tax settings.
- Choose No for the Do you charge sales tax option.
- Finally, click on Save.
In Automated Sales Taxes
- Click on Taxes.
- Choose Sales Taxes.
- Now, click on Sales tax settings.
- Choose Turn off sales tax.
- Finally, click on Yes.
Wrapping It Up
This was all about calculating sales tax in QuickBooks automatically and manually. If you find anything complicated to follow or want our ProAdvisors to assist you, just call us. Our QB ProAdvisors are available 24/7 to provide real-time support and guide you on how to calculate sales tax in QuickBooks. Dial 1855-546-5024 Now.
FAQs
To add sales tax to an invoice, you must create a specific sales tax line item that you can add to the invoice. This can be done by going to the Invoices menu, selecting Create Invoice> Add product or service > and choosing the product from the Product or Service drop-down. Enter “Manual sales tax” as the name and sales tax rate. Finally, click Save, and you can now enter “Manual sales tax” whenever you need to create an invoice.
You must note that sales tax and income tax are different. The following states do not collect income tax but instruct QuickBooks to collect sales tax: South Dakota, Nevada, Washington, Texas, and Wyoming. Florida also instructs QuickBooks to collect sales tax, but it is not always for the residents to file income tax.
Before you assign a sales tax category to a service or product, check which category to select for the item you want to assign a tax category. Once done, go to Sales, select Product & Services, select the item for which you wish to add a tax category, and click Edit. Select Edit sales tax, go to the Other options section, choose Taxable – based on location only or Nontaxable, and select Done. Finally, click Save and close to complete assigning a tax category to the selected product or service.
