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The Beginner's Guide to Sales Tax in QuickBooks

Posted by Jakob Mann on Aug 8, 2018

A variety of businesses must collect sales tax as part of their business operations, remitting those funds to the appropriate government agency on a predetermined schedule. The process of correctly collecting, recording, and paying these sales tax liabilities can be somewhat daunting at first, but QuickBooks has some tools built in that can help this go more smoothly.

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Setting QuickBooks Sales Tax Preferences 

Making your sales tax collection and payments into a simple process starts with setting up a solid foundation of correctly set-up sales tax items and settings. The sales tax settings can be accessed in two ways, though they both lead to the same area.

First, you can simply open the Preferences window from the "Edit" menu and choose the Sales Tax section from the left column.

How to Set Up Sales Tax Settings in QuickBooks Desktop 10

You may also choose to open Vendors > Sales Tax > Manage Sales Tax. The first button in this window will open the Preferences window directly to the Sales Tax section. There are some other features in the Manage Sales Tax window as well, which we’ll go over in more detail further down.

How to Set Up Sales Tax Settings in QuickBooks Desktop

The first and most important setting is to tell QuickBooks whether you charge sales tax. If the answer is no, congratulations, you’re done! But in all seriousness, you’re probably reading this because you do charge sales tax, so we’ll select Yes to turn it on, and then the other options are no longer grayed out. That said, if you use another system for your sales taxes entirely, it’s possible that third party application may require sales tax be turned off in QuickBooks to function correctly, and this is where you’d do that if necessary.

How to Set Up Sales Tax Settings in QuickBooks Desktop 2

 

Sales Tax Items in QuickBooks Desktop

From here we can add sales tax items, and this is just like adding one by creating a new item in the item list. The item type Sales Tax Item will be pre-selected. From here, give the sales tax item an appropriate unique name. If you’re using barcode scanning, sales taxes can be assigned a barcode for easy scanning onto transactions. You’ll enter a description for this tax, the rate the tax is charged at, and the tax agency that you collect this tax for, which is set up in QuickBooks as a vendor.

How to Set Up Sales Tax Settings in QuickBooks Desktop 3

In many cases, more than one sales tax rate may apply to a purchase. Your state may charge a 6.5% sales tax, your county might charge an additional 2%, and your city may have yet a further tax of 1.5%. How do we handle this in QuickBooks? While it would be possible to create one sales tax item for the combined 10% of the taxes above, we’re left with the problem that we can only assign a single tax agency to a given sales tax item, so if these taxes go to different agencies, or if they must be reported separately, this can cause a problem. You could manually add sales taxes as line items to transactions, but doing this for every tax on every order is cumbersome and leaves openings for errors to slip in.

How to Set Up a Sales Tax Group 

QuickBooks thankfully provides us a simpler solution, in the form of Sales Tax Groups. Using these, you can tell QuickBooks that a given set of sales taxes should all apply together, allowing you to select the sales tax group as a single rate on transactions while still ensuring that the individual taxes are separately tracked as they should be. You’ll still create individual taxes as outlined above. Once you’ve created all the taxes that will be in a group, you can then create the sales tax group, which is another item type.

Just as when setting up a sales tax item, you’ll enter a name, a description, and a barcode number if applicable. Rather than setting the details in this window, you’ll add sales tax items you’ve already created to the lines in the bottom section of this window by selecting them from the drop-down, one per line. Below these lines, you see what the total of the combined taxes in this group will be. If any changes need to be made to individual rates within the sales tax group, you’ll need to edit the sales tax items themselves.

How to Set Up Sales Tax Settings in QuickBooks Desktop 4

 

Aligning Sales Tax Items with Sales Tax Preferences

Back on the Sales Tax preferences screen, once you’ve got at least one sales tax item created, you can select your most commonly-used sales tax item or group. QuickBooks requires that you choose a most common item so that it knows what tax rate to default to on transactions for customers who are listed as taxable.

Below this, you’ll select the sales tax codes (different from sales tax items or groups) that determine if items on your transactions are taxable or non-taxable. Typically, these will just be Tax and Non, respectively. It’s uncommon to use more than these two sales tax codes, so if you have more than that you may want to check with your bookkeeping or accounting professional to confirm which you should set here.

Finally, you’ll tell QuickBooks about how to handle some of your sales tax dates. You’ll choose whether you owe sales taxes as of the date of a customer invoice (accrual basis), or the date you receive payment from a customer (cash basis). You’ll also tell QuickBooks whether you pay your sales taxes monthly, quarterly, or annually.

What Happens When Using Sales Tax in QuickBooks 

Now that we’ve got our taxes set up, let’s look at how we use them elsewhere in QuickBooks. As we learned above, QuickBooks needs to know your most common sales tax item to have a default, but we also know not all customers may be charged the same sales tax, depending on your location, their location, and the tax laws involved. Some customers may even be exempt from sales tax. To account for this, we can set up a default sales tax item for each customer.

Please note that if you use nested customer:jobs on your customer list, default sales tax items can only be applied at the customer level, not at the job level. If you require more detailed automation of sales tax item selection, you may wish to look into connected apps such as AvaTax.

Sales Tax for Customers 

To add a default sales tax item or group to a customer, select them from the customer list and edit them. In the list of tabs on the left, choose Sales Tax Settings. Here you’ll choose the customer’s tax code, typically tax or non, though you may have different non-taxable tax codes to differentiate why a customer is non-taxable. You’ll then select the sales tax item or group that you’d like to have appear on that customer’s transactions by default (though if circumstances require, this can be changed on the transaction itself). Lastly there’s a place to enter the customer’s resale number. This isn’t required in QuickBooks, but you may need it for tax reporting purposes, so the space is provided to keep this with your other relevant customer information and to add it to certain reports or transaction templates.

How to Set Up Sales Tax Settings in QuickBooks Desktop 5

After saving that customer, you should now see that if you create an invoice and select the customer, the sales tax item you selected as their default populates automatically. This is easiest to see when the default for the customer is different from the global default we set in the main sales tax preferences. If a customer has their own default set, that item should be pulled on their transactions. If there is no default set for the customer, QuickBooks will pull the global default instead.

Invoicing with Sales Tax

Sales taxes can also be used in another way, often when a tax may only be applicable to certain orders. Like any other item in your item list, a sales tax item can be selected as a line item on an invoice, sales order, estimate, or credit memo. In this case it will function just as it does when selected as the sales tax for the whole order, except that it only applies to the item directly above it on the transaction. Should you need this to apply to multiple items, you could use a subtotal and place the sales tax item below that. As an example of how this might be used, let’s say your tax jurisdiction charges a rate of 7.5% on all taxable sales, but an extra 1.5% on sales of certain types of item. To reflect this in QuickBooks, you’d make sure that the sales tax item selected for the whole order is the correct item for the 7.5% tax rate. Then as you add items to the transaction, make sure that all items taxed at the higher rate are entered together, preferably at the top. When you’ve added all the items at the higher tax rate, add a subtotal item that totals the amounts of the items above it. Now when you add the sales tax item for the additional 1.5% tax as a line item, it will be calculated based off that subtotal. This saves time and clutter over needing to add that tax for each of the items with the higher rate.

How to Set Up Sales Tax Settings in QuickBooks Desktop 6

This is probably also a good time to talk about a point of setting sales tax on a transaction that may be easy to overlook.

There are two places where we choose tax codes on a transaction, both on the individual line item and for the customer overall in the footer of the transaction next to the memo. Both should automatically fill based on a combination of the item and customer’s settings.

If a customer is set to non-taxable by default, or the customer tax code on the transaction is switched to non-taxable, any items on the invoice or sales order will be set to non-taxable as well, regardless of whether they’re normally taxable.

If, for some reason, you need to charge tax on a specific item for an otherwise non-taxable customer, you can switch the code for that line to tax, and it will apply tax for that item regardless of the customer’s tax code. If a customer is taxable, then the tax code for each line item will be pulled from item defaults, so non-taxable items are correctly marked as such even for taxable customers. They can then be changed on the order if circumstances require.

Paying Sales Tax Liability

Now that you’ve set your preferences, created your sales tax items and groups, and learned to apply them to customers as well as use them on transactions, you’re well on your way to successfully managing the collection of sales taxes in QuickBooks. But collection is only half the equation. You’ll also need to pay your sales tax liabilities to the appropriate agencies, and QuickBooks has some tools to assist you on that side of things as well.

All the time that you’re recording sales using these sales tax items, QuickBooks is taking the amount of sales tax you owe and collect and posting these balances to a sales tax payable liability account, associated by name to the appropriate vendors. Writing a regular check to your sales tax vendor, while it will record that you sent the agency funds, won’t properly clear out this account. This could lead to your sales tax payable reports containing bad data, and potentially throwing off your books. Instead you’ll want to use the Pay Sales Tax function, available either from the Manage Sales Tax window or directly from the Vendors > Sales Tax menu. Unless your bank and QuickBooks are set up to send e-checks through QuickBooks, this won’t actually pay the vendor, of course. But it is a necessary step in QuickBooks even if you already paid the vendor completely outside QuickBooks with a handwritten check, for balances owed to be tracked properly.

How to Set Up Sales Tax Settings in QuickBooks Desktop 7

Here you’ll select the bank or credit card account you’re paying the sales tax from, the date of the payment, and the date through which you’re paying the sales taxes. You’ll also select the starting check number of the checks created by this action.

Below you’ll see a list of the amounts due to your sales tax vendors, and the sales tax items those amounts are associated with. If you see a line for a vendor that has no item listed, this is an amount due to the vendor that is not associated with a sales tax item. If this is not related to a sales tax adjustment you have entered (more on that below), then you may wish to examine reports on that vendor’s transactions to determine the source of the amount.

Check off each amount you are paying on the left. If you are not paying the full amount that is listed as due, you can change the amount in the amount paid box on the right. If all the amounts are correct and you’ll be paying them all in full at this time, click Pay All Tax to select everything. The ending balance of the selected bank account after these payments is shown below the amounts. The checkbox for “To be printed” at the bottom instead marks the checks for later printing, rather than assigning them numbers now.

How to Adjust Sales Tax

Should you find that the amount QuickBooks says you owe and the amount the sales tax vendor says you owe differ for any reason, you can enter a sales tax adjustment in QuickBooks. Besides discrepancies, this can be used to account for late payment or other additional fees, or for early payment discounts, etc. Either from the Vendors > Sales Tax menu or on the Manage Sales Tax window, you can select Adjust Sales Tax Due. On the Pay Sales Tax window, there’s a button simply labeled “Adjust”, which will take you to the same place.

How to Set Up Sales Tax Settings in QuickBooks Desktop 8

When entering a sales tax adjustment, you’ll enter the date the adjustment is taking place, as well as a reference number for this transaction, which will actually just be a journal entry entered through a handy UI screen. If applicable, you can select an appropriate class to assign to this transaction. Below, you’ll select the sales tax vendor for whom you’re adjusting the balance owed, and the account this adjustment will be offset to (do not choose sales tax payable, as this is the account the amount is being offset from). You’ll select whether this should be an increase or decrease in the amount owed, and the amount of that increase or decrease. Lastly, you can and should enter a memo explaining what the sales tax adjustment was for.

After entering an adjustment, you’ll see the adjustment listed among the amounts in the pay sales tax window. The original amount QuickBooks has calculated will still be listed but selecting the adjustments along with the original amount (they will have no associated item) will increase or decrease the total as appropriate. Once the adjustments have been paid, or used to offset an amount to pay, they will no longer be listed in this window.

Tracking Sales Tax Liability via QuickBooks Reporting

If you need to see where QuickBooks is getting its sales tax payable numbers, or you require more detailed sales tax information for filling out your sales tax forms, QuickBooks provides some reports that may be useful for this. 

We can find the Sales Tax Liability and Sales Tax Revenue Summary reports in a few places: 

  • From the Reports > Vendors & Payables menu

How to Set Up Sales Tax Settings in QuickBooks Desktop 9

  • From the Vendors > Sales Tax Menu
  • From the Vendors > Manage Sales Tax menu

How to Set Up Sales Tax Settings in QuickBooks Desktop

On the Sales Tax Liability report, you’ll see each of your sales tax vendors listed, and nested below them each sales tax item associated with that vendor. The columns show your Total Sales, Non-taxable and Taxable Sales, the Tax Rate for that item, the Tax Collected for the dates the report is set for, and the Sales Tax Payable as of the end of the selected date range. This may be higher than the tax collected if there are unpaid prior amounts. You can double click on any of these totals to drill down for details about the transactions that make them up.

The Sales Tax Revenue Summary report gives you a simple total of the sales by sales tax vendor, broken down further to sales tax item, and columns by tax code, typically taxable or non-taxable and totals. This can be handy for quickly finding totals of each tax in the chosen period, which you’ll likely need for filling out your sales tax forms.

This should be just about everything you need to get started setting up the basics for correctly and smoothly tracking and paying sales tax in QuickBooks desktop. And there’s no better time for it. With this year’s US Supreme Court decision on South Dakota v. Wayfair, Inc., many businesses that previously had to handle either no sales taxes or a comparatively small amount may find that in the coming months, as states put their economic nexus regulations into effect, they suddenly need to plan for the collection and remittance of taxes that they were never required to account for before. A sudden change like this can put a lot of strain on your procedures and the people performing them if you’re not adequately prepared.

If you’re still feeling a little overwhelmed, or you’ve got a tangled mess of old incorrect sales tax information to clean up, give us a call and let our fantastic bookkeeping team help you get things under control.

Do you have more complicated sales taxes to deal with? Want to remove most of the work and potential for mistakes in selecting your sales tax? Our expert sales associates can help you find out if automated solutions like AvaTax are a better fit for your business, and they’ll assist in getting you set up smoothly if you choose to switch. Give us a call at 503-885-0776 and start the conversation to simplify your sales tax today!

Topics: QuickBooks Software, QuickBooks Desktop, QuickBooks Enterprise, QuickBooks Pro, QuickBooks Premier, Taxes, Sales Tax

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