I see a lot of questions about sales tax in the Intuit Community forums, so I’ll give a quick overview of how to set it up in QuickBooks.
If you are going to charge sales tax on an invoice, several things must be set up:
- The sales tax preference must be enabled.
- You need one or more sales tax items and possibly some sales tax groups in your Item List.
- When you create an invoice, you must have a taxable customer tax code selected, a sales tax item or sales tax group selected for the tax, and any taxable charges must be set as being taxable on the detail line.
Enable Sales Tax
To start, you need to enable the sales tax preference. Select Edit then Preferences and select the Sales Tax prefence. Click on “Yes” for the question “Do you charge sales tax”.
In the lower half of this screen there are several options to review to make sure they are set properly for your business (how often you pay sales tax, and so forth).
Sales Tax Items
As you probably know, all charges that you add to an invoice must have an entry in the item list. Sales tax is the same. You will create one or more sales tax items in the item list. You can do this by clicking on the add sales tax item button in the preferences screen, or by adding an item to the item list in the normal way.
Enter the percentage for the sales tax, and a vendor for who you pay that sales tax to (typically your state sales tax agency).
So what do you do if you have multiple jurisdictions? You could have a situation where you have a state tax, a county tax, a city tax or even more. When you file your reports to the state tax agency you need to split out the amounts by jurisdiction, usually.
To manage this, create a sales tax item for each jurisdiction. One for the state, one for each county you work with, one for each city. However you need to break it down for your reporting. Then, create a sales tax group item and add each of the jurisdiction taxes:
If you use this sales tax group in an invoice the rate will be 8.1%, but the program will report each tax separately.
Please note that if you have a large number of taxable jurisdictions this can become very complex. You need to have a sales tax item for each jurisdiction, and a sales tax group for each “nexus” or location that has different combinations. There are third party add-on products that help with sales tax tracking, but these usually are reasonable only if you have a large number of invoices to process.
Back in the preferences section, in the dropdown list Your most common sales tax item you can select the sales tax item or group that you most commonly use.
Customers and Items
Now, let’s look at your customers and items. Some customers are taxable, others are not. Some items and services are taxable, others are not. We will set up both to have the usual value for taxation, although you can always override this when needed.
Edit your customer, you can specify which sales tax item or group to use for this customer. Also, the tax code needs to be set – it should be set to tax.
Edit your items to specify if they are taxable or not – select the tax code of tax.
Putting It All Together
Let’s create an invoice for this customer. The default values for the tax related questions are taken from the customer record and item records used. Three things must be set to have sales tax calculate: The customer tax code must be taxable, the tax item or group must be selected, and the tax setting on the item must be selected. If this all happens, sales tax is calculated properly.
Remember, you can override these if you need to change something for a specific situation. If one line isn’t to be taxable for some reason, change the tax setting on that line to non taxable. If the customer should get a different tax rate, change the tax item or group for the invoice. You can also change the customer tax code.
I’ll talk about sales tax reporting in a future article. Note that to get the most efficiency out of your QuickBooks program you want to set up and use your sales tax items properly.
Let me know if this helps!
- Changing Sales Tax Rates Mid-Year
- How QuickBooks Shows Sales Tax on Invoices
- Mixing Sales Tax Rates in an Invoice
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70’s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the Accountex Report blog, as well as his California Wildflower Hikes blog.