Setting Up Sales Tax in QuickBooks

If you are going to charge sales tax on an invoice, several things must be set up:

1. The sales tax preference must be enabled.

2. You need one or more sales tax items and possibly some sales tax groups in your Item List.

3. When you create an invoice, you must have a taxable customer tax code selected, a sales tax item or group selected for the tax, and any taxable charges must be set as being taxable on the detail line.

Enabling Sales Tax:
To charge sales tax, you need to enable the sales tax preference. Select Edit from the menu bar and then click Preferences. When the preference window opens, select the Sales Tax preference and click on the Company Preferences tab. Finally, click on “Yes” for the question “Do you charge sales tax”. You can also set up Sales Tax items and select which is the most common sales tax item or group that you use.

In the lower half of the preferences window you will see the preset Taxable and Non Taxable Item Codes that QuickBooks uses on invoices. You can set up other Item Codes, such as “Exempt” (for government and other organizations) and “Out of State” for customers outside of your sales tax jurisdiction.

There are several options to review to make sure they are set properly for your business. You can select when you owe sales tax (if you are on an accrual basis or cash basis) and how often you pay sales tax. These preferences are important when you run sales tax reports.

Sales Tax Items:
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 above or by adding an item to the item list in the normal way.

In the New Item window, enter the Sales Tax Name, the Tax Rate and the name of the Vendor, aka Tax Agency, that you pay the collected sales tax to.

Multiple Jurisdictions:
You may 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. To manage this, we can create a sales tax item for each jurisdiction. For example, in NY we have a State Tax, a City Tax and a Metropolitan Commuter Transportation Tax. We can create a sales tax item for each of these taxes. Then we can create a sales tax group item (in the item list) and add each of the jurisdiction taxes.

If you use this sales tax group item in an invoice the rate will be 8.875%, but each tax jurisdiction will show up separately on sales tax liability reports.

Note: 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.

Customers and Items:
Now, let’s look at your customers and items. Some customers are taxable and others are not. The same can be said about your items and services. We can set up customers and items to have default values on an invoice although you can always override this when needed.

When you setup or edit a customer record you can specify which sales tax item or group to use for that customer in the Sales Tax Settings tab. You should also select the proper Tax Code for each customer.

You can also setup your items to specify if they are taxable or not by selecting a Tax Code.

Creating an Invoice:
When we create an invoice, the default values for the tax related questions are taken from the customer record and item records used. As you can see in the invoice below, thecustomer tax code, the tax item and the tax setting on the item are all automatically filled in from information we filled in above.

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.