I am fairly a new business owner and still get confused at times on the accounting side. I have just started paying quarterly income taxes. I also pay sales taxes on merchandise. When I pay quarterly income taxes, doesn't this include the sales taxes I pay on merchandise? I am confused am I overpaying. Any advise is greatly appreciated. I hope I am making sense.
Hey @BJTYRE1 - welcome to QB Community, and congrats on your new venture!
It's totally OK to feel "confused at times on the accounting side." We've got plenty of QB Community members who rock at what they do - from chocolate-making to truck driving - and still feel stumped on stuff like tax questions. What's cool is that we also have a bunch of folks in our community who are rockstar accountants :smileyhappy:
Sales Tax is not revenue for your company. You are collecting this on behalf of the state where you made the sale, and it should be accounted for as a liability. And then you simply pay it to your Dep of Revenue when it's due.
If your accounting system is set up correctly it will track sales tax separately from your revenue.
Does that make any sense what I am writing here?
What version of QuickBooks are you using? QBO self employed? Plus?
The tax side of business can be confusing especially when you are just starting! Most business owners are thrown into it and I commend you for reaching out for help! It is much easier to take care of and easier to grasp the concepts in the beginning stages of a business rather than a few years in.
Sales tax and income tax are completely different. The way sales tax is handled is based on your state. Each state has different rules and websites to go to to remit it.
As stated by @LeahIlanah sales tax is not income. You are more of a "middle man" between the consumer and the state. Kind of like some payroll taxes. But we won't get into those right now
Income tax is based on the net amount of money your business makes throughout the year. When you are an employee, the income taxes are taken out of your paycheck automatically and your employer remits it to the IRS. A business doesn't work like this though. They don't get a paycheck with their earnings.
Therefore, you have to remit these taxes to the IRS throughout the year. When you file your tax return, it reconciled how much income you actually have for the business after your expenses and then figures out what the tax is on that. Then the actual tax is compared to the amount of income tax that you paid throughout the year. if you paid more than your tax you get a refund, but if you didn't pay enough throughout the year then you have to pay an additional amount.
Lets look at a quick example, let's say the sales tax is 8% and income tax (just federal to keep it simple) is 20%. And you sell 10 things for $10 each.
Your state determines at what interval you remit the sales tax. In California if it's a small business it's quarterly. So for each sale you charged and collected from the customer $10.80. (10 for merchandise and 80cents in sales tax). Every quarter you remit this sales tax to your state. So at the quarter you would remit $8 to your state for sales tax. ($100 of merchandise x 8%). Still with me? That's all for sales tax!
Now income tax. This is due quarterly as well. You have federal and state income tax. In the above example, I used only federal to keep it simple. There are worksheets/calculators available on www.irs.gov that you can use to estimate what your income tax percentage is. We are just using 20% to keep it easy.
So you made $100 for the quarter. (You collected $108. But remember sales tax is not income). That is your gross income. Let's say you had $70 in expenses. Your NET income is $30. You then multiple this by the % to determine the estimated tax due which is $6 (30*20%). You would remit this to the IRS on their website. And you would have a state one if your state has an income tax. The website for your state will guideugui through it.
I hope I didn't lose you. I know this can be a little much at first and that was a very long post. But I hope it's a little bit clearer. Did you understand that?
Ok, so it tracks your Self Employment Tax.
Your income tax is still something different, though the SET has some effect on it.
Just a heads up, so you don't end up with a surprise come April 15.
Hi @BJTYRE1 great question and @JenPM & @LeahIlanah summed it up beautifully for you! They are two completely different things with no relation or effect on one another. Consider yourself a coin holder for the state you conduct business in regarding sales tax. At a future date you owe the state the money you are required to collect for the sales tax. QBSE has a feature where you can set up your state's sales tax and track what you owe. However, I do not believe you can pay it through QBSE. You should however be able to do so with more powerful versions of QBO and QBDT, so you may want to explore the other versions capabilities.
As previously described, your 1040 and state equivalent QES taxes are based off the net income of your business. I always suggest talking to a tax expert. While these forums are very helpful, they are not suitable for the complexities of tax law and planning because they are too general in nature. Best of luck to you!