Paying sales tax in combination with other state taxes

BrianHart · ‎October 15, 2018

I have been confused for some time regarding how to handle payment of sales tax. Theoretically, posting it all to the ST payable account and then using Pay Sales Tax, in conjunction with sales tax adjustments, should work. However, there are two complications with QuickBooks' approach to sales tax that make it messy, if not entirely unusable:

1. Due to the differences in rounding at the invoice level and at the quarterly total level, there is always a small difference between the tax collected and tax due. I understand that this can be corrected using the ST adjustment process; however, in my state (Washington State), sales tax is collected in two tiers: state rate that is the same for all transactions, plus a local rate that varies by location. This means that an overall adjustment to sales tax may well reflect adjustments to separate line items, not a single adjustment to the overall total. And if adjustments to multiple areas happen to offset one another, it may well mean that one tax location needs an upward adjustment, while another tax location needs a downward adjustment--all with no net adjustment to the sales tax liability to the state. That is, I highly prefer to have the adjustment made at the line-item level so that I have an accurate record in QuickBooks of the amount paid by sales tax location that matches my tax return. Apparently, though, QuickBooks allows adustments only at the account level, not per line item--meaning that I would have to have a separate account for each sales tax location, which is entirely unworkable. And because all sales tax is reported on a single return, it naturally involves a single payment, so it is not workable to select each sales tax location (line item), do an adjustment, and pay that tax. That would result in many checks in my register that actually make up a single payment to the state.
2. My state taxes must be paid in a single payment, based on my quarterly return calculations, that includes sales tax and other state business tax, such as use tax on business items purchased out of state and the tax on doing business. If I use the Pay Sales Tax process, QuickBooks will not allow me to go back into the check, change the amount, and add line items for the non-sales-tax portions. That is, my single check to the state must include entries against my Sales Tax Liability account and expense accounts for business taxes. And I think it would be a very poor idea to create separate entries in the check register that constitute what is, in reality, a single check. That would cause confusion when balancing the checking account.

While I would prefer to have adjustments made at the tax-location level, I suppose I could live with the lack of transparency inherent in #1 by just doing one adjustment per quarter. But I cannot overcome #2, and it has kept me from using the Pay Sales Tax feature from the outset. So I have been paying sales tax outside the Pay Sales Tax process, but that has two complications of its own:

1. Since QuickBooks will not give me a way to include the sales tax in gross receipts, I have to be careful to avoid reporting sales tax paid as an expense in my annual federal tax reporting.
2. The balance of my Sales Tax Liability account continues to grow. I understand that I could simply adjust this down to zero now and at the end of each quarter, but I am not sure that would serve any useful purpose for my one-person business where I do my own accounting. It is more likely to cause confusion to an accountant or auditor someday.

I understand, at this point, that cleanup would involve going back to the beginning and working my way forward, but before I am willing to try this, I need to know if there is a workable way to force the square peg of QuickBooks' approach into the round hole of the real world. I think the core question comes down to how to pay sales tax on the same check as other taxes paid to the same vendor.

Ideas?

qbteachmt · ‎October 15, 2018

Whew. I can address a few things.

"Theoretically, posting it all to the ST payable account and then using Pay Sales Tax, in conjunction with sales tax adjustments, should work."

You should be letting the Sales Transactions handle the calculations and the posting for you. Are you describing Manual Entries?

"If I use the Pay Sales Tax process, QuickBooks will not allow me to go back into the check, change the amount, and add line items for the non-sales-tax portions. That is, my single check to the state must include entries against my Sales Tax Liability account and expense accounts for business taxes. And I think it would be a very poor idea to create separate entries in the check register that constitute what is, in reality, a single check. That would cause confusion when balancing the checking account."

Make each payment posting as a Cash account. Make the one real payment, in your system, using that Cash account, as if this is a transfer. The check to the agency is the total.

"I think the core question comes down to how to pay sales tax on the same check as other taxes paid to the same vendor.Ideas?"

This is called a Clearing Process = you want details in one place, and the Total is offset by the actual entry elsewhere. For instance, in Desktop, sales taxes cannot be paid using the Credit Card tool, so we use a Clearing method, to show we did this, anyway. You do this in QB already, if you use the Undeposited Funds method, for incoming.

"Since QuickBooks will not give me a way to include the sales tax in gross receipts,"

You Sales Tax reporting should provide this, as Sales + taxes collected = Gross.

"I have to be careful to avoid reporting sales tax paid as an expense in my annual federal tax reporting."

Only adjustments are part of P&L, and of course, that can go up and down.

"The balance of my Sales Tax Liability account continues to grow"

No matter how creative you intend to be when not using proper functions, you cannot orphan functions. You have to use them correctly; for instance, the adjustment you make, for one but not the other sales tax, is something you still figured out, and document. You figure out that adjustment in the payment function, then in a website, you Enter the breakdown how your State wants it, and you confirm the total; then, in the bookkeeping, you know you are on track and are ready to Adjust and Pay (issue the payment). Even if the payment was through that worksheet on that website, the "bookkeeping" is waiting for you to "pay." This is called "doing the bookkeeping." It is not literally Making the payment.

"results in a message indicating that "You must specify a vendor name for the sales tax account"--even though it is the same vendor as on the check. "

You are confusing the PAYEE name, which is Source, with the DETAIL Lines, which is Target. You are asking about Splits and the Transaction, itself. This is different pieces of info.

"Evidently, I can create a check in my checking register and having one or more lines post against the Sales Tax Payable account. But I have to manually type the sales tax VENDOR under Customer."

Yes, you specify meaningful info. That is part of bookkeeping, and the program is helping, when you don't provide Required info. You are Flagged.

But now you are doing Manual Accounting, bypassing the Function for managing Sales Taxes properly.

"converting the old sales tax line items to the Sales Tax Payable account) creates another anomaly: while the balance of my sales tax is working its way down, it is only because the entries I am doing are increasing the amount of a single debit with no item (i.e. not specific to a tax location)."

Exactly :)

You just Orphaned the Sales Tax functionality, by manually changing Account balances. You grabbed the bus and kicked the riders to the curb, and drove off.

"there are other payments to the same agency for things such as my corporate renewal."

So what? All you are describing is, I have Lots of activities with this agency. They don't have you fill in the sales tax form, mix in the corporate renewal. You would issue a separate check for that. The same is true for the Feds. You don't pay the 940 with the 941. You do them separately.

View solution in original post

BrianHart · ‎October 15, 2018

Now, after a bit more research, I find that one time, back in 2014, I managed to get a transaction split so that a single check to the Washington Dept of Revenue included both expense $$ (business taxes) plus Sales Tax Liability--that posted to the Sales Tax Liability account. However, I either did that by mistake or have completely forgotten how I did that, and attempting to do this manually now (enter a split transaction in the checking account with one of the line items to Sales Tax Liability account) results in a message indicating that "You must specify a vendor name for the sales tax account"--even though it is the same vendor as on the check. But it gives me hope that perhaps I can at least update my existing sales tax transactions to post against the ST Liability account...need help on how to do it though.

BrianHart · ‎October 15, 2018

OK, so now I have something more. Evidently, I can create a check in my checking register and having one or more lines post against the Sales Tax Payable account. But I have to manually type the sales tax VENDOR under Customer.

But working through a few of these (converting the old sales tax line items to the Sales Tax Payable account) creates another anomaly: while the balance of my sales tax is working its way down, it is only because the entries I am doing are increasing the amount of a single debit with no item (i.e. not specific to a tax location). So, while I might eventually get my overall balance down to $0 with this vendor, it will still consist of positive credits for each tax location and one summary debit for the tax payments. It is really not feasible to create a separate Sales Tax Payable account for each tax location, and I am not sure what the effect would be if I got the balance to $0, then posted all those tax-location-specific credits (in the Sales Tax Payable account) against the one big debit that comes from the check splits.

On top of this, there are other payments to the same agency for things such as my corporate renewal. So that would throw the balance off--meaning that I still need somewhere tax-neutral to dump an adjustment to account for that payment.

qbteachmt · ‎October 15, 2018

Whew. I can address a few things.

"Theoretically, posting it all to the ST payable account and then using Pay Sales Tax, in conjunction with sales tax adjustments, should work."

You should be letting the Sales Transactions handle the calculations and the posting for you. Are you describing Manual Entries?

"If I use the Pay Sales Tax process, QuickBooks will not allow me to go back into the check, change the amount, and add line items for the non-sales-tax portions. That is, my single check to the state must include entries against my Sales Tax Liability account and expense accounts for business taxes. And I think it would be a very poor idea to create separate entries in the check register that constitute what is, in reality, a single check. That would cause confusion when balancing the checking account."

Make each payment posting as a Cash account. Make the one real payment, in your system, using that Cash account, as if this is a transfer. The check to the agency is the total.

"I think the core question comes down to how to pay sales tax on the same check as other taxes paid to the same vendor.Ideas?"

This is called a Clearing Process = you want details in one place, and the Total is offset by the actual entry elsewhere. For instance, in Desktop, sales taxes cannot be paid using the Credit Card tool, so we use a Clearing method, to show we did this, anyway. You do this in QB already, if you use the Undeposited Funds method, for incoming.

"Since QuickBooks will not give me a way to include the sales tax in gross receipts,"

You Sales Tax reporting should provide this, as Sales + taxes collected = Gross.

"I have to be careful to avoid reporting sales tax paid as an expense in my annual federal tax reporting."

Only adjustments are part of P&L, and of course, that can go up and down.

"The balance of my Sales Tax Liability account continues to grow"

No matter how creative you intend to be when not using proper functions, you cannot orphan functions. You have to use them correctly; for instance, the adjustment you make, for one but not the other sales tax, is something you still figured out, and document. You figure out that adjustment in the payment function, then in a website, you Enter the breakdown how your State wants it, and you confirm the total; then, in the bookkeeping, you know you are on track and are ready to Adjust and Pay (issue the payment). Even if the payment was through that worksheet on that website, the "bookkeeping" is waiting for you to "pay." This is called "doing the bookkeeping." It is not literally Making the payment.

"results in a message indicating that "You must specify a vendor name for the sales tax account"--even though it is the same vendor as on the check. "

You are confusing the PAYEE name, which is Source, with the DETAIL Lines, which is Target. You are asking about Splits and the Transaction, itself. This is different pieces of info.

"Evidently, I can create a check in my checking register and having one or more lines post against the Sales Tax Payable account. But I have to manually type the sales tax VENDOR under Customer."

Yes, you specify meaningful info. That is part of bookkeeping, and the program is helping, when you don't provide Required info. You are Flagged.

But now you are doing Manual Accounting, bypassing the Function for managing Sales Taxes properly.

"converting the old sales tax line items to the Sales Tax Payable account) creates another anomaly: while the balance of my sales tax is working its way down, it is only because the entries I am doing are increasing the amount of a single debit with no item (i.e. not specific to a tax location)."

Exactly :)

You just Orphaned the Sales Tax functionality, by manually changing Account balances. You grabbed the bus and kicked the riders to the curb, and drove off.

"there are other payments to the same agency for things such as my corporate renewal."

So what? All you are describing is, I have Lots of activities with this agency. They don't have you fill in the sales tax form, mix in the corporate renewal. You would issue a separate check for that. The same is true for the Feds. You don't pay the 940 with the 941. You do them separately.

View solution in original post

BrianHart · ‎October 15, 2018

Thank you!

I am not calculating sales tax manually. I configured sales tax so that it calculates automatically, with different tax rates per tax location. That all works perfectly; all my questions related to accounting for sales tax payments via the built-in process. Many of my comments are entirely moot if I figure that out.

I was just coming up blank trying to figure out how to use the built-in Pay Sales Tax process. The built-in Make Deposits functionality, as you point out, uses a clearing account/process, but it does so in a way that is entirely transparent to me. I know only that I enter payments, click Make Deposits, select payments, and it then creates the required deposit in my bank account. I never thought to investigate how it does that. Looking at it now, I can see that it uses the Undeposited Funds account, which is an "Other current assets" account.

But the Pay Sales Tax process had nothing I could find like the "Make Deposits" function, and it will let me use only bank-type accounts as the destination, so please let me know if what I finally tested below sounds right:

1. Create new bank account called "Sales tax"; tax-line mapping is B/S-Assets: Cash. This will be the ST clearing account.
2. Post "Pay Sales Tax" to that account. This creates a debit against that account with the payee being my state tax agency.
3. Create my check in the bank account, posting my business taxes against my business tax expense account and sales tax against the sales tax clearing account. The payee here is the same state tax agency.

This creates the credit against the clearing account, retaining the correct check amount for the state and resulting in a clearing account balance of $0. And I think I understand it to also leave the entire sales transaction income-tax-neutral. Am I reasonably close yet, or have I just jumped from the frying pan into the fire? This is all something of a brain-teaser for me, but I think it makes sense now (at least unless/until I find that I did not understand, which is entirely possible...).

dsliesse · ‎October 15, 2018

Sorry, but I'm still a little confused by the mechanics of the operation. I get the theory behind what you're saying, but I'm not sure how to make it work. I hope I'm just overlooking something really simple -- not seeing the trees for the forest, as it were.

The "Pay Sales Tax" function doesn't allow for making the payment to another account; it wants to credit a bank account and debit a payable account via a payment to a specified vendor. Here in the State of Washington (where I'm guessing Beethoven is also located) we DO combine all excise taxes into a single payment to the Department Revenue -- in my clients' cases that can include B&O tax, lItter tax, and sales tax (there are dozens of others).

The question boils down to: how do I either (a) make the sales tax payments go to another account, or (b) pay sales tax to the vendor and include other taxes that are included in the same actual payment?

(I suppose I could make the company its own sales tax vendor, but this means paying the taxes becomes a three-step process -- make the payment, receive the payment, and make the real payment -- as well as changing a few hundred sales tax vendors.)

BrianHart · ‎October 15, 2018

OP (Beethoven) here.

There are three parts in doing this:

1. For the WA Department of Revenue check (or EFT, since that is how I do it) in the check register, enter the sales tax paid line item using a sales tax clearing account. This gets payment made to WA state without counting it as an expense and debits against that account.
2. Use Pay Sales Tax to credit the sales tax against that same account.
3. Use a Sales Tax Adjustment expense account for sales tax adjustments. These should normally be just the few cents' difference between the sum of individual invoice tax withholdings and the tax payment of the sum of all invoices' taxable amounts for the quarter (i.e. as calculated on the DOR return as a percentage of the sum).

Here are the details of what I finally worked out as a way to use a clearing account for the sales tax but combine all WA B & O tax in one payment with sales tax without inadvertently counting sales tax as an expense. Keep in mind that I do not use the Pay Bills feature in QB; I just enter transactions (checks) directly into the bank account check register. So, while I cannot speak to the detail of exactly how to go through this using Enter Bills and/or Pay Bills to get the entry into the check register, the result should be the same if done that way. Also note that I, as an Information Systems consultant, have two separate WA B & O tax classifications: Service for my professional/IT service, and Retail for any computer hardware I sell to my clients.

Setup:
Lists → Sales Tax Code list
Tax (Taxable Sales)
Non (Non-Taxable Sales)
Sales tax items
Create one for each sales tax jurisdiction (city or unincorporated area of a county I serve)
Type: Sales Tax Item
Name them using tax location code and description
e.g. 3000 Skamania County
Make one called Out of State with 0% tax. This is used for retail sales delivered to customers in Oregon or other non-taxable states
Tax rate: percentage per WA Department of Revenue total rate (i.e. state rate + local rate)
e.g. for 3000 Skamania County, this is 6.5% state + 1.2% local/county, so I enter 7.7%
Tax Agency: Washington Department of Revenue
Tax Code for Item List
Taxable items: Tax
Non-taxable items: Non
Customers
Under Sales Tax Settings, select the Tax Item
e.g. for a customer in Skamania County, select 3000 Skamania County
e.g. for out-of-state customer, select Out of State
Account #1
Name: B & O tax
Account type: Expense
Tax-Line Mapping: Deductions: State franchise or inc. tax
Account #2
Name: Sales tax clearing
Account type: Bank
Tax-Line Mapping: B/S-Assets: Cash
Account #3
Name: Sales tax adjustment
Account type: Expense
Tax-Line Mapping: Other miscellaneous taxes (or could/should, I suppose, be the same as for B & O tax above, Deductions: State franchise or inc. tax, but that is a nuance, not critical)
Tax accrual
As invoices are created, the tax rate is calculated and added automatically based on the Sales Tax item set for that customer.
This accrues to the Sales Tax Payable account.
Payment processing
Create a single check in the bank register
Payee: WA Department of Revenue
Detail Line 1
Account: B & O Tax
Amount: Amount of B & O Service tax based on amount calculated in quarterly return
Detail Line 2
Account: B & O Tax
Amount: Amount of B & O Retail tax based on amount calculated in quarterly return
Detail Line 3
Account: Sales tax clearing
Amount: Amount of sales tax due on quarterly return
(Detail Line 4 & 5: state & local use tax for any business-related items purchased out of state)

That gets the state paid the correct amount without treating sales tax as an expense. Now I just need to get it all accounted for correctly without coming through as an expense; since I report pre-sales-tax $$ to the IRS, I obviously cannot claim the sales tax paid as an expense. But note that Detail 4 & 5 above (use tax) do go to a tax expense account when I complete my 1120 at the end of the year.

Vendors → Sales Tax → Pay Sales Tax
Pay From Account: Sales tax clearing
Check Date: date of DOR quarterly filing; same as check date above
Show sales tax through: end of prior quarter
Check Pay All Tax
Compare the amount here with the total sales tax due on the return and recorded in Detail Line 3 of the check above.
If there is a discrepancy (which should be just pennies due to taxes being collected per invoice but paid per quarter, all customers/invoices combined), click Adjust, then:
Sales Tax Vendor: WA Department of Revenue
Adjustment Account: Sales tax adjustment
Increase or decrease as required, but the amount of the discrepancy above
Complete the adjustment and pay the tax
Reconcile the Sales Tax Clearing account; set ending balance as $0 and clear the in from the check & out to the Department of Revenue.

The net effect is that the sales tax is (correctly) never an income nor expense, the state gets exactly what they are due, and the pennies' discrepancy/adjustments become either a positive or negative expense. Actual payment goes through the single check to WA Department of Revenue from the bank account. the clearing account is required only to accommodate 1) QuickBooks' requirement to go through Pay Sales Tax to keep the sales tax payable account from continuing to build up ad infinitum in combination with 2) QuickBooks' inability to combine sales tax payment with any other payments.

The only thing I do not have here is a record of exactly how much tax was paid for each local jurisdiction; however, that does not really matter to me, since the state gets what they require, and I can always run a report based on sales tax collected by invoice to see how much was collected alongside a report of sales tax adjustments to see the pennies' adjustments.

rtfletcher841 · ‎October 15, 2018

Thank you for succinctly explaining how to use a Sales Tax Clearing Account for QuickBooks asinine handling of sales tax with multiple jurisdictions. One added note that I figured out. If you receive vendor compensation for paying taxes before the due date, one more step needs to be added.

When the single check is created in the check register to record the actual payment to the taxing authority,
Amount of check: Actual amount paid to tax authority (including vendor compensation)
Account: Sales Tax Clearing
Amount: Amount that QuickBooks shows as due on the quarterly return as a positive amount
Account: Other Income - Vendor Sales Tax Collection Compensation
Amount: Negative amount of vendor compensation received from taxing authority as a credit on sales tax return

Then go through the steps you mention above through Vendors - Sales Tax - Pay Sales Tax.

THANK YOU for posting this solution! You helped more than the hours of research I tried asking my question in different ways!!

qbteachmt · ‎October 15, 2018

"and resulting in a clearing account balance of $0."

That is Exactly Correct :)

The point of Clearing is to always end that task session at 0. So, reconcile that "bank" account to 0, to show you verified this session ends at 0 and everything is In Balance.

NWAdventure · ‎May 31, 2019

While I am struggling with the fact that QBO only adds up sales tax we collect from our sales and does not deal with B&O taxes that are reported on the same form as Sales Tax when filing, this is how I deal with the multiple Sales Tax rates for all the different locations:

(We are a service business; construction in different locations with differing sales tax rates). I put each location address in the Ship To section on the INVOICE and QB automatically computes the sales tax for that location even though we don't actually ship anything.

See if that works. At least it takes the manual computation for all the Sales Tax locations.

However, I am still ticked off that when trying to add an additional WA State tax (B&O) there is no option to. I see other States in the dropdown menu allow counties / cities to be added to their agencies, but not WASHINGTON. Would be an easy fix for QBO developers to add.

BettyJaneB · ‎May 31, 2019

Hello there, @NWAdventure.

I appreciate you sharing this information about handling sales tax with differing rates. This would surely help other users who have the same concern as yours.

On the other hand, our developers are continually working to improve our products to meet our customers' needs and demands. I'd encourage you to visit our QuickBooks Online Blog to be updated with our latest news and updates including what our Product Care Team is working on.

Additionally, if you need assistance in the future that requires live technical support, feel free to reach out to our Customer Care Team.

You can always visit the Community if you have any queries with QuickBooks. I'll be around to lend a helping hand. Have a great weekend!

NWAdventure · ‎May 31, 2019

yes I contacted both already

@BettyJaneB wrote:
Hello there, @NWAdventure.

I appreciate you sharing this information about handling sales tax with differing rates. This would surely help other users who have the same concern as yours.

On the other hand, our developers are continually working to improve our products to meet our customers' needs and demands. I'd encourage you to visit our QuickBooks Online Blog to be updated with our latest news and updates including what our Product Care Team is working on.

Additionally, if you need assistance that requires live technical, feel free to reach out to our Customer Care Team.

You can always visit the Community if you have any queries with QuickBooks. I'll be around to lend a helping hand. Have a great weekend!

yes, i contacted both thanks

BettyJaneB · ‎May 31, 2019

You're most welcome, @NWAdventure.

QuickBooks aims to help you run your business easier. That said, I will also do my part and notify you through this thread whenever I receive updates about this concern.

In the event that you should have questions about this, or need anything else, you can find me here. Cheering you to continued success in all of your endeavors.

dsliesse · ‎May 31, 2019

My apologies for not responding long ago; for some reason I don't remember I wasn't able to find my way back to this thread. Thanks for the instructions; they should get me past my sticking point!

Since my client pays many different sales tax localities I do separate them in the Sales Tax processing, but it should work exactly the same way (one rate for the state, one rate for each locality, then a sales tax group for each locality that splits the state and local amounts). I do this more for my benefit, so I can cross-check the DOR return. Occasionally have to make an adjustment when the state and local rates both round in one direction but the combined total rounds the other, but he's a monthly filer so it's seldom an issue.

(And thanks to NWAdventure for posting, generating an email that let me find this thread again!)

HoneyLynn_G · ‎May 31, 2019

Thank you for joining back in this thread, @dsliesse.

I can share some more insights about the Sales Tax feature.

The calculation of sales tax in QuickBooks Online are according to your setup and the following information:

The state where you have nexus and are registered to collect sales tax.
The physical address of your business.
The physical address on the sales receipt or invoice.
The product mapping you have associated with the products or services you are selling.
The exemption status of your customer.

To avoid creating adjustments, make sure to enter them correctly as QuickBooks do all the accounting for you. For further details, you can check the Automated Sales Tax article.

That should do it, @dsliesse. Keep me posted if you have follow-up questions about sales tax. I'm always here to offer assistance.

Topics

Training

Community

Resources

Paying sales tax in combination with other state taxes