The answer to this question depends on whether you are keeping your books on the cash basis or the accrual basis. If you are using GAAP (generally accepted accounting procedure - which is required for public companies), you are using the accrual basis. Many small private businesses however, do use the cash basis for their books, and federal income tax is calculated on the cash basis. On the accrual basis, you record a liability and an expense when you collect the sales tax from your customers. Quickbooks does this for you when you set up sales tax in Quickbooks Online and record it on invoices, or use the invoice sales tax feature in Quickbooks Desktop. (The accrual basis records expenses when incurred, not when paid: so on your invoice Quickbooks adds this for you: debit expense, credit liability.) Then the liability for the sales tax is reduced when the sales tax is paid. (Debit liability, credit checking.) The expense or check would be recorded as paid from account checking, account paid would be your sales tax liability account. (Example: Accounts Payable - Vendor Department of Revenue).
If you are not recording sales tax on your invoices or sales receipts, then you likely are using the cash basis for sales tax . In this case, the expense would be recorded when the sales tax is paid: Debit sales tax paid expense, credit checking. Quickbooks Online does this for you when you enter an expense the usual way: +, Expense, pay from account checking, down below the account would be the sales tax expense.
There are problems with lprincecpa's answer. In many states and local jurisdictions, what is known as a sales tax is actually a transaction privilege tax levied on the seller . . . the seller is not just collecting an amount from the buyer and then remitting it to the government agency(ies). In these cases, the liability belongs to the seller and the expense is a seller's expense. If the amount is included in the selling price (the amount received), then, for tax purposes, it can also be deducted on the business return.
In these cases, the seller should be recording the tax expense on either the accrual (time of sale) or cash basis (time of payment). QB can be configured for either case based on how the seller keeps its books.
Thank you for this. We are in Hawaii and the tax is a privilege tax that can be written off. However, I don't know how to do this in quickbooks. We are cash basis and our sales receipts add in sales tax which get auto added into liabilities. Right now I can only think of balancing this with a journal entry to debit the bank account and credit the liabilities owed. However, How do I go about adding it as an expense without it throwing off everything? I imagine adding it as an expense is how we deduct it at tax time. Or do I handle this deduction outside of quickbooks?
QuickBooks Online (QBO) automatically calculates tax amount based on the state where you have nexus and are registered to collect sales tax, physical address of your business and on the forms, and the product mapping you've associated with the item you're selling.
In this case, you can override the sales tax amount on the transaction.
See the Set up and use automated sales tax article for further guidance.
Let me also share this link that will help you in the future: Enter sales tax amount manually.
Please leave a comment below if you have any follow-ups or other questions. I'm here to help. Have a wonderful day.
Aloha, Thank you for the detailed response. I don't think I explained my question correctly. Let me try one more time as I still can't figure out how to match everything using Quickbooks Online.
My sales tax is charged and collecting fine. On my balance sheet the taxes are being added into a liabilities account labeled: "Hawaii Dept of Taxation Payable."
On my banking tab, which I still have to "Match" I show a payment made to the state of Hawaii to pay my Monthly taxes.
My question is,
1. How do I enter this into Quickbooks so that the payment deducts the liabilities owed in the account mentioned above on the balance sheet?
2. Since Hawaii is a privilege tax state I can deduct the taxes paid. How would I also add this as an expense that shows on the P&L?
I found one thread on the internet that mentioned adding the bank item as an expense to a sales tax expense account and then a journal entry to deduct from the liabilities account.
To me this doesn't make sense either because unless they are all matched, QB would essentially be adding this expense twice.
Maybe someone can help clear my confusion up with this. Thank you! Aloha & Mahalo!
I appreciate the complete details about your concern, @mauifun.
There are different scenarios involving sales taxes, and the accounting treatment varies in each scenario. Let me share additional information to ensure you're able to record your sales tax payments accurately.
Also, I'd recommend consulting your accountant so you'll be guided in recording your sales tax payments.
Keep me posted if you have other questions. I'm always here to help.
Thank you Very much for the response. My accountant is busy for a little while and cant assist yet.
I understand what you shared.
I made a payment to the state for sales tax and a it shows in my banking tab. I have a full liabilities account with money owed. How do I reconcile that payment I made so that it withdrawals and reduces the liability account.
Allow me to join the thread and share some ways so you'll be able to reconcile your transactions successfully, @mauifun.
You need to record the sales tax payment manually through the Sales Tax Center in QuickBooks Online (QBO) to reduce your liability account. Once completed, you can then match it to the sales tax payment showing up on the Banking page.
To record a tax payment:
For additional reference about managing sales tax payments, you can check this article: Manage sales tax payments.
To match the payments:
For more insights about downloading, matching, and categorizing your bank transactions, you can read this article: Download, match, and categorize your bank transactions in QuickBooks Online.
After following the steps provided, you'll now be able to reconcile your transaction/s. For the steps, you can follow this article: Reconcile accounts in QuickBooks Online.
You can also check these articles in case you have any other sales tax and banking concerns in the future:
Keep posted if you have any other questions. I'll be right here to help!