This article takes a closer look at what to do to set up, record, and track sales tax for products you sell in QuickBooks Online.
Foremost, QuickBooks Online is accounting software, not tax software. You cannot file your taxes directly with QuickBooks. However, you will use QuickBooks to track the collection of sales tax. These financial records are also essential for reporting your income to the IRS.
First, let’s make sure you’re set up to collect Sales Tax. All of your tax information is managed from the Tax Tab in QuickBooks Online. The first time you visit the Tax Tab, you will be prompted to complete an onboarding workflow.
Before completing this workflow, make sure you've selected your business’ accounting method in Account and Settings (Gear Icon > Account and Settings > Advanced > Accounting). This step is very important – currently, the Automated Sales Tax Center feature in QuickBooks Online only calculates taxes using the accrual method, regardless of company accounting preferences.
The Automated Tax Center (using accrual method)
If you are new to QuickBooks Online and you...
... set your accounting method to Cash BEFORE setting up your Sales Tax Center, your QuickBooks will use the Manual Sales Tax option and not the Automated Tax Center. Read the full article to learn more. You may prefer to do this manually, and that’s perfectly fine. If so, follow the steps in the linked article and learn more about sales tax in general.
The Automated Tax Center (using cash method)
... set your accounting method to Cash AFTER setting up Sales Tax, QuickBooks will calculate your sales tax, but your Sales Tax Center will only display using the accrual method. As a workaround, you can use Sales Tax Liability reports to calculate your sales tax payments.
Remember, both methods require you to state where you sell your products in order to set the appropriate tax rate.
The first time you begin the setup in the Tax Tab, you’ll be asked where you sell your products. By choosing your accounting method and specifying where you sell products, you're also deciding whether you want QuickBooks to automatically identify your state tax agency and calculate taxes for you.
Once you input your tax period start date and filing frequency, the Sales Tax feature is set permanently.
You should also check whether the products you sell are taxable. Generally, services are not taxable, but there are exceptions – if you’re unsure, reach out to a tax professional. When you’re in the Products and Services menu editing an item, you can choose to make it taxable. There are several Sales Tax Category options. Here’s the advice from our experts:
From the "Sales tax" category drop-down, select the category that bestfits your item. Example: Food and Drink
From the "What you sell" drop-down, select the best description that provides specific details. Example: Soft Drinks Water
If you sell to tax-exempt customers (organizations, non-profits, or charities, to name a few), you can choose to not collect sales tax from them. By default, all customers are “taxable.” To change this setting, navigate to the Customers subtab and edit their account. Find the Tax info tab in the edit window and uncheck the box to exempt their account.
Still feeling a bit unsure? Here's the long-form guide for setting up taxes in Quick Books Online
Taxes are complicated territory. There are rules that are downright confusing. What makes these rules even trickier is that many arecontextual, someonlyapply tocertaintypes of business incertaincircumstances.
It’s best not to guess when it comes to tax laws. When in doubt, reach out to your accountant or a tax expert for advice. Prepare a list of questions and use your consultation to ask specific questions about your accounts. You can also reach out to the experts on theTurboTax communitywith your pressing questions about tax collection, exceptions, and categorizations.
While setting up the Sales Tax Center takes a bit of planning, recording sales tax is very easy. The process is exactly the same for both Invoices and Sales Receipts. If a product is set as “taxable,” the sales tax option is automatically selected on the sales form.
Keep an eye on the tax column when you’re preparing sales forms so you aren’t accidentally collecting sales tax for non-qualifying products or services. A quick review of the total and subtotal is another simple way to prevent minor but nonetheless pesky errors. In general, most services are non-taxable, but it depends on your industry and where you live.
If you use the Automated Tax Center (and not the manual method), QuickBooks Online will calculate sales tax for you based on the customer’s address on file. If you need to change the tax rate, simply select the correct one from the drop-down.
You'll track sales tax throughout the quarter, but how do you use the collected data to actually make tax payments?
Tools like the Sales Tax Liability Report and Tax Tab will help you record tax payments made throughout the year, pull the numbers needed to make tax payments, and maintain accurate accounts once you’ve made tax payments. As the video mentions, you cannot pay or file your taxes directly using QuickBooks Online. Instead, you will...
You use your sales data from QuickBooks to estimate how much state sales tax to pay so you can complete sales tax payments for each state you do business in (visit your state tax website for more on the actual payment process).
Once you’ve filed and made tax payments with each state tax agency, take time to review your accounts. You will make adjustments to the totals in QuickBooks for the actual amounts paid as well as the payment sources after you file (your estimates may be spot on and you will not need to make an adjustment).
Your accounting method matters! Depending on whether you are using cash or accrual method, your "sales" and thus collected sales tax are defined differently. Learn more about these accounting methods.
The totals on this report are recorded by state since you need to file taxes for each state you sell products to.
With the information from the Sales Tax Liability Report in hand, go to the Tax Tab where you will see of all the returns you’ll need to file. Go through these returns one-by-one, using the figures from your Sales Tax Liability Report and the data in the Tax Tab to prepare your filings outside of QuickBooks.
As needed, you can make adjustments so your accounts in QuickBooks so they match what you actually paid to each state. If everything looks good, click “Record Payment” and enter your tax payment information so the returns in QuickBooks are now marked as "paid."