Handling Sales Tax in QuickBooks

The majority of states charge their shoppers sales tax and so it is the business owner’s responsibility to collect it for qualifying transactions. The collecting part usually isn’t hard. But it can be a bit of an issue after that!

Sales tax is a little bit of a tricky concept in accounting because although you get the money and you handle the money and you deal with the money- it isn’t yours. So you need to account for it as though it isn’t.

The problem is the sales tax funds are mingled right in with your funds and it all looks the same. If you are creating invoices and collecting sales tax that way then it is easier to keep it straight by making the appropriate items taxable and then just making sure when you pay your sales tax you are reducing the sales tax liability account. There are lots of lessons on how to do this correctly online.

But what if you are collecting sales tax as part of credit card or cash sales- like in a restaurant? When you see the deposits in the bank, some of that money is really sales tax but QuickBooks doesn’t know that.

In this case, you first need to create a sales tax liability account. Then, at the end of the month or the week or whatever period you are working on, you need to make a journal entry to move whatever portion of your sales is sales tax into your sales tax liability account and out of sales.

For example, suppose your restaurant shows you have $10,000 in deposits into your bank account for the week. You check your POS report and it shows you had $10,500 in sales and of that total $525 was sales tax. So now in QuickBooks, you move $525 from sales income (were deposits normally go) to sales tax liability. Now QuickBooks will show you only have $9475 in sales for the week. The sales tax is gone- not as an expense (sales tax is not your money so it can’t be an expense!) and won’t artificially inflate your sales.

When you pay your sales tax bill, you write the check against the sales tax liability account so your balance goes back down.

The main things you don’t want to do are A) include sales tax as part of your sales, or B) include sales tax as part of your expenses.

You may be thinking- if I include it in sales AND as an expense- won’t it just wash out? Yes, but that isn’t the right way to do it and if you are in a place where you pay any local or state taxes (many, many places) on a revenue basis you are now overpaying because your revenue is being inflated by sales tax that isn’t really revenue at all.

How to Get Your QuickBooks Balances Right Every Time

Reconciling is the process of matching your transactions in QuickBooks with a source document- usually a bank or credit card statement.

This simple function is the way you make sure the balances you are seeing in your books actually match with reality. The longer you go without reconciling the more likely it is the books are off- maybe way off, depending on how you do things.

If the beginning balance is correct and you have checked all the transactions for the period are correct then your ending balance is correct and all is well. Some people don’t bother do this step because they assume that the downloads are already taking care of that but that is definitely not the case!

Surprising as it is, bank downloads are very often not quite correct and they may include duplicates, errors or missing items that will only be caught by a reconciliation.

If you aren’t downloading transactions there is even more chance of making a mistake and missing something or just typo-ing an entry and not realizing it. If you have no way to check your work then you won’t automatically see that kind of error.

Another way it goes wrong is in transfers between accounts- a transfer should only be entered once and include movement from one account to the other. But if you download your checking account and it shows all the movements to your savings account, and then you download the savings account and it shows all the movements to your checking account you may have just duplicated a lot of cash in QuickBooks that isn’t really there in reality.

Most people think of reconciling as only being for bank accounts but credit card accounts, lines of credit, paypal accounts and anything else with a starting and ending balance can be reconciled.

We always reconcile active accounts for clients and strongly recommend anyone doing their own books make it a regular part of their process. I can also guarantee if you don’t reconcile your books there are errors- the only question is how big and in which direction.

On a side note- when you do reconcile, it should match! QuickBooks gives you an easy way out to enter a reconciliation discrepancy- the difference between what it should be and what it is. But that only means you’ve got a problem you are ignoring, not that you fixed the problem! If you are regularly using the discrepancy account to cover differences you may as well not bother reconciling in the first place.

And on another note- as you go through and find items that haven’t cleared in a while- more than 30 days for a credit or debit transaction or 60 days for a paper check- take them out! They probably aren’t ever going to clear. or at least investigate further to see what is going on. These items will reduce your balance (or inflate in the case of uncleared deposits) in QuickBooks so if they aren’t real and never happened in the bank they are only contributing to having your ending balance be off. Dump ’em.