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.