How to Set Up Sales Tax in QuickBooks Desktop

Before you start

• This guide covers the QuickBooks setup only. Which sales are taxable, which rates apply and how often you file are questions for your tax advisor.
• Intuit also says to verify rates and requirements with your tax agency before you set up sales tax items or groups.
• Each tax agency you pay is a vendor in QuickBooks. You can add a missing one while you create the tax item.
• Get your rates, agencies, filing frequency and reporting basis from your tax advisor before you start.
• Collect resale certificate numbers for the customers your advisor says are exempt.
• These steps follow Intuit's setup article, which covers the Windows editions of QuickBooks Desktop.

Step 1: Turn on sales tax

1. 1Go to Edit > Preferences and select Sales Tax.
2. 2Open the Company Preferences tab.
3. 3Under Do you charge sales tax?, select Yes.
4. 4Under When do you owe sales tax?, choose As of invoice date (Accrual Basis) or Upon receipt of payment (Cash Basis), as your advisor directs.
5. 5Choose how often you pay: Monthly, Quarterly or Annually.
6. 6Select OK.

Turning on sales tax creates two tax codes: TAX for taxable and NON for nontaxable. To change the basis later, Intuit's steps have you sign in as the administrator and switch to single-user mode first.

Step 2: Create a sales tax item for each location

1. 1On the same Company Preferences tab, select Add sales tax item. You can also start from Lists > Item List, then Item > New.
2. 2In Type, choose Sales Tax Item.
3. 3Enter a Sales Tax Name tied to the location, such as the county or city, and a Description.
4. 4Enter the rate in Tax Rate (%).
5. 5In Tax Agency, choose the agency you pay. Select Add New to set one up as a vendor.
6. 6Select OK. Repeat for each county, district or city you collect for.

Always fill in the Description. Intuit says a sales tax item without one won't print as its own line on invoices. To change a rate later, go to Lists > Item List, right-click the item and select Edit Item.

Step 3: Combine items into a sales tax group

A sales tax group puts several tax items that apply to one sale on a single line of the form. Each item in the group is still tracked and reported on its own.

1. 1Start a new item the same way and choose Sales Tax Group in Type.
2. 2Enter a Group Name/Number and a Description.
3. 3Add each sales tax item that belongs in the group. Select Add New to create one that's missing.
4. 4Select OK.

Step 4: Set tax codes on items

1. 1Go to Lists > Item List and open the item, or create a new one.
2. 2In the Tax Code dropdown, choose the code that fits. For items your advisor says aren't taxed, Intuit's examples are Non Taxable Sales and Non Taxable Labor.
3. 3Select OK.

Need more codes than TAX and NON for reporting? Select Add New from any Tax Code dropdown. Intuit gives the examples below. They are labels for reporting only; whether a sale is exempt is for your tax advisor to say.

Step 5: Set each customer's tax code and tax item

1. 1Go to Customers > Customer Center.
2. 2Right-click the customer and select Edit Customer:Job.
3. 3Open the Sales Tax Settings tab.
4. 4In Tax Code, choose the customer's code, such as a non-taxable code for a customer your advisor says is exempt.
5. 5In Tax Item, choose the sales tax item or group to charge this customer.
6. 6For a reseller, enter their certificate number in Resale No.
7. 7Select OK.

Step 6: Check tax on your sales forms

Invoices and other sales forms show three tax settings, all filled in from your setup.

• The Tax column on each line shows the item's tax code.
• The tax item or group, with its rate, comes from the customer.
• Customer Tax Code shows whether the customer is taxable.

QuickBooks adds up the taxable lines and multiplies the total by the rate of the tax item or group. To treat one sale differently, change any of the three on that form. Only that sale changes; the item and customer setup stay as they are.

Step 7: Review what you owe

• Reports > Vendors & Payables > Sales Tax Liability shows taxable and nontaxable sales, the rate, tax collected and sales tax payable for each agency.
• Reports > Vendors & Payables > Sales Tax Revenue Summary shows sales by tax agency and tax code.

Sales tax payable subtracts payments made in the report's date range, so it won't always match tax collected. Use these reports with your advisor when you prepare each return.

Step 8: Pay sales tax

1. 1Go to Vendors > Sales Tax > Pay Sales Tax.
2. 2In Pay From Account, choose the bank account. Only bank accounts are listed.
3. 3Check the Show sales tax due through date and the Starting Check No.
4. 4Select Pay All Tax to pay everything listed, or enter amounts in Amt Paid for a partial payment.
5. 5Select Adjust if you need to record an adjustment, such as a credit or fine.
6. 6Select To be printed if you'll print the checks later, then select OK.

Don't pay sales tax with Write Checks or Pay Bills. Intuit says that causes errors in your books and your sales tax reports.

To raise or lower what you owe, go to Vendors > Sales Tax > Adjust Sales Tax Due. Intuit's examples include an agency credit, a fine and rounding differences. Intuit says not to use Sales Tax Payable as the adjustment account. Ask your accountant which account to use.

Things that trip people up

• An inactive sales tax item stays in its group. Open the group from Lists > Item List and remove the item so the active ones apply correctly.
• QuickBooks won't delete a sales tax item still assigned to a customer. Run Reports > List > Customer Contact List, add the Tax Item column and sort by it to find them.
• Intuit says QuickBooks doesn't track sales tax on bills, checks or purchase orders automatically. Tax on purchases is calculated and entered by hand.
• Some places require each rate to show separately on the invoice. Intuit's method uses a 0% default tax item, a Subtotal item and a separate line for each tax item.
• To check which customers are taxable, run Reports > Customers & Receivables > Customer Phone List. Customize it to add Sales Tax Code and filter for taxable codes.

Where QuickBooks Desktop leaves the work to you

• You enter every rate yourself. When a rate changes, someone has to edit each sales tax item that uses it.
• Each customer's tax code, tax item and resale number are set by hand on the Sales Tax Settings tab.
• Tax on purchases has to be worked out and entered by hand.
• The Sales Tax Liability report gives you figures for your sales tax forms. Filling out the forms is still up to you.

A sales tax item prints as its own line only if it has a Description, so check your invoice layout too. See how to customize an invoice template.