Sticky Situations You May Not Know How to Handle Part 4

Today, we're talking about SALES TAX!

There can be a lot of hesitation and confusion around inputing sales tax in your quickbooks and how exactly you need to do that. Here's what we have to help:

🧾 Scenario: You Need to Charge and Track Sales Tax on Sales

In this scenario, you sell products or services that are taxable, and you’re required by your state or local government to collect sales tax. QuickBooks can track what you collect and what you owe, but only if it’s set up correctly.

✅ Step-by-Step Guide to Recording Sales Tax in QuickBooks Online

🔹 STEP 1: Turn On Sales Tax

1. Click the Gear icon (⚙️) > Select Account and Settings.

2. Click Taxes from the left menu.

3. Under Sales Tax, click the pencil ✏️ icon to edit.

4. Toggle Sales tax ON.

5. QuickBooks may ask for your business location (state) to determine which tax agency to set up.

📌 QuickBooks will automatically set up the main tax agency (e.g., your state’s Department of Revenue).

🔹 STEP 2: Add Tax Rates or Agencies (if needed)

If your state or locality has multiple tax rates (e.g., state + county), you can add custom rates.

1. Go to the Taxes tab on the left.

2. Click Sales Tax Settings.

3. Click Add tax > Choose Custom rate if QuickBooks didn’t auto-setup your local rules.

4. Enter the agency name, rate, and any additional components (e.g., city, county).

💡 Some states require you to break down sales tax by jurisdiction—check with your local requirements.

🔹 STEP 3: Use Sales Tax When Creating Invoices or Sales Receipts

1. Click + New > Choose Invoice or Sales Receipt.

2. Enter your customer and product/service details.

3. Ensure each item is marked as “Taxable” (edit product/service settings if not).

4. At the bottom, make sure Sales Tax is applied (QuickBooks should calculate this automatically).

5. Save and send to the customer.

✅ QuickBooks will track this sales tax in a Sales Tax Payable account (a liability).

🔹 STEP 4: Track and Remit Sales Tax

1. Click Taxes from the left-hand navigation.

2. Select your Sales Tax agency (e.g., “Texas Comptroller”).

3. Click Prepare return.

4. Review the total sales tax collected for the period.

5. Record the payment to the agency by clicking Record Payment.

🧾 The amount paid reduces your Sales Tax Payable liability—it does NOT affect your income.

🔍 Common Mistakes to Avoid

• Mistaking sales tax for income: It inflates your sales numbers if recorded incorrectly.

• Not enabling sales tax in settings: QuickBooks won’t track what you owe.

• Forgetting to update tax rates: Rates change—review your settings at least annually.

• Not marking items as taxable: Products/services must be flagged for tax to apply.

🎯 Pro Tip

If your business sells in multiple states (e.g., through e-commerce), consider a sales tax automation service like Avalara or TaxJar, both of which integrate with QuickBooks and help with multi-state compliance.