Lesson 3 Sales Tax Date: January 24, 2011 (1:00 EST, 12:00 CDT, 11:00 MDT 10:00 PDT) Time: 1.5 hours Presented by:vickie Ayres The Countess of QuickBooks & Tech Support Specialist for QuickBooks & Quoting Note: This webinar is being demonstrated with QuickBooks Premier 2011. The basic concepts are the same in all versions of QuickBooks even if some screens or features appear differently in your version of QuickBooks. QuickBooks does a great job calculating and paying your sales tax, providing your setup is correct. You must also follow a systemized procedure for sales tax payments. In this lesson we will cover: Simple Sales Tax Setup Sales Tax Groups Setup Sales Tax Liabilities Reports Procedures for Paying Sales Tax Repairing Sales Tax Liability Balances Simple Sales Tax Setup Open your Item List Lists>Item List and scroll way to the bottom to the very last item on your list. Pretty simple stuff, Who do you pay sales tax to? What rate do you charge? Do you want to add the states initials in front of the name and description? Make sure you choose a sales tax item as the type. Now lets check the settings in your Preferences Edit>Preferences>Sales Tax
Again very simple stuff. Check yes that you charge sales tax, and if you end up with more than one kind of sales tax to charge, choose the most common one, it will show up on every Estimate as the default. How often do you have to report and pay sales tax collected? Cash Basis, that is a rule for when you are required to show sales tax liability and pay it to the government. It has nothing to do with accounting cash or accrual reporting. You need to check with your States Dept of Revenue (for simplicity I will refer to the agency as the Dept of Revenue, your state may have a different title for the reporting agency) to find out if you are cash or accrual. Most states are cash basis. Meaning that when you receive cash on an invoice, meaning you have accepted cash as earned income, sales tax is due on whatever portion of the job is represented by the cash. For example your estimate is for 2000.00, tax added is (@ 10%) = 200.00. When you pick up the downpayment and create the sales receipt, no sales tax is due, no earned income yet. From an accounting point of view you have control of the cash but you haven t earned it yet. You owe somebody something, product or time spent working on their project or their money back. It is a liability to the company in your Chart of Accounts. When you create the invoice at the end of the job, when you click Save, that is the moment you have earned income and the portion of the job represented by the cash has sales tax due at the next reporting time. Now you would think that if you took ½ down, ½ of the sales tax due, its not that simple. QuickBooks is going to be perfectly accurate and if you took in 1000.00 as a downpayment a portion of that is your money and a portion of it is the governments money, so it is a composite number. It isn tt 1000.00 times 10% = 1000.00, that would be 1100.00 and we didn t get 1100.00. The actual sales tax due would be, 90.91 and your portion would be 909.09. Check my math you collected 909.09 @ 10% that s 90.91, with a little rounding. There is an algebraic equation that calculates all of that for you, but I ve slept a lot since that class. So I use Excel to demonstrate it. $ 2,000.00 tax rate 10% When you create the invoice, you will some sales tax, but on a cash basis Total Job 909.09 90.91 1000.00 $ 200.00 tax princ tax total $ 2,200.00 Total Job with tax $ 1,000.00 Down Payment After you accept the final balance the rest of the sales tax becomes due $ 1,200.00 Balance Due 1090.91 109.09 1200.00 2000 200.00 1200.001 See, not so simple and we used really easy numbers. When you start thinking about jobs having odd numbers, not quite ½ down, invoices straddling different accounting periods, and rates having decimal points it gets even more complicated. The good news is QuickBooks can keep track and calculate all of this behind the scenes really, really well. The hard part is trusting QuickBooks to do that. I talk to customers every day who want to run a report that tells them exactly what they are paying and how on every job. There isn t a report like that so they decide to print their jobs, calculate sales tax due and then they write a check, not good. If you have set it up properly and then you process jobs with a system that is proper you can let QuickBooks tell you what you owe and let QuickBooks generate the check. We will be doing that a little later. 2
Sales Tax Groups Setup Many of you have multiple entities you collect sales tax for, State, City, County, I have even seen special sales tax for Sports Stadiums. Depending on where you are when you are selling it can change the composit rate you are collecting. So you will need individula sales tax rates setup for each kind of tax you have to charge and collect. On your Estimate you can only choose one item though. So QuickBooks has a special kind of item called a Sales Tax Group Item. Works in a similar way as those Group Items we created for quoting. We take the individual items we need and put them in a Group that refers to the locality we will need it for. Here is the info for our next example: Lafayette City Sales Tax.0125 payable to the City of Lafayette Carroll County Sales Tax.022 payable to IN Dept of Revenue (IN Dept of Revenue collects for the county and sends the money back to the county IN State Sales Tax.075 payable to IN Dept of Revenue NOTE: These are fictional and for demonstrating purposes only. Here are the 3 setup screens for these 3 individual sales tax items. This item required we setup a new vendor on the fly the City of Lafayette This tax item is using a Vendor we already have. We setup this Sales Tax Item when we setup our company initially. 3
I named the group starting with G so that it easily recognizeable in the Item List as being a Sales Tax Group and not an Individual Sales Tax Item. You add items to the group by choosing the black drop down arrow and choosing each item required. Now our item list has 3 individual sales tax items and one Sales Tax Group Item with a 10.95% composite rate. Before we use this on an estimate lets look at a Sales Tax Liability Report. DownPayments and Sales Tax Collecting and tracking downpayments on jobs in QuickBooks is always a workaround, the rules for this money are different from state to state. The primary difference goes back to that cash vs accrual setting. Is that downpayment a sale once the cash crosses your hands? Is it a taxable sale or a non-taxable sale? The method we recommend assumes you are a cash basis state and that money doesn't hit your accounting as income until you turn an estimate into an invoice. The first step is to add a downpayment item to your Estimate, using a negative number for the amount your are applying to the Estimate as a downpayment. When the invoice is saved, with that negative number for the downpayment item, it hits your accounting and magically moves money from the Customer Downpayment account to all the different Income/Sales accounts for every kind of item you sold to the customer...but only for the proportional amount that you have seen some cash from, that downpayment money. That is why it gets so complex and to top it all off the Sale Tax Liability report now has a skewed number for non-taxable sales. It has all of your regular exempt/non-taxable sales reduced by a negative number. Your accounting is perfect but your report looks wrong. I have been testing a new method I learned at QuickBooks conference, yes they have conferences just for QuickBooks Consultants, that separates those downpayment non-taxable sales from your regular non-taxable sales. 4
Lets go through the parts we need to create to handle downpayment money and sales tax reporting with this new method. Create a new sales tax code called "NST". Go to Lists>Sales Tax Code>Right-click anyplace in the list and choose New. The setup screen is below. Create a new Item "Down Payments New", it will need a unique name if you already have an item called Down Payments. Use the "NST" as its sales tax code. When it is time to report and pay your sales tax you will start by running two reports; The Sales Tax Liability Report and the Sales Tax Revenue Summary. The Sales Tax Liability Report is shown below, The last 3 columns are the ones you care about in this report. It gives you the Taxable Sales for each kind of tax you have to report. It also gives you the tax you have collected and the tax you owe. You are very happy and should do the Happy Sales Tax Dance when these two columns match..all is well with your sales tax processing in QuickBooks. If they don t match you may want to give me a call and I can help you get it back on track. The Sales Tax Revenue Summary Report will separate your Taxable Sales, Non-Taxable/Exempt Sales and your NST/Non-Sales Tax. In most states the NST number can be ignored on the report. It's money that is not yet a sale. It will be a sale and sales tax 5
will be payable the day you convert the estimate to an invoice and you have cash that is associated with that invoice. Now you have all the numbers you need to go online or fill out your form and pay your sales tax. When you are filling out your form with the Total Sales, Non-Taxable Sales and Taxable Sales you may end up with a different number to pay then what QuickBooks says you have collected and need to pay. This could be due to rounding on each sale or from a collection allowance you are allowed to take. Its OK, just know what the difference is between what QuickBooks says to pay and what your form calculation wants you to pay. We need to use the proper screen to generate the Sales Tax Payment in QuickBooks. This is critical, if you just open the check writing screen and create a regular check to pay the sales tax, things will not turn out well. Even if you are very, very careful and you use the Sales Tax Payable account, it still won t be right. You need to go to Vendors>Sales Tax>Pay Sales Tax, this is the screen that will open: If you need to make an adjustment you will click on the Adjust button and either reduce or increase the amount you want to pay based on that difference number. If you are keeping some of the sales tax collected, reducing the payment amount, that would be income to you, so choose the Sales Tax Adjustment Income account. If you are increasing the amount to pay, you are adding some of your money to the money collected, use the Sales Tax Adjustment Expense account. Choose OK and you are back to the Pay Sales Tax screen. 6
**Note: Notice how in the Sales Tax dialog screen and the Sales Tax Adjustment screen all of my dates match the end of the sales tax reporting period I am working with? This is a little trick I use to keep all the collected and the payments in the same reporting period. It makes your reports look nice and clean when you go back to run them later. You will need to place a check mark on all the lines of sales tax you are reporting and paying, including the line that has appeared for the adjustment you just made. The last column should now match what your form or online payment said to pay. Click Ok and TaDa! Your check/payment for paying sales tax has been recorded in QuickBooks. Procedures for Paying Sales Tax Reports are for information only you must use the proper screen to generate checks to pay Sales Tax. You have to check mark the tax you want to pay and then QuickBooks will show that amount being paid in the lower right hand corner. Make sure you have the right dates set for your check and for the reporting period. Enter the check number you are going to use. If you are going to print the check make sure you have the To Be Printed checkmarked. Some States allow you to keep a little bit of the money as a Collection Allowance. Other states require that you round up to an even dollar. Situations like that require that you choose the Adjust Button. This example shows that we are going to round up by.94 cents to an even dollar amount. The Adjustment Account you need is an Expense account, your sample company has one but you might need to create this in your business company file. You will need to re-check the pay column for both entries. 7
Your Sales Tax Liability report automatically updates with this new line for the.94 cents extra that went to the State. It comes up on that IN Dept of Revenue - Other line because we sent some money to the Sales Tax Vendor for an Other reason, not for a sales tax item. Lets look a t a new job and use the new sales tax group we created. Here is our new tax amount Don t forget to choose the Group Item. If this is where you are going to do most of your work you will want to go to Preferences and choose it as your most common sales tax item. Here is what our Sales Tax Liability Report Pay Sales Tax screen looks like with the multiple items from the group. Don t worry about those lines with the negative numbers, its just QuickBooks way of making the totals total to the proper amount. I showed a downpayment on this job of 2000.00 and generated the invoice for it so that it would show up on the report. But they still owe money on this job and we didn t get it until March. So lets pay this tax and look at our liability report for March. 8
I processsed the final payment in March so that is where the amount payable shows up. The sales tax due follows the date you accept cash, Cash Basis sales tax. TaDa! Repairing Sales Tax Liability Balances The most common sales tax error I see is where the check is created without going through the Pay Sales Tax dialog box. You want to ask yourself a couple of questions before trying to fix them. Have you made a backup of your data? Have taxes or financials been prepared using the data in its current state? If yes, you need to be concerned about the dating and the type of corrections you make. Have you determined outside of QuickBooks what you really owe in sales tax? If payment was made without using the Pay Sales Tax dialog box and it as not been reconciled yet, you can just void or delete the transaction and then re-create the check or bill payment using the Pay Sales Tax dialog box. In more recent versions of QuickBooks there are warning boxes that come up making it less likely to do this in error, unless you ignore them. If it has already been reconciled you will want to follow these steps: Open the Check or Bill form that was used. If not already assigned, assign the Sales Tax Payable liability account in the Account field on the Expense tab. In the Customer:Job field choose your Slaes Tax Vendor (make sure it is a regular Vendor and not an Other name. Save & Close (If more than one check or bill form is involved complete this for all of them before going on to the next step Open the Pay Sales Tax dialog box under Vendors>Sales Tax>Pay Sales Tax Place a check mark next to each sales tax item including the one for the correction. If the net effect is zero, you are done and no check will be generated. However if you are left with a balance due or a negative number, you should use the Adjust Button to get to a net zero position If your Sales Tax Liability report has a discrepancy between what is collected and what is due it is probably because sales transactions have been edited after sales tax has been paid. Try not to edit items on sales transaction after sales tax has been processed for that period. In a future Lesson we will look at setting Closiing Dates that are password protected. If the changes created a change in what should be paid is legitimate, you can accept the new number and run the Pay Sales Tax Dialog screen. TIP: Process Sales Tax before reconciling the previous months banking statements. If an error is found it is so much easier to repair before transactions have been reconciled. 9
Definitions Sales Tax Codes are an additional classification for calculating and reporting sales tax. A sales tax code is assigned to each product/item, as well as to each customer. Taxable or Non-Taxable in most cases. Sales Tax Items These are items that are used to calculate a percentage/amount of sales tax on each sale. There are two types of sales tax items. The individual sales tax items will be for the state, county, locality, etc You might only have one sales tax item for the state or you could have one state and many more extra percents for selling in different geographic areas. The second type of sales tax item is a Sales Tax Group Item. You set this up as a way to choose several individual sales tax items at the same time so you end up with a composite rate required for the geographic area you are selling in. Lesson Three Homework for your Right Start Coaching Program Project NOTE: Use the same date for all of the transactions. After each step, look at your Chart of Accounts, watch how the money flows from Undeposited Funds to your checking account and out of Down Payments when you create the Invoice. 1. Edit the Sales Tax Item in your Right Start Coaching Program sample company file to match your state. 2. Edit your Sales Tax Preferences to match your company requirements 3. Create an Estimate with a Down Payment Item 4. Create a Sales Receipt to process the money into your accounting 5. Deposit the money into your checking account 6. Turn the Estimate into an Invoice 7. Accept a Final Payment against the Invoice and Deposit it into your checking account Run A Sales Tax Liability Report and A Sales Tax Revenue Summary before processing and paying the Sales Tax that is due. 10