Do you sell taxable products or services? If so, you have tax rates set up in your bookkeeping software, and one (or more) may need to be updated at some point. As you may be aware, tax calculations can often be complicated. You need to know the specific tax rate for your state (and often the county or even the city) to properly charge and collect the sales tax due. But how should you handle this update if you are using accounting software such as Quickbooks?
The first thing I recommend is to create a new sales tax item rather than modifying the one already being used. The reason I suggest this is to make sure prior transactions maintain the correct information. Let’s assume the following:
- The original tax rate on the invoice was 8%
- The tax rate increased to 8.25% the following quarter
- The sales tax payment has been made
- The customer called in questioning an item on the invoice and you open it up to view the details
If you modified the original tax rate, once the invoice is opened, it will update to the new rate and show a balance due on the invoice and on the sales tax liability report. This would be incorrect, and if you don’t realize what you have done, you may inadvertently pay the balance. This is why I suggest new rates be created for each location and the old rates be made inactive. My usual process is to name it the name of the jurisdiction (usually the county) and the rate. For instance, Los Angeles 9% so that it is obvious what the location and rate is for the invoice.
I also suggest that the rate not be entered in the customer file. If a new rate applies, you would have to update to the updated item in each client file or it will recall the old rate. It is much easier to add the rate on the invoice as it is created. If you work with a lot of jurisdictions and don’t remember each one’s rate to be billed, a note can be placed on the customer (or in many cases a transaction can be memorized). If you memorize a transaction with an old rate, it just needs to be updated and re-memorized to properly bill at the new rate.
It’s important that tax rates be properly calculated and paid. Updating rates as necessary with this process will help you maintain the integrity of your prior transactions and properly calculate rates once the new percentage goes into effect.
If you have a lot of tax jurisdictions in multiple states, an option is to use an add-on to your QuickBooks file to calculate each rate properly. Avalara is one that is highly recommended by many in the accounting field and syncs with your Quickbooks file and will calculate the rate based on the location of your customer.
Have questions regarding how to set up your tax items correctly? Feel free to give us a call. 310-534-5577.
