Sales Taxes are something that every bookkeeper or small business owner that deals with merchandise or real estate must become acquainted with. So in this article, we will give a short overview of what Sales Taxes are, how to keep track of them, and how to pay them for small business owners. So, what are Sales Taxes to start with?
To keep it short, sweet, and to the point, Sales Tax is a direct tax applied to retail sales of goods and services, making them the most common tax for entrepreneurs who sell their own merchandise or act as an intermediary. Every individual state has its own tax rate, and businesses are expected to not only keep track of their accumulated amount but to remit the payment to their state’s department of revenue. To find out your state’s particular sales tax, to see if there are any additional components such as a county tax, and to see if there are any particular services that are excluded or included as a part of what must be remitted, you will need to visit your state’s department of revenue website.
With that out of the way, we will now cover how to record them as part of bookkeeping.
One of the first things every business should do when setting up their chart of accounts is to have a liability account specifically to record the accumulated sales tax. Some might label it Sales Tax Payable, others might label it based on the state it must be remitted to, like Georgia Department of Revenue Payable. The key factor here is that it is treated as a liability account, meaning it increases every time you collect sales tax from a sale and then decreases when you remit it.
For example, let’s say that on October 1st you made a sale for $3000 worth of goods with a sales tax of 6%. You would first need to collect the total value of them both, which would increase the Checking Account (Asset), Sales Revenue (Income), and Sales Tax Payable (Liability). This would be recorded as the following:
Oct 1st: Checking Account $3,180
Sales Revenue $3,000
Sales Tax Payable $180
Then you would remit the amount at the end of the month, due to being on a monthly remittance schedule, to the state department of revenue. You would be paying from the Checking Account (Asset) and decreasing the amount owed to the state according to the Sales Tax Payable (Liability). That would be recorded as follows:
Oct 31st: Sales Tax Payable $180
Checking Account $180
It should be noted that you need to be certain what remittance deadline your business will operate on, because depending on how much income you make, certain options may not be available. There are penalties associated with not having the remittance sent on time, so it is in your best interest to keep ahead of the due dates. The last thing you want is to find out that you have unnecessary fees due to a miscommunication or lack of understanding.
And with that, we have given a simple overview of what sales taxes are, how to track them in your books, and how to remit them. We hope that those new to business find this information to be helpful and informative. If you require a bookkeeping firm that will gladly handle the processes for you, then don’t hesitate to Contact Us. We’ll help keep your books in the black.
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