Sales Tax Accounting Treatment
Failing to remit sales tax is a felony. Fortunately, calculating and remitting sales tax to your local government is simple and easy. Your books should reflect sales tax as separate from the actual sale. Keep a running balance of sales tax collected during the period. Your company's income statement should not reflect sales tax as part of the company's revenues.
Sales Tax
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To calculate sales tax, multiply the tax rate by the purchase price of the item. For example, if the tax rate is 8 percent, the sales tax amount on a $25 item is $2, calculated as 1.08 multiplied by $25. On your income statement, the actual sale is $25, even though you collected a total of $27 from the customer. The journal entry to record the sale and sales tax is debit cash or accounts receivable $27, credit sales for $25 and credit sales tax payable $2. In your general ledger, set up an account called, "Sales Tax Expense." This account keeps a running tab of your sales tax collection during the period. Using the previous example, record $2 for the sales tax expense in the general ledger.
Sales Tax Payable
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Sales tax payable reflects the tax liability on your balance sheet. Increases in this account reflect your growing sales tax liability. For example, if the sales tax payable account was $640 and you collected $2 in additional sales sax, your total sales tax payable is $642 for the period. Record direct payment to the taxing authority to zero out the account balance. The journal entry to record sales tax payment is debit "Sales Tax Payable" $2 and credit the cash account $2.
Remitting Sales Tax
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Check with your local tax authority for how often your business should remit sales taxes. For example, in the city of Gunnison, Colorado, when you remit sales tax depends on your sales volume. So for instance, if you have sales of $300 or more a month, remit sales taxes monthly. For sales under $300 for the month, remit sales taxes quarterly. Depending on your jurisdiction, you may pay sales tax electronically by creating an online ID for your business.
Failing to Remit Sales Tax
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Proper accounting of sales tax and timely remittance of taxes is important for your business. Failing to remit sales tax in a timely fashion leads to penalties, fines and possible jail time depending on the severity and extent of the offense. Respond to any inquiries or notices for failure to remit sales tax and pay as much of the taxes as you can and set up a payment arrangement for the balance.