How to Track Use Tax in QuickBooks

Use tax is a sales tax that is owed on purchases made out of state or from a vendor who does not charge sales tax. It is important for businesses to track and report use tax to ensure compliance with tax regulations. QuickBooks, an accounting software widely used by businesses, provides several options to track use tax. In this article, we will discuss the steps to track use tax in QuickBooks and answer some frequently asked questions about this topic.

1. Set up a use tax liability account: Go to the Chart of Accounts, click on New, and select the Liability type. Name the account as “Use Tax Liability” or a similar name.

2. Create a use tax expense account: In the Chart of Accounts, click on New, and select the Expense type. Name the account as “Use Tax Expense” or a similar name.

3. Record purchases subject to use tax: When recording purchases in QuickBooks, select the appropriate expense account and enter the amount excluding sales tax. Then, add a second line item using the use tax expense account and enter the amount of use tax owed.

4. Set up sales tax items: Go to the Lists menu, select Item List, and click on New. Choose Sales Tax Item, and enter the name and description. Set the Tax Rate (%) to 0.00.

5. Apply use tax to invoices: When creating an invoice for a customer, add a line item using the sales tax item created in the previous step. Enter the amount of use tax owed.

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6. Track use tax liability: Regularly monitor the use tax liability account to ensure it reflects the correct amount owed. You can generate reports or use the QuickBooks sales tax liability feature to reconcile the amounts.

7. Pay use tax: When it’s time to remit use tax to the tax authorities, record a payment using the use tax liability account. This will reduce the liability and accurately reflect the payment made.

8. Review and reconcile: Periodically review all use tax transactions and reconcile them with your records. This will help identify any discrepancies or errors.

Frequently Asked Questions:

1. What is the difference between sales tax and use tax?
Sales tax is charged by vendors on taxable goods and services sold within a specific jurisdiction, while use tax is owed by the purchaser for out-of-state or untaxed purchases.

2. When is use tax owed?
Use tax is owed when a business purchases taxable goods or services from out-of-state vendors or vendors that do not charge sales tax.

3. How is use tax calculated?
Use tax is generally calculated based on the purchase price of the taxable goods or services.

4. Do I need to track use tax if I only make purchases within my state?
If all your purchases are made within your state and you are charged sales tax, there is no need to track use tax separately.

5. Can QuickBooks automatically calculate use tax?
QuickBooks does not have a built-in feature to automatically calculate use tax. You will need to manually enter the use tax amount when recording transactions.

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6. Can I use a different liability account for tracking use tax?
Yes, you can create a different liability account to track use tax as long as it is properly labeled and reflects the accurate liability amount.

7. Can I use the same expense account for tracking use tax as I use for sales tax?
It is recommended to use a separate expense account for tracking use tax to differentiate it from sales tax expenses.

8. Do I need to report use tax on my tax returns?
Yes, use tax should be reported on your tax returns. Consult with your tax advisor or accountant for guidance on reporting use tax correctly.

Tracking use tax in QuickBooks is essential for accurate financial reporting and compliance with tax regulations. By following the steps outlined above and understanding the FAQs, businesses can effectively manage their use tax obligations and ensure accurate record-keeping.

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