Menu > Admin > System setup > Time & billing > Sales tax rates
Sales tax rates are used to automatically calculate sales tax amounts on project estimates & client invoices. Sales tax rates can also be linked to vendors, so you can automatically determine the amount of sales tax due at the end of the year.
You can have any number of sales tax rates set up, however, only two rates can be set up on a client/vendor to calculate automatically. If possible, combine city/county/state taxes where possible.
Though only two tax rates will default onto an invoice, you can add 'other tax' rates to individual invoices.
VAT (value-added tax) can be set up as a tax rate. See below regarding the 'piggyback tax' setting to ensure compliance with your local tax regulations.
Sales tax ID: Text box, enter a unique ID for the sales tax code.
Sales tax name: Text box, enter a descriptive name for the sales tax code.
Invoice description: This labels the estimate & invoice sales tax. Enter a description that should show on client invoices & estimates when the sales tax code is used. If this is left blank, the 'sales tax name' field will be used.
Paid to: Text box, enter the vendor ID of the tax authority this tax will be paid to.
Tax payable GL account: Text box, enter the GL account you want to track the collected sales taxes for this specific code.
Tax AP GL account: Enter the GL account you want to track the vendor-paid sales taxes for this specific code. For the US, this is typically left blank, as taxes charged by your vendors are just part of the overall expense. For Canada, this GL account may be set to the same account as the tax payable GL account to report on the difference between client taxes collected vs. vendor taxes paid for your tax authority.
Sales tax rate percentage: Text box, enter the percentage for the sales tax. The percentage should be entered as 6.25 for 6.25%, not .0625.
Active: Checkbox if you do not want people to be able to use this sales tax code, but it is already tied to existing transactions.
Piggyback - NOTE: This type of tax is not used in the USA. Check this box when 2 tax rates are applicable, and this tax should be calculated over the invoice Total + Tax 1. For example, the invoice Total + the Provincial tax amount X the Federal tax to arrive at the invoice grand total.
NOTE: This type of tax is not used in the US. However, you can have 2 tax rates calculated without 'piggybacking' them. In this case, the first tax is calculated based on the invoice total, and then the second tax is also calculated based on the invoice total. The invoice grand total comprises the invoice amount + Tax 1 + Tax 2 (it does not matter if the tax rates are state or federal, or a combination of each).
Setting up items
In order for sales tax to track correctly and flow through to billing, you must also set up the following items:
Services - Define what services are taxable or not
Purchase items - Define what purchase items are taxable or not
Expense report items - Define what expense report items are taxable or not
Client record - Define the tax rate(s) associated with the client
Vendor record - Define the tax rate(s) associated with the vendor. This should only be used if your tax authority requires you to track taxes paid to vendors, such as in Canada and Europe. If you are in the US, do not set this up.
How tax applies to client invoices
Taxes are applied at the line level of client invoices, not individual transactions.
The taxable or non-taxable status must be determined by separate lines in the invoice.
This process of generating invoices is based on your setup of items as well as each client's setup.
Time & materials
To make this process as streamlined as possible, you will want to set up the client record to be 'one line per billing item and item'. This way, when you generate an invoice, each service and expense will have its own line on the invoice, and based on how that service or expense is set up, the client designated tax will then apply to each line.
You can then use billing worksheets and/or mass billing - Production to generate these in mass, which relies on system setup and client setup.
To get as close to the time & materials process as possible, you must generate your fixed fee invoices by 'percentage of service and item'.
You can then use billing worksheets to facilitate this process as well.
Manually creating the invoice.
If you manually create an invoice or edit an existing one, remember that tax is applied at the invoice line level. If you have two service transactions, one is taxable while the other is not, then you need to create at least two lines, one for each service. Apply tax to one line with the taxable service and not to the other.
You can also create a sub-line, where maybe your top line is called 'services', and you then create two lines under it. One sub-line being taxable, and the other is not.
Retainers do not use taxes, as it does not bill or generate the line detail to do this.
In some rare cases, if you do need to tax the total amount of the retainer, such as in Canada, then you can set up the tax as stated above, and then after you generate the invoice, check the 'tax applies' box for the line generated.
If you happen to have 'expenses not included', then it will create a separate line/or invoice for those transactions. However, it puts the transaction into one line, so you would need to manually break them out into separate lines to get the tax the way you need it.
Tracking tax-exempt clients
Even though the client may be tax-exempt, it is still recommended that you track the invoice amount into the sales tax report to provide easy reporting to the tax authorities.
System setup: Sales tax rates > create a non-taxable or tax-exempt rate. Set the tax rate % = 0
NOTE: If you have out-of-state clients that are tax-exempt, create an out of state/non-taxable sales tax rate to differentiate between local and out-of-state sales.
Client setup: Billing > Defaults >>set the client sales tax 1 to the appropriate tax-exempt rate.
Printing the invoice
When using taxes properly while generating invoices, more lines may be created in the invoice than what you want/need to show the client on the PDF printout.
If this is the case, then please review the invoice layout options on how to show the details you want.
Old layout tool - Invoice/estimate layouts
Layout tool - Invoice templates
To monitor sales tax overall, run the Sales tax analysis report.
This report will display the total amount invoiced for the selected period, along with a break out for each sales tax rate that was used.
Tax-exempt/non-taxable rates will also be displayed with the total amount billed that was considered non-taxable.