Two use tax tracking tips for your handmade business – one using QuickBooks and the other using spreadsheets.
Last week we talked about the difference between Sales & Use tax and how it’s your responsibility to keep track of the amount of Use tax that you owe the tax department when you file your Sales & Use Tax return. This week I’ll provide you with two tips or ways to help you keep track of the amount of use tax that you owe.
Accounting software such as QuickBooks, will automatically keep track of the Sales Tax that you charge and collect from customers – if it’s set up properly – and keep track of it in an Other Current Liability account called Sales Tax Payable in the Balance Sheet section of the Chart of Accounts.
BUT, you’ll need to manually keep track of how much Use Tax you owe. And in this instance, when I say manually, I mean that you’ll have to MAKE QuickBooks track your Use Tax for you.
Let’s work with my example from last week:
I purchased a ream of copy paper for $9.99 at Staples in New Hampshire and didn’t pay Sales Tax, so now I owe Use Tax to the State of Vermont.
Setting up Use Tax Tracking in QuickBooks
If you use another accounting program you should be able to use these instructions as a guideline.
So, in QuickBooks, I already have an Expense account in my Chart of Accounts called Office Supplies.
The first thing I would do is to create two sub-accounts under the main Office Supplies account, called:
- Sales Tax Paid
- Subject to Use Tax
I would also create a new Expense account called:
- Use Tax Paid on Purchases
Now my Chart of Accounts would look like this:
Now, my accounting software is setup to track Use Tax, but it’s up to me to do all the behind the scenes accounting work in order to make it happen.
When I record the check (or credit card charge) in QuickBooks I choose the new sub-account under Office Supplies called Subject to Use Tax.
When it’s time to file my Sales & Use Tax return, I run a Profit & Loss Report and I can easily see:
- The total amount of Office Supplies that I purchased and paid Sales Tax on
- The total amount of Office Supplies that I purchased and need to pay Use Tax on
- The grand total of Office Supplies I purchased
I would then Export this report into Excel and add a formula that would calculate the amount of Use Tax I owe ($.60). I would print this report and save it with my year-end tax documents.
Next, I would do a Sales Tax Adjustment, using the Use Tax Paid on Purchases account and increase the overall Sales (& Use) tax liability by $.60. NOTE: My adjustment date is the last day of the Sales Tax Reporting period.
When I run my Sales Tax Liability report, it does look odd because the Use Tax shows up as an Other amount due. This is happening for two reasons:
- QuickBooks doesn’t automatically track Use Tax and I’m forcing it to
- I only want to make one single payment entry that includes both my Sales and Use Tax due for the reporting period
Use Tax tracking when you use Spreadsheets
I realize that many handmade business owners don’t use a bookkeeping or accounting package to handle their business finances and rely heavily on Excel or Google spreadsheets. The trouble (in my opinion) with spreadsheets, is that you simply have TOO MANY and you have to enter the same information in multiple spreadsheets and it’s easy to forget something and it’s quite easy to break the formulas without knowing it.
If you use spreadsheets, you could simply create a new one similar to the one shown in the screenshot below where you keep a diligent record of:
- date of purchase
- where the item was purchased
- a description of the item(s) purchased
- the amount you paid
- the amount of use tax paid (you would create a formula for this)
- the running balance (another formula)
- the total for the reporting period (another formula. Reporting periods vary, it could be monthly, quarterly, or annually)
- date the use tax was paid
- check or electronic transfer acknowledgement number
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I hope you found this post to be helpful, if so please leave a comment.
Until next week – Happy Handmade!