A Quick Guide to Set Up and Use Tax in QuickBooks Desktop

A proper setup or configuration of your QuickBooks is necessary for accurate sales tax calculation, recording, tracking, and reporting, so you can charge customers properly and file your tax returns without errors.

Calculating your taxes and filing also requires adding tax agencies (state/city), setting the correct tax rates, taxable or non-taxable products, and customers, and testing invoices to ensure tax is applied properly.

Learn how you can set up and use tax in QuickBooks Desktop for automatic tax calculation on invoices and sales receipts, track how much tax you collect, generate liability reports, and help you record tax payments to the correct agencies, making tax filing accurate and hassle-free. 

Before You Set Up Tax in QuickBooks Desktop

Before configuring and using taxes in QuickBooks Desktop, make sure you have the following information:

• Your state/local sales tax rates
• Tax agency/vendor name
• Which products/services are taxable
• Customer resale certificates (if any)
• Backup your company file

Learn How You Can Set Up and Use Tax in QuickBooks Desktop 

In this section, you will learn how you can set up the accurate tax rates, products & customers, add tax agencies, and how much tax must be collected. Let’s enable the tax feature and further configure it for accurate tax calculation: 

1. Turn on ‌the Sales Tax feature

In QuickBooks Desktop, you must enable the sales tax feature and set up sales tax items or tax groups to start recording sales tax:

• Select Edit from the top menu bar. 
• Choose Preferences.

• Choose Sales Tax in the Preferences window.
• Move to the Company Preferences tab.
• In the Do you charge sales tax section, click Yes to enable the feature. 

2. Configure Sales Tax Settings

Go to the Sales Preferences tab for Sales Tax and proceed below: 

1. Set up Sales Tax Items: Add sales tax items for all the locations (county, district, city) you collect taxes from. Click on Add sales tax item… to start the process. Check the steps mentioned below to create items and groups. 

2. Assign Sales Tax Codes: These codes help you easily differentiate taxable and nontaxable sales and customers when reporting. QuickBooks will automatically create TAX (taxable) and NON (nontaxable) codes when you turn on sales tax.

• Use TAX for items/customers from whom you are collecting taxes.
• Use NON for all tax-exempt items/customers (for example, non-profits, out-of-state sales, resale items).

3. Set Tax Basis: Select how you would pay sales tax:  

• As of invoice date (Accrual Basis)
• Upon receipt of payment (Cash Basis)
• Consider your company’s accounting preference.

4. Set Payment Frequency: Select how you would pay sales tax: 

• Monthly
• Quarterly
• Annually

Click OK to save your preferences.

3. Create Sales Tax Items and Groups

Here’s how to specify sales tax items and groups for accurate tax calculations in QuickBooks Desktop: 

Sales Tax Item

Sales tax items calculate a specific tax amount on taxable sales only.

Let’s create a new sales tax item: 

• Choose your Sales Tax Item under the Type dropdown.
• In the Sales Tax Name field, enter your name and the related tax location. Then, add more details in the Description field.
• Enter the specific rate in the Tax Rate (%) field.
• Enter the name of your collecting agency (set up as a Vendor) in the Tax Agency field. If the agency isn’t listed there, click on Add New to set it up.
• Select OK.

Let’s edit an existing sales tax item:

• Go to the Lists menu. 
• Choose Item List. 
• Look for the sales tax items that you want to update. 
• Right-click the same item and choose Edit Item (the pencil icon in QuickBooks for Mac). 
• Now, update the name, rate, or tax agency as required. 
• Finally, click OK. 

Sales Tax Group

Use a sales tax group when multiple sales tax items apply to the same transaction but should be shown as a single line item on forms. Even though they appear as one line, you can still track and report each tax separately.

To create a sales tax group:

• From the Type dropdown (when adding a sales tax item), choose Sales Tax Group.
• In the Group Name/Number field, enter a preferred name for the group. Add more details in the Description field.
• Add each sales tax item that belongs to the group. If an item doesn’t exist yet, select Add New and follow the steps to create a sales tax item.
• Select OK.

Assign Sales Tax Codes

Using the correct sales tax codes (such as TAX or NON) for items and customers helps ensure that taxable and non-taxable sales are reported accurately.

4. Set Up Non-Taxable Status

You must specify which customer or item is non-taxable so QuickBooks can exclude it from tax calculations for accuracy. Here’s how to set up non-taxable status: 

1. For an Item

• Select Lists in the menu bar. 
• Select Item List.
• Choose Item and then New (or Edit item if you wish to make changes to an existing item).
• Under the tax code dropdown, choose Non-Taxable Sales (or Non-Taxable Labor).

2. For a Customer

• Go to the Customer menu. 
• Click on Customer Center.
• Right-click your customer name, then click Edit Customer: job. If you haven’t set up the customer, choose New Customer & Job > New Customer. 
• Navigate to the Sales Tax Settings tab.
• Choose Non-Taxable Sales (or Service) under the Tax Code dropdown. 
• In the Resale No. field, enter your customer’s resale certification number.
• Finally, click OK.

5. Create Specific Tax Codes

If the standard TAX and NON codes don’t meet your needs, you can create custom tax codes.

• From any Tax Code drop-down menu, select Add New.

Other Non-Taxable Codes: These can be used to handle specific scenarios where items or services are not taxable.

Sales tax code	When to use
OOS	OUT-OF-STATE SALES. Many states don’t require sales tax on out-of-state sales. You can assign this sales tax code to a customer who purchases from your store but resides in another state. Many QuickBooks company files already include this non-taxable sales tax code by default.
LBR	LABOR. In many states, labor services aren’t subject to sales tax so that you can assign the LBR code to a service item. Some QuickBooks company files already include this non-taxable sales tax code by default.
NPO	NON-PROFIT ORGANIZATIONS. These organizations aren’t charged sales tax, even when the products or services you sell are normally taxable. The NPO code would be assigned to the customer.
GOV	GOV. Sales made to government offices are not subject to sales tax.
WHL	WHOLESALERS. Customers who purchase goods from you solely for resale.
RSL	RESELLERS. Customers who purchase your products in order to resell them, or who use your products as components to create and sell their own products.

Conclusion 

When you set up and use tax in QuickBooks Desktop, you can easily calculate taxes, assign tax or non-tax status to products and customers, and generate reliable reports with confidence. By following the steps outlined in this guide, you can streamline your tax management process and avoid costly errors. 

If you need expert assistance at any stage, contact QuickBookSupportNet at the +1(866)500-0076 for instant consultation. Speak with a certified QuickBooks ProAdvisor today!

Frequently Asked Questions 

How to set up tax code in QuickBooks Desktop?

Go to Lists > Item List. Choose a tax code such as “TAX” or “NON” from the dropdown. Or select Add New to create custom codes from the Tax Code dropdown. Define your tax basis (Cash/Accrual) and payment frequency, assigning codes to items and customers as needed.

How to set up tax in QuickBooks Desktop? 

Go to Edit > Preferences > Sales Tax, create individual Sales Tax Items and Sales Tax group in the Item List, defining the tax agency and rate for each. Now, assign your taxable items and customers and ensure the tax codes are applied correctly on transactions to track and report liabilities. 

How do I set up local tax in QuickBooks Desktop?

First, create individual Sales Tax Items for sales tax or add them as Payroll Tax Items for employee-based local taxes in the Item List and Employee Center, respectively, then assign them to customers/employees.

Where is the taxes tab in QuickBooks Desktop?

In QuickBooks Desktop, there isn’t a single “Taxes” tab; instead, tax functions are found under the Edit > Preferences > Sales Tax for setup, the Vendors menu > Sales Tax > Pay Sales Tax to pay, and the Employees > Payroll Center > File Forms for payroll taxes.