Various states handle sales tax collections in various ways, but one of the more difficult to grasp concepts is prepaid tax. The easiest way to describe it is to give you an example. In Ohio, if you pay enough sales tax to qualify, they require that you prepay your tax. For simplicity we will talk about the 3rd Quarter ( July, August, & September ) and their payment months ( August for July, September for August, and October for September ). So what would happen is in August, when paying your sales tax for July, you would be required to not only pay the July amount ( lets say $25000 ) plus you would be expected to pay what you estimate ( or collected to this point ) for August ( lets say $19000 ) – so in August, you write a check to the state for $44000. Now September rolls around, and its time to pay for August. So now, your tax due for August is $22000. But now you get to deduct what you prepaid for August back in August ( that $19000 ) so we only owe $3000. But we still need to prepay for September ( lets say $23000 ) – so in the end, we would write a check to the State for $26000 ( 22000 – 19000 + 23000 ).
Now slightly different are states like California where you prepay monthly and settle quarterly. So using our 3rd quarter example, in August, you would write a check for $25000 for July. In September, you would write a check for $22000 for August. In October, you would do your sales tax for July – September and determine you owe the state $74000 in sales tax. So you would write a check for $27000 ( $74000 – $25000 – $22000 ).
So now that we understand why we have to do this, and how we do it manually – lets see what we do in Lizzy.
First, if we don’t have a PrePaid sales tax account set up, we should do so.
Go to Accounting > Chart Of Accounts > View Accounts, and from there we will add our PrePaid Sales Tax account. We suggest we make this an ‘Other Current Asset’ type of account, so lets make 140.00.000 or Master account, so it will be grouped on the Balance Sheet properly. Account Type should be “Other Current Assets”. Account Number – we suggest 142.00.000 – but choose another if you already have a 142.00.000 or want a different number ( or use a different numbering sequence ). And as an account name – Prepaid Sales Tax will do ( or name it what you feel you’ll need it to say. ). Please keep in mind, for the rest of this example, I will be using these accounts, so change them appropriately below.
Now we need to tell Lizzy that we have a prepaid sales tax account, so we head to Settings > General > Tax Rates, and right next to our Save button we have PrePaid Sales Tax Account. Select your new account ( 142.00.000 ) and click Save. You will get the following message: “Error: You must enter a name, select an account and select a tax vendor to continue.” Please ignore this and click Close Window. The error is a guardrail so it doesn’t save a tax item without a name, account or vendor. Since we just wanted to save the Prepaid account, we can ignore the error, and move on.
Now, Lizzy knows our prepaid sales tax account, and will use it on our tax reports. At this point, we assume you already have a “Generic Tax Report” configured in your Tax Reports. Handling prepaid sales tax assumes you using Lizzy’s Generic Tax report functionality.
So at this point – business goes on normally until its time to pay your sales tax. If you do NOT do quarterly tax assessments, then skip to the next paragraph. If you do quarterly taxes, and have already paid into the quarterly fund, you will need to move the money from whatever account you hit on your sales tax prepayment check to your new Prepaid Sales Tax account. So do that through a GL Adjustment. At this point, it should either be the first check in your quarter your about to write, or what you’ve paid so far for the quarter is in your Prepaid Sales Tax account. Now, for the current assessment, we simply write a check to our Tax Vendor for our prepayment amount, and offset our new Prepaid Sales Tax account.
Now for our quarterly reconciling, or our monthly payment handling, we move to our tax report. Going to Invoicing > Reports > Sales Tax Report, and setting our date range, and select our report to generate, then click Generate. On this report you should have all the figures you need to fill out for your state filing report. When we are ready to generate the check, we click “Pay Sales Tax from This Report” in the middle of the screen. MONTHLY FILERS: At this point, you may want to run this report for the current month, to get an idea of how much you need to prepay for this month. So do that, and get your amount to prepay, and write it down. Then regenerate your current payment month and click the Pay button.
On our payment form, you’ll see all the taxes you currently owe ( through your end date ) for the various tax vendors you have. Check the pay button on the right for all the tax municipalities you will be paying right now. Towards the bottom of the report, you’ll notice 2 lines that say “Estimated/PrePaid Last Month” and “Estimate to Prepay This Month“. While the descriptions are mainly for the montly filers, these are the fields you quarterly filers will use as well. By default, both of these lines should have your prepaid sales account in them ( because we told Lizzy what it was earlier ). And because of that, Lizzy was nice enough to go gather how much we’ve prepaid already in to our sales tax, and filled that in.
QUARTERLY FILERS: At this point – if you’ve checked all your tax items, the total to pay at the bottom should be what you now owe ( your prepaid amount has already been subtracted from the tax total for your check calculation. ) You may jump down to the paragraph following the Monthly filers.
MONTHLY FILERS: At this point, all you need to do is enter that number we wrote down earlier for the current prepayment and enter it the “Estimate to Prepay This Month” Amount column. It should increase your check total.
ADJUSTMENTS: If your paying late, or your state is nice enough that if you pay early or on time, you get to take a small deduction ( lets say .75% ( or 3/4 of 1 % ). We can go to the Enter Adjustment Info line and enter a ( – ) negative amount to deduct, or a positive number if we owe a late fee, and then select what account we want this to hit. ( The accounts only allow you to look at other income and other expense accounts ).
At this point – we should be ready to process our payment. If we want Lizzy to write our check, she’s already to do it, so we just click “Process Payment(s)” and she’ll write our check. If we want to pay later, and want a PO instead, we can simply click Create Payables, and Lizzy will go write payables up for our sales tax.
Either way, congratulations! You’ve handled your Prepaid Sales Tax assessment properly.