Okay, so if you followed our steps to create a professional invoice guide, you should know how to create an invoice but perhaps you’ve heard of invoice tax and aren’t quite sure what it is or how it’s calculated. Let’s dive in a little deeper on invoice tax.
Definition
According to the Business Dictionary, invoice tax is an account that appears among the current liabilities portion of the balance sheet for a business. The tax payable account is made up of taxes that the company needs to pay to the appropriate government agency within the current tax year according to the laws of its home country.
In terms of a tax appearing on an invoice, the tax owed is showed as a separate line item on the invoice to the client. For example, you would create your invoice as usual, and if taxes are going to be owed as a part of the total, you offer a subtotal, and then create a line item for the tax. Then calculate the subtotal, plus the tax, to find your total amount owed.
Most of the time, you won’t be adding tax to invoices that only include services rendered. However, if the invoice includes products or other inventory that’s been purchased, sales tax may be applicable. In order to calculate the correct amount of sales tax for an invoice, you first need to know some information about your state’s finance bureau.
Sales tax calculation
Start by finding out the correct sales tax in your state. Sales tax is usually anywhere between 5 percent and 15 percent. Often, you can look this information up online, and find the correct state tax percentage by zipcode. Next, take a look at your invoice and figure out which items qualify for sales tax. Usually services, hourly rates, or resale items are not eligible for sales tax. However, you can find out what falls within the guidelines from your state’s financial bureau.
Then, calculate the total of the items that are taxable. Let’s say the taxable items add up to $100, pre-tax. Then, the tax in your state is 8 percent (for example). Multiple the pre-tax total by the tax percentage to get the tax amount. In this case, the tax would be $8. Add the numbers up to get the total amount owed, and it would be $108.
If math isn’t your strong suit, there are many free tax calculators online that allow you to type in your subtotal, then input your state sales tax rate, and it will multiply and add up the amounts for you. It’s a great way to double check your amounts, as you don’t want to send an invoice to a client that has an incorrect amount on it.
At the bottom of the invoice, you may want to include some boilerplate language surrounding the tax charge, just so the client doesn’t have any questions regarding. You’ll also want to be sure to keep record of the fact that you did charge for the taxes, and once the invoice is paid, you’ll want to set aside the tax fees so that when it’s time for you, or your business, to pay taxes, you already have the money ready.
Invoice tax is not to be confused with a tax invoice. A tax invoice is a document that is required by vendors if they wish to claim input taxes. A supplier that is a registered vendor must issue a tax invoice to its recipient within 21 days after making a taxable supply issue. It is against the law to issue more than one tax invoice per taxable supply.
Next, learn all about a VAT invoice and how to use it properly in your business endeavors.