How sales tax works in Wave

This article explains how sales tax works in Wave, and how to record sales tax activity.

How is sales tax tracked?

When you create a sales tax, Wave automatically creates a sales tax liability account on your chart of accounts, named after the sales tax. Every time you create a transaction that includes sales tax, the amount of tax is recorded to the sales tax liability account.

If you need to set up multiple sales taxes, be sure to give each sales tax a name that you'll recognize easily.

You can add sales tax to the following transactions:

    • Invoices
    • Bills
    • Income transactions
    • Expense transactions

How is sales tax calculated?

There are two types of sales tax calculations in Wave: exclusive of tax, and inclusive of tax.

  1. Exclusive of tax: this means the sales tax is calculated based on the price (the "base amount"), and then the sales tax is added to the base amount to arrive at the transaction total. Examples of this in Wave include invoices and bills.
  2. Inclusive of tax: this means the sales tax is included in the total of the transaction (or the individual item). The pre-tax amount is calculated based on the total amount and the sales tax rate. Examples of this in Wave include income and expense transactions.

So how do I handle sales taxes in Wave?

How to add sales tax to an invoice

When you create an invoice, after you add an item, click the arrow in the "Tax" box to open the list of available sales taxes, and select all taxes that need to be applied. You can add multiple sales taxes to an invoice.

How to add sales tax to a bill

Click inside the box below the "Tax" header; the list of sales taxes will appear. You can add multiple sales taxes to a bill.

How to add sales tax to an income or expense transaction

On the transactions page, the detail pane has an "include sales tax" link for both income and expense transactions. Clicking that link will open the list of sales taxes; you can apply multiple sales taxes to the transaction. When you're done adding sales taxes, click Update and then Save.

 

How to record a sales tax payment

To record a sales tax payment, create or categorize the expense transaction on the Transactions page. Click in the "Category" field, and select "Sales Tax Payment To Government." The list of sales taxes set up in your business will appear; select the one you are paying and click Save.

If you are paying more than one tax, you can split the transaction and select each tax included in the payment.

How to record a sales tax refund

To record a sales tax refund, create or categorize the income transaction on the Transactions page. Click in the "Category" field, and select "Sales Tax Refund From Government." Select the tax for which you received a refund in the dropdown list, and click Save.

How to record a discount on sales tax owed

If your business is allowed to pay less sales tax than you owe (for example, an early payment discount), you still need to record the full amount as paid, since you don't owe that money anymore. You can accomplish this by splitting your payment transaction to record the full payment and the discount.

 

  1. Navigate to Accounting > Chart of Accounts, and click the "Add a New Account" button in the upper right corner. In the Account Type dropdown, scroll down to the Income section, and select Discounts. Name it “Sales tax discounts.”
  2. Next, head to Accounting > Transactions. Locate or create the payment transaction and open the transaction details. Click “Split this withdrawal.”
  3. On one of the line items, enter the full amount of the tax due according to the Sales Tax report. Categorize this amount to “Sales Tax Payment to Government” and choose the sales tax from the list.
  4. On the other line item, enter the amount of the discount. Categorize this to “Discounts and Fees,” and then choose the “Refund for…” the sales tax discount account you created in step 1.

    Choosing the Discounts and Fees category will flip the sign to negative, so the transaction will balance.

  5. Click Save, and you’re done! The Sales Tax report shows that the tax is paid in full, and the correct payment amount is recorded in your bank account.

How to see your sales tax transactions

There are two ways to see the sales tax transactions for your business: the Sales Tax report, and the Account Transactions report.

 

The Sales Tax report is a summary of all sales tax transactions, listed by individual sales tax, and organized by tax collected, tax paid, and payments or refunds to and from the government.

The Account Transactions report - which you can link to from the Sales Tax report - shows the beginning balance of the sales tax account, all of the activity in the account, and the ending balance of the account. The transactions are totalled by debits and credits, which won't necessarily equal total tax collected and paid on the Sales Tax report.

 

Looking for more information? Check out these other sales tax articles:

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