How to Set Up Tax Settings and Manage Taxes in QuickBooks Online

Overview

QuickBooks Online’s Automated Sales Tax (AST) calculates sales tax based on what you sell, where you sell or ship, and whom you sell to. You still determine whether you are required to collect tax (nexus and registration), but once AST is set up, QBO keeps rates current and tracks what you owe by agency and filing period.

What you’ll need:

• Your business locations (shipping/fulfillment points) and any states where you have nexus.
• Sales‑tax registration details (account/permit numbers) and filing frequency for each agency.
• A list of products/services with their correct taxability (e.g., taxable, exempt, reduced rate, or special category).
• Customer exemption statuses and resale certificates, if applicable.

1) Determine Your Tax Requirements

1. Identify nexus. Confirm physical or economic nexus (e.g., revenue/transaction thresholds) in each state where you sell. Register with the state before collecting.
2. Define filing frequency & method. Monthly, quarterly, or annual. Most jurisdictions use electronic filing and electronic payments.
3. List agencies & accounts. For each state/local agency, note your account/permit ID, start date, and reporting basis (cash or accrual).
4. Classify items. Some items (e.g., groceries, digital goods, SaaS, clothing) have special rates/exemptions. Decide each item’s category so QBO can calculate properly.
5. Note exemptions. Capture customer exemption certificates (resale, nonprofit, government) and maintain records for audit support.

2) Turn On Automated Sales Tax

1. In QBO, go to Taxes → Sales Tax.
2. Select Use Automated Sales Tax (or Get started) and follow the setup prompts.
3. Confirm your business address and primary tax location.
4. Set your default reporting method (cash or accrual) to match your tax‑agency registration.

Once AST is enabled, QBO will maintain tax rates and many agency rules for you and apply the right rate based on item category and ship‑to/sale location.

3) Tell QuickBooks Where You Collect

For every state (and applicable local jurisdictions) where you’re registered:

1. Open Taxes → Sales Tax → Sales Tax Settings.
2. Choose Add agency.
3. Select the state/local agency (or search), then set filing frequency, start date, and reporting method (cash/accrual).
4. Save. Repeat for each jurisdiction where you must collect.

You can add additional agencies later as you expand. Keep agency names and IDs consistent with your registrations for clean audit trails.

4) Assign Sales‑Tax Categories to Products & Services

Assigning the correct sales‑tax category tells QBO how to tax each item. Examples include “Tangible Personal Property (General),” “Clothing,” “Prepared Food,” “Software as a Service,” and “Labor (Non‑taxable)” depending on state rules.

1. Go to Sales → Products & services.
2. Edit an existing item (or create a new one).
3. In the Tax dropdown, choose the most accurate category (or mark as Non‑taxable if applicable).
4. Repeat for all items.

5) Double‑Check Customer Tax Info

1. Open the customer record → Tax info.
2. Set default taxability (taxable vs. exempt) and tax location if your workflow requires a default.
3. Attach exemption certificates (resale, nonprofit) and track expiration dates.

For B2B customers, ship‑to address controls the jurisdiction. For pickup/local delivery, your origin may control the rate—confirm your state’s rules.

6) Use Taxes on Estimates, Invoices, and Sales Receipts

1. Create the form (estimate, invoice, or sales receipt) and add your items.
2. Ensure taxable items are flagged in the Tax column.
3. Verify the ship‑to (or sale) location. QBO uses this with the item category to compute tax.
4. Review the Sales tax calculation area at the bottom. If the location or item category changes, update and re‑calculate.

7) Reports & Checking Your Liability

To monitor what you owe by state/agency and period:

• Open Taxes → Sales Tax to see upcoming return periods and balances due.
• Run the Sales Tax Liability report for detailed taxable/nontaxable sales and tax by jurisdiction.
• Drill into any number to view the underlying transactions and correct mis‑categorized items or addresses.

Reconcile your tax liability monthly—especially if you post adjustments, credit memos, or issue refunds—to avoid surprises at filing time.

8) File Your Return & Record the Payment

1. From Taxes → Sales Tax, choose the return period that’s due and review amounts.
2. File the return directly on your tax agency’s website (QBO doesn’t e‑file state sales tax). Keep the confirmation number.
3. Back in QBO, open the same period and select Record payment.
4. Choose the bank account, enter the payment date and amount, and save.

Payments recorded here reduce the sales‑tax payable balance and appear in your payment history. If you received a refund or credit from the agency, record it accordingly in the tax center.

9) Adjustments, Credits, and Corrections

Sometimes you’ll need to adjust your return in QBO before marking it filed:

• Agency credits/discounts. Add an adjustment line for vendor discount or credit allowed by your state.
• Prior‑period corrections. Use an adjustment to correct minor prior‑period errors per state guidance, and document the reason in the memo.
• Rounding differences. Small rounding variances can be adjusted to reconcile to the agency’s total.

If you need to delete or edit a posted tax payment, locate the period in the tax center, open the payment details, and edit or delete as permitted for your closing preferences.

Common Mistakes to Avoid

1. Collecting without registration. Always register with the state before collecting tax.
2. Wrong item categories. Using a generic category for a special‑tax item leads to under/over‑collection.
3. Incorrect addresses. Missing/incorrect ship‑to addresses misapply local surtaxes.
4. Ignoring exemptions. Not storing exemption certificates (or letting them expire) risks assessments.
5. Mismatched filing basis. If the agency expects cash basis but you configured accrual (or vice‑versa), your liability won’t match the return.
6. Not reviewing liability monthly. Waiting until quarter‑end makes errors harder to fix.
7. Turning off AST workarounds. Avoid excessive custom rates; prefer correct categories and locations.

Helpful Tips & Best Practices

• Keep a “Taxability Matrix.” Maintain a simple sheet listing each item, its tax category, and states where it’s taxable or exempt.
• Lock periods after filing. Close the tax period in QBO once the return is filed to prevent back‑dated changes.
• Use classes/locations for analysis. Still categorize sales by business unit; tax uses item category + addresses.
• Document adjustments. Enter clear memos for every adjustment—auditors love good notes.
• Audit your catalog. Re‑review item categories each quarter and after new product launches.
• Sync ecommerce channels. Ensure ship‑to addresses flow correctly from your storefront/marketplaces into QBO.
• Coordinate with your accountant. Confirm special rules: delivery fees, installation labor, digital goods, and holiday tax‑free weekends.

Legal & Compliance Notes

• Sales tax is governed at the state and local level. Your business is responsible for registering, collecting, reporting, and remitting according to each jurisdiction’s rules.
• QuickBooks calculates and tracks, but does not file state sales‑tax returns for you. File on the agency’s portal and then record the payment in QBO.
• Keep exemption certificates and resale permits on file. Many states require timely renewals.
• Penalties and interest accrue for late filings and under‑collection. Review liability routinely and file ahead of the due date where possible.
• This tutorial is general information, not legal or tax advice. Consult a CPA or state‑licensed tax professional for jurisdiction‑specific guidance.

Real‑World Scenarios

A) U.S. small business reconciling monthly bank transactions

Each month, they reconcile bank accounts and confirm that sales‑tax payments posted in QBO match the amounts remitted on the state portal. If differences appear, they run the Sales Tax Liability report for that month, drill into exceptions (e.g., mis‑categorized items, bad addresses), post adjustments if the agency allowed a timely discount, and then record the payment on the correct date for a clean bank reconciliation.

B) Travel agency issuing recurring invoices

The travel agency sells packages that may include non‑taxable services (agency fees) and sometimes taxable merchandise (branded gear). They assign categories so services are non‑taxable and merchandise is taxable where applicable. Recurring invoices inherit item categories; the bookkeeper reviews ship‑to addresses for group bookings to ensure the correct jurisdiction is used each time.

C) Wellness clinic tracking expenses across categories

The clinic sells services (generally non‑taxable in many states) and over‑the‑counter products (often taxable). They configure AST, mark services as non‑taxable, and assign correct categories to products. Each filing period they run the liability report, confirm taxable vs. non‑taxable sales, then file and record the payment. For vendor purchases, they capture contractor invoices and verify that sales‑tax paid on supplies is recorded appropriately (and not mixed with sales‑tax collected from customers).

FAQ

How do I change from accrual to cash (or vice‑versa) for sales‑tax reporting?

Open Sales Tax Settings for the agency and set the reporting method to match your registration. Changing methods mid‑year may require adjustments—coordinate with your accountant.

Can QuickBooks e‑file my state sales‑tax return?

No. File directly on your tax agency’s portal, then return to QBO to Record payment for that period.

What if an item is taxed differently in different states?

Assign the most accurate item category. AST uses that category plus the ship‑to/sale location to apply the correct rule per state.

How do I handle exempt customers?

Mark the customer as exempt in the Tax info section and retain their certificate. Exemptions override item taxability for those sales.

Why doesn’t my liability report match the agency’s return?

Common causes include wrong addresses, incorrect item categories, mis‑set filing basis, or back‑dated edits. Re‑run the period report, drill into outliers, and post documented adjustments where allowed.

Can I turn off Automated Sales Tax?

Generally, once AST is enabled, you should continue using it. If you must use custom rates, add them in Sales Tax Settings and document the business reason.