Work with multi-component custom tax codes

Multi-component custom tax codes present several accounting challenges. Individual tax components may be:

  • Levied by different tax authorities
  • Payable to tax authorities on different dates
  • Subject to rate changes at different times
  • Applicable to different customers
  • Effective only for certain categories of goods or services

Basic instructions for creating multi-component custom tax codes are contained in another Guide. Read that Guide first. Those instructions are adequate for simple situations where all components:

  • Apply simultaneously to goods or services
  • Are payable to the same authority at the same time
  • Are not expected to change

If any of these criteria does not apply, read on.

An example

This Guide uses a custom tax code with three components as an example. The overall tax code is named Sales tax 6.25%. Components are levied by the state, the county, and a special transit district. Percentage tax rates are as shown:

In the simple situation outlined above, all components were assigned to a single tax liability account. (That situation is also illustrated in an example in the other Guide.) On a sales invoice with a line item to which this tax code applies, the applicable tax code is selected:

The resulting sales invoice lists the individual tax component amounts rather than the amount for the overall tax code:

Assuming no other taxable transactions have been recorded yet, the Summary shows all taxes payable in a single account:

The various tax reports in the Reports tab also group all components together. For example, the Tax Summary report includes just one line:

If it is necessary to determine how much of each component was collected, a calculation must be made outside Manager. That amount is the ratio of a component to the total tax rate multiplied by the tax collected. But this approach is cumbersome. Manager can streamline the process.

Establish separate tax liability accounts

To keep track of individual tax components when they are payable to different authorities or on different schedules, rename existing or create separate new tax liability accounts for each. Continuing with our example, in the Settings tab, we select Chart of Accounts:

On the Balance Sheet side, we click Edit for the original Tax payable account and change its name to State sales tax payable, corresponding to the first component of the tax code. For purposes of illustration, we also assign a Code to the tax liability account. We click Update to save our changes:

Back at the Chart of Accounts screen, we click New Account:

We enter a name for a tax liability account for the second tax component, in this case, County sales tax payable, and assign it the Code of 2502. We repeat the process for the third component, creating a Transit tax payable account, 2503. All accounts are placed in the Liabilities group (or they could be assigned to a subgroup under that). The Tax Code fields are all left blank.

We then return to Settings Tax Codes and edit the tax codes by assigning each component to its matching tax liability account:

Now, the Summary shows a breakdown of how much tax is owed to each authority:

Required payments to various tax authorities can now be determined from their appropriate accounts, eliminating the need to calculate prorated shares of an overall tax liability.

At the present time, tax reports in Manager cannot break out individual components.

Handling different taxable situations

For situations where all tax components do not apply, create new tax codes to match. In the example, goods and services delivered outside the county are exempt from county sales tax, but still subject to the other two. And food sales are exempt by law from the transit sales tax. So two new tax codes are created in the same manner as the first:

  • County-exempt sales tax 3.75%
  • Transit-exempt sales tax 5.55%

Component account assignments are made to the same three tax payable accounts, as applicable. Tax codes would also be created for any other feasible combinations of customer, location, and applicability. Every tax code is, in effect, a subset of the basic, three-component code originally created. Transactions can be designated for proper tax treatment based on identity or location of the customer, type of goods, etc. If necessary, tax codes can be selected on a line item basis within any transaction form.

After the new tax codes are in place, a second sales invoice for the same services to a customer outside the county is summarized on a new line on the Tax Summary, reflecting the lower tax rate:

But the various components are posted to the same tax liability accounts as before (reflecting the two transactions entered so far):

Changing component tax rates

When a component of a tax code changes, a completely new tax code must be created. Good practice is to make the obsolete tax code inactive.

Never edit components of a tax code that has already been used for any transaction. All previous transactions using that code would be retroactively modified.

Returning to the example, assume the state sales tax component increases to 3.5% mid-year. We create new tax codes and make obsolete ones inactive. Subsequently, we issue a third sales invoice for identical services to a customer within the county. The resulting Tax Summary shows all three rates used during the accounting period:

Changing component rates do not require adjustment of tax liability accounts or changes to their names. Only a new tax code must be created, with components assigned to the same liability accounts as before.

Paying individual tax authorities

Rather than paying off all or a portion of a single tax liability account, payments can be made to tax authorities for a single component, posting the bank or cash transaction to the appropriate component’s tax liability account. Assume, for example, we want to remit only the transit tax payable. After the three transactions described above, the balance of our Transit tax payable account is 2.25. We enter a payment for that amount, posted to the Transit tax payable account. The Balance Sheet shows nothing remaining in that liability account, but amounts remaining to be paid to other tax authorities:

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