Welcome to the Fit Small Business Xero training course!
In this lesson, we’re going to cover how to set up sales tax rates in Xero.
To follow along with me, log into your Xero account now, or click the link below this
video for a free 30-day trial of Xero.
You can also click this link to access our full Xero course and other helpful resources.
Let’s get started!
As a business owner, you are responsible for keeping track of, reporting and paying a number
of different taxes.
If you sell products and services that are taxable, then you are required to charge sales
tax to your customers and send the sales tax payment along with the appropriate documents
to your state tax authority by the deadline.
Most small businesses are on a monthly, quarterly or annual payment cycle.
One of the many benefits of using Xero is that it has everything that you need to stay
on top of sales tax.
You can use the sales tax lookup feature, keep track of the sales tax you collect from
customers and file and pay your sales taxes all from within Xero!
We will use our fictitious company, Acme Web Pros Plus to cover step by step how to set
up your sales tax rates in Xero.
From the Settings menu select General Settings.
Below the Organization section, select Tax Rates
Click on it.
Here's some helpful hints at the top on getting started with tax rates.
To set up a new sales tax rate...
As you can see we have 6 rates already set up, so we will click
the Edit button to the far right of Tax Rates. This will expand and you will be able to see more details.
To set up a new tax rate, you want to go ahead and
Click on the +New Tax Rate button.
There are several fields that we need to complete in this screen.
Starting with the Tax Rate Display Name - In this field, include the name of the tax as you would like it to
appear on invoices, purchase orders and reports.
Tax Components - If the sales tax includes multiple components (i.e. city tax and state
tax) then you want to add each component along with the tax rate for each component.
In the example above, the LA County Sales tax is made up of a city tax component (7%)
and a state tax component (2%).
Total tax rate - Xero will combine each tax component to get to the total tax rate that
will be applied to all transactions that are subject to this tax rate.
Save - Don’t forget to click the “save” button to make your changes.
Our new sales tax rate is here.
You may have a situation where you need to make changes to a sales tax rate.
You can do that at any time by simply clicking on the sales tax rate that you want to make changes to.
Once the window opens up, you can make the necessary changes and just make sure that you save them.
You make also encounter a situation where you need to delete a tax rate. To do that, put a checkmark next to the tax rate and click delete.
There are a few tax rates that have been automatically created by Xero that you are unable to delete.
If the tax rate has a padlock to the left of it, like these, you are unable to delete or make changes to the tax rate.
These are required to stay set up in Xero.
One of the things that sets Xero apart from its competitors is the sales tax lookup feature.
If you sell products and services to customers who are located in a different tax jurisdiction,
you can use this lookup sales tax feature to find the correct sales tax rate that you
need to charge.
Xero’s sales tax lookup feature, once turned on, adds an option to the sales tax column
of an invoice that allows you to lookup the sales tax rate based on your customer’s
address.
By using this sales tax lookup feature in Xero, you can avoid overcharging or undercharging
your customers for sales tax.
If you undercharge your customers, you will be on the hook to make up the difference when
it’s time to remit payment to the tax authority.
This can come back to haunt you if you ever have to undergo a sales tax audit.
To turn on the sales tax lookup feature, navigate to Sales Tax Lookup.
Click on the Edit button next to Sales Tax Lookup.
If sales tax lookup is off, you will not see the checkmark.
In this field, you want to go ahead and enter your physical address of your business.
If you ship products, this should be the address of the warehouse(location) where you ship products from.
So it may not necessarily be your office. It may be the address of your warehouse.
You also want to be able to indicate the tates where your business is registered to collect sales tax - Enter all of the states
Terms of Use - Mark this box to accept the terms of using this lookup service provided by Xero's tax partner, Avalara.
Once that feature is turned on and saved,
you are able to create an invoice that will allow you to look up the sales tax rate.
Let's hop on over to create an invoice, so that we can see how the sales tax lookup feature would work.
Notice under the tax rate column,
if you click the drop down,
you have a list of all the sales tax rates that have been created in Xero
and we also got the lookup rate option. That option would not be there if we did not turn on the feature.
Select that option,
and the sales tax rate will be looked up based on the address info on file for your customers.
So notice, it selected the CA Tax (8.5%) rate.
Now, let's talk about sales tax reporting.
There are two reports that you can run to review your sales tax transactions in Xero:
The Sales Tax Summary report and the Sales Tax Audit report.
To run the Sales Tax Summary Report, go over to the reports section
and select all reports.
Right below the Tax group, we have our Sales Tax Report.
Select a date range.
We'll run this report for Jan 1st through March 31st and click update.
So notice that we have 3 options right below the date range.
You can run this report to show it by Tax Rate.
The default is to show it by Tax Component.
Finally, you can run this report to show it by Account Type.
So here is our Sales Tax Summary report for Acme Web Pros Plus.
For the time period, January 1st to March 31st, 2017.
What you'll notice is our Taxes by Tax Component, since that's the option that we chose.
At the bottom of this report,
you will notice that you can print the report,
or export it to Excel, PDF, or Google Sheets
Let's talk about our Sales Tax Audit Report.
Right next to Sales Tax Summary, we have our Sales Tax Audit Report. Go ahead and click on that.
The Sales Tax Audit Report shows the sales tax calculated for each transaction for the
period by sales tax rate.
So this report, was run for the same exact time period as the Sales Tax Summary Report. As you can see it is
categorized by the Sales Tax Rate.
Similar to the Sales Tax Summary Report, you can print this report or export to Excel, PDF, or Google Sheets.
Now let's talk about how do you prepare and file sales taxes in Xero.
Stay on the Sales Tax Summary report.
And as we discussed earlier, the sales tax info that you track in Xero can be used to prepare
and file your sales taxes.
In order to file your sales taxes, you must set up an account with Xero’s sales tax
partner, Avalara.
Once your Avalara account is set up, you can easily import your sales tax data from Xero
to Avalara, then use it to run sales tax reports to help you file & pay your sales tax.
The first thing you have to do is set up an account with Avalara.
Setting up an account with Avalara is absolutely free.
To do that, scroll down the the bottom of the report and click the File Online button.
This note here is just letting you know that you can prepare and file your sales tax returns online by signing up with Avalara.
As I mentioned, this account is absolutely free.
You'll be able to import sales data, and run reports that sort state and jurisdiction taxes to help file your returns.
Note that there is a cost to file directly to a tax department using Avalara.
So there is no charge to use Avalara but there is a charge to actually files your taxes through Avalara.
Click the continue button.
This will take us to the Avalara website.
On this site, you want to go ahead and select the For Merchants button.
Follow the onscreen instructions to set up your free Avalara account.
That wraps up the lesson on how to set up sales tax rates in Xero.
To access our full Xero course or any of the other lessons in this series, click this link.
You can also find a link below this video for a free 30 day trial of Xero.
If you have feedback about this course or if you have any questions, please leave a
comment below.
Also don't forget to subscribe!