Cloud Accounting Sales Tax
Sales taxes are judged based on the following things:
- VAT (value added taxes): The ability to track taxes paid on expenses in order to collect a refund from the government.
- Component rates: The ability to combine two or more tax rates into a tax code.
- Compound taxes: The ability to charge taxes on top of taxes, you know, like the government likes to do
- Different tax rates on expense line items: The ability to have a different tax rate for each line item when entering an expense.
- Making tax adjustments when entering expenses: The ability to adjust taxes on a line item or total taxes paid basis when entering expenses.
- Both inclusive and exclusive taxes: The ability to either add sales tax on top of a transaction (exclusive), or have the tax included in the amount you’ve entered (inclusive).
- Assign tax code to items: The ability to assign tax codes to items (which are products or services that a company sells or buys that are associated with an account).
- Assign tax code to accounts: The ability for accounts to have a default tax code.
- Assign tax code to contacts: The ability for contacts to have a default tax code.
- Form for entering the tax into the software: A specialized form that allows for the easy entry of tax payments into the accounting software.
All software can handle component rates. The implementation is slightly different amongst the different companies, but I’ve found no one necessarily better than the other.
For making making tax adjustments when entering expenses, QuickBooks Online and Kashoo are the best.
Wave, FreeAgent, and FreshBooks can’t have expenses with multiple line items for different accounts, so of course they’re not able to have different tax rates on expense line items.
For tax reporting, I feel that the way QuickBooks Online reports on taxes is the most comprehensive. There’s a dedicated section to sales taxes, and although it’s not super intuitive, you can drill down into reports for an individual tax agency, which allows you to get summary reports, which you can then drill down further into to get detailed (audit type) reports.
For filing taxes, QuickBooks Online is the best. It has a built in tax filing feature, which specifically handles payments for tax liabilities, making the tax filing process simpler. Included in QuickBooks Online’s filing feature is the ability to make adjustments to the taxes being filed.
Kashoo has a fairly neat feature that I haven’t seen anywhere else, which is that it allows you to make adjustments on a per taxable expense basis (like making an adjustment to only claim 50% of taxes paid on meals and entertainment).
The ability and process of making adjustments when filing taxes is quite uneven across the various accounting software.
Xero and QuickBooks Online do the best job of minimizing tax entry, by allowing you to associate default tax codes with both vendors and customers.
For adjusting taxes that need to be paid when filing, I’d say that QuickBooks Online is the best, while Kashoo and Wave have easy manual methods (via journal entry). You can adjust your taxes in Xero, but there’s a slight workaround that you have to do, since you can’t post directly to a sales tax account in Xero and have it appear in the reports.
Overall, I found QuickBooks Online had the easiest tax system to work with, while Kashoo was a close second (it was more flexible than QuickBooks Online, but not quite as polished and user-friendly).
Xero’s taxes are usable, but you have to understand Xero’s capabilities so as to be able to accomplish what you need to.
Wave’s taxes are usable and straight-forward, but are missing a few things that would made taxes easier.
FreeAgent and FreshBooks have limited tax capabilities. It can work for your business, but if you have more complex needs, those systems may not be able to handle them.
Overall, taxes was one of the most difficult comparison points to work on, since each system did handle taxes in a different way. Also, making a straight comparison is tough, since business are working in many different tax jurisdictions and thus have different reporting requirements.
My advice, is to really spend some time to figure out how the tax works in your accounting software and to run through some tax scenarios to see if your accounting software can handle your tax needs. I’ve found that getting the taxes to do what you need it to for reporting purposes often requires some work arounds.
Xero
There are some pre-set tax rates for New Zealand, Australia, and the UK. You can have default tax rates attached to accounts in your chart of accounts as well as contacts.
There’s no adjusting the total dollar value of tax when entering bills. However, if you’re creating spend money transactions, you can adjust rates when you choose your amounts to be tax exclusive (although, the interface requires you to add or deduct from the auto-calculated tax rate, which is much harder to deal with then if you could just simply type in the total dollar value amount that you wanted).
Xero calculates it’s sales tax report based on if you chose a sales tax code when entering transactions. If you post a transaction directly to a sales tax account, this won’t show up in the sales tax report.
There’s no easy way to file your sales taxes. To pay taxes (or to receive a credit), you must create a sales or purchase invoice (or a spend money or receive money transaction). However, tax payments posted to the Sales Tax Payable is not reflected in the sales tax report, so it’s hard to verify that you’ve accounted for your payment of taxes correctly in the system.
QuickBooks Online US
The US version has a sales tax center which is a nice interface for the filing of taxes.
For its sales tax reports, QuickBooks Online pulls its numbers from all transactions from the associated sales tax payable and receivable accounts, meaning you can post adjustments to the sales tax accounts via journal entry. When you file taxes you also have the ability to adjust taxes.
If you do inadvertently make adjustments to taxes for a period for which taxes have already been filed, the tax owing amounts will show up in the next report, although the details of what was changed won’t show up in the report.
The International versions of QuickBooks Online do handle taxes differently that the US version. Upon testing, I found the International version to handle taxes just as capably as the US version.
Kashoo
For its sales tax reports, Kashoo pull its number directly from the sales tax payable and receivable accounts, meaning you can post adjustments to the sales tax accounts through a transfer or adjustment (journal entry).
When you file your taxes, you have the option to either pay (or receive a credit) for taxes on a specified date to a specific account or to receive the amount as unpaid accounts payable / receivable.
If you are dealing with component tax rates (meaning two or more taxes applied together to form one tax rate), Kashoo allows you to create separate payable and receivable accounts for these taxes and then combine them into a single rate (like for someone who has to charge local, state, and federal tax). All the taxes can be held in separate receivable and payable accounts, making it easy to distinguish which agency is owed what.
If you do inadvertently make adjustments to taxes for a period for which taxes have already been filed, the tax owing amounts will show up in the next report, although the details of what was changed won’t show up in the report.
When entering income or expenses, Kashoo doesn’t display the breakdown of taxes associated with the transaction. However, if you go back and edit an income or expense transaction, it will give you the full breakdown. While this doesn’t take away from the flexibility of using taxes in Kashoo, it does make it not as user-friendly as it could be.
A special note for Canadians: For purchases that have both GST and PST, you can enter custom tax amounts manually for a purchase that has both GST and PST.
Wave
The sales tax payable report is simply a report (which honestly works well enough), but it would be nice if there were a tax form attached to this, so you can enter the taxes paid into Wave based on the report. The audit report is very clean, drillable, and ultimately, quite usable.
FreeAgent
FreeAgent only allows a maximum of 2 taxes and 3 rates per tax. Some businesses in the U.S. would need to manually calculate the division of taxes collect to go to each tax authority if they have to submit taxes to more than 2 tax authorities.
When entering expenses, you can only adjust taxes when you have 1 tax rate. This looks like a bug in the software, since you have the option to choose a custom rate, but you aren’t able to enter a custom rate.
For tax reporting, you’re giving a summary and audit (detailed) report. It would be nice if you could drill down into the individual transactions contained with the report (but, you can get this via doing a transaction report on your tax account).
When using taxes, there’s no way to know what the tax amount charged on an entered bill is, except if you go into your tax accounts transaction report. It would be nice if the taxes paid showed up on the actual bill or expense.
There’s no easy way to file your sales taxes. The only way I could find was to go to Banking, select your bank, then add a transaction. This will give you the option to make a payment to your sales tax account. However, this payment is not reflected in the sales tax report, so it’s hard to verify that you’ve accounted for your payment of taxes correctly in the system.
FreshBooks
FreshBooks only allows you to use two taxes at a time within component rates.
FreshBooks has a tax summary report, but no audit (detailed report).
Since FreshBooks is not fully functional accounting software, it can only report on taxes entered via creating invoices or entering expenses. When it comes to filing, paying, and making adjustments, this has to occur outside of FreshBooks.
This post was written Greg Lam. For a complete list of the articles in this series - Cloud Accounting Introduction