There are many benefits to using Square to process your business transactions – fast payments, integrated apps, and inventory management. But one of the best features of Square is the ability to calculate and include sales tax on your transactions.
Square’s latest iteration of its sales tax module includes automatic sales tax calculations based on the shipping address of your order. This means you can skip the hassle of monitoring every local sales tax rate and spend time running your business. Note that the ultimate responsibility for correctly charging and paying sales tax lies with the seller, not Square.
Understanding Square and Taxation
Square is a third-party payment processor that allows you to have both in-person and remote payment processing through the same platform. In addition, Square charges fees based on a percentage of sales and does not have any monthly fees or setup fees, making it affordable for businesses to implement credit card processing for their businesses.
Depending on the ultimate destination for your items, your sales may be subject to sales or value-added taxes (VAT). Sales tax is typically applied at the point of sale and is calculated as a percentage of the final purchase price. The seller collects it because they are responsible for submitting the tax to the government. VAT is charged at multiple stages of the production process, allowing you to collect the tax at each stage. Unlike sales tax, you calculate VAT based on the value added at each stage, although the final consumer ultimately bears it. Square can calculate the tax on the sale, but sellers are responsible for paying and filing sales tax returns.
It’s crucial for sellers using Square (or any other payment processor) to comply with all sales tax regulations. Missing payments, late payments, and unfiled tax returns can lead to significant penalties and interest.
Setting Up Square for Tax Calculation
Here are the step-by-step instructions on how to configure tax settings in Square:
- Access the Square Dashboard.
- Click on the “Account & Settings” tab.
- Click on the “Business Information” tab.
- Click on the “Sales Taxes” tab.
- To create a new tax rate, click on the “Add Tax Rate” button.
- Enter the following information:
- Tax Name
- Tax Rate
- Decide if the tax should apply to All Taxable Items (and, if not, select Items to Apply Tax To)
- Add Exemption Rule (if applicable)
- Include Tax in Item Price (if you want to show a single price for the item and sales tax)
- Click on the “Save” button.
Tips for setting up tax rates accurately
Research local tax rates and regulations: Understanding the tax rates applicable to your business location is essential. Research and identify the specific tax rates at the federal, state, and local levels.
Consider different tax rates for specific products or services: Certain products or services may be subject to different tax rates or exemptions. For example, some jurisdictions apply lower tax rates to essential goods like groceries or medical supplies.
Stay updated on tax law changes: Tax laws and regulations can change frequently (sometimes as often as quarterly), so it’s crucial to stay informed about any updates or modifications. Subscribe to reliable tax news sources, consult with tax professionals, and regularly check government websites to ensure you have the most up-to-date information on tax rates and regulations.
Implementing Tax on Square Transactions
Square uses the tax rates input by the seller during the setup process and applies the tax to the sale. Square will add taxes to the order differently depending on how you place the order.
The tax rate is applied based on the business’s location when processing an in-person transaction through Square. The system then automatically calculates the tax amount by multiplying the transaction total by the applicable tax rate. Finally, Square adds the calculated tax to the total.
For online transactions, Square provides an e-commerce platform called Square Online, which includes built-in tax management. For example, when setting up an online store, businesses can configure tax settings based on the customer’s shipping address or the business’s location. The system then calculates and adds the appropriate tax amount to the order total during the checkout process.
Square allows sellers to add tax during the checkout process or list items with tax already included.
Managing Tax Reporting and Compliance
Maintaining adequate sales records is key for supporting your filings in the event of a sales tax audit. Therefore, you should keep the records for seven years.
Square offers various built-in reports that can assist with tax management. These reports provide an overview of sales, taxes collected, and other transaction details. In addition, businesses can generate reports specific to a certain time period, location, or tax type. You can access these reports through the Square Dashboard or the Square Point of Sale app.
It is crucial to regularly review and reconcile tax reports generated by Square or other accounting systems. This helps identify any discrepancies or errors in tax calculations or collections. By promptly addressing any issues, businesses can fix the problem before they become an issue with taxing authorities.
Tax regulations can be complex and subject to change. If you have specific tax concerns or are unsure about certain tax requirements, it is advisable to seek advice from a tax professional or accountant. They can guide your business’s circumstances, ensuring compliance with relevant tax laws and regulations.
Best Practices for Tax Management with Square
It’s important to review your Square reports regularly to ensure you properly charge tax through the platform. Though Square’s automated tax calculator works well, the ultimate responsibility is on your to ensure that you are compliant.
Square streamlines tax reporting by integrating with third-party accounting software. This integration reduces the chance of data entry errors. In addition, integrating Square with accounting software provides a comprehensive view of your business’s financial data, including tax-related information.
Effective tax management is crucial for businesses using Square, and following best practices can simplify the process and ensure compliance with tax regulations.
Businesses can streamline tax calculations and reporting by accurately setting up tax rates, regularly reviewing and adjusting tax settings, and utilizing Square’s reporting features. Ongoing monitoring, periodic audits, and seeking professional advice when needed are essential for maintaining accuracy and compliance.
Are you having trouble configuring sales tax and need more help on how to add sales tax on Square? We can help you identify your sales tax needs and quickly get you up and running and in compliance on Square. Contact us to set up a free initial consultation.