In plain English
It is a liability, not income. It should tie to the sales tax return.
Keep the money available.
Why it matters
Sales tax you collect is held for the state. If it lands in your income accounts, revenue is overstated, and at return time you may not have set aside enough money to pay. Owners sometimes discover this only when the return is due and cash is tight.
A sales tax payable account that ties to your filed returns also makes a state review much easier to get through.
Worked example
Taxable sales of $10,000 at 6.625% collect $662.50, owed to the state.
How to handle it
- Set up sales tax in your software so tax on each invoice or sales receipt posts to a liability account.
- Run a sales tax liability report for the filing period and compare it to taxable sales.
- Record the payment to the state against the liability, not to an expense account.
- Confirm the liability account returns to roughly zero for the period after you pay.
- Check current rates and rules with the state tax agency or your accountant.
Common mistakes
- Recording sales tax payments as an expense, which double counts the cost and leaves the liability showing as owed.
- Entering sales as a single total including tax, which mixes the state's money into revenue.
- Using the collected tax to cover operating bills, which leaves a shortfall when the return is due.
Not the same as: Revenue
Revenue is money you earned and keep. Sales tax payable is money you collected on behalf of the state and must pass on. See Revenue.
Go deeper
- The Sales Tax Payable Account: Keeping It Accurate: How sales tax moves through your books, why it is a liability and not income, and how to reconcile it to your returns.
- New Jersey sales tax for small businesses: How New Jersey sales tax works for small businesses: when to register, what is taxable, how to collect and file, and how to record it in your books.
Related terms
- Shareholder loan: Money an owner lends to the business or the business lends to an owner, tracked as a loan.
- Shrinkage: Inventory lost to theft, damage, error or spoilage, found by comparing counts to the books.
- Revenue: The money a business earns from selling goods or services before expenses.
Common questions
What is a sales tax payable?
Sales tax collected from customers that you owe to the state.
Can you give an example of sales tax payable?
Taxable sales of $10,000 at 6.625% collect $662.50, owed to the state.
Why does my sales tax payable balance not match my return?
Common causes are manual sales entries that skipped the tax setting, returns not recorded, or a payment coded to the wrong account. Run the liability report by period and compare it line by line with the return.
Should I keep sales tax in a separate bank account?
Some owners move collected tax to a separate savings account after each deposit so it is not spent by accident. It is optional but can make paying the return easier.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.