Adding tax to a price
Multiply the price by one plus the rate written as a decimal. At a 6.625% rate, a $100 item becomes $100 times 1.06625, which is $106.625, rounded to $106.63. The tax is the difference, $6.63.
Always use the rate that applies where the sale is taxed. Rates can differ by place and by what is sold, so get the rate from your state or local tax agency instead of guessing.
Taking tax out of a total
Divide the total by one plus the rate. A receipt total of $106.63 at 6.625% gives $106.63 divided by 1.06625, or $100.00 before tax. The tax is the total minus that price.
A common mistake is to multiply the total by the rate. That takes tax from an amount that already includes tax, and it comes out too high. For example, 6.625% of $106.63 is $7.06, not the real $6.63.
Rounding
Tax is usually rounded to the nearest cent. Some places round on each line and others on the whole invoice, which can create small differences of a cent or two. Use the method your point of sale system or your tax agency specifies, and use it consistently.
If your records and your register disagree by pennies, check rounding before looking for a bigger problem.
Keep it out of your income
Sales tax you collect belongs to the state, not to you. Record it in a liability account instead of as revenue, and pay it on the schedule your tax agency sets. If it ends up in income, your profit looks higher than it is and your tax filings may not match.
Reconcile the liability each period to the amounts on your returns. A small difference that repeats every month usually points to a rounding or setting problem.
What is taxable
Not everything is taxable. Some goods, services and customers are exempt, and rules vary by state. Keep exemption certificates for customers who claim an exemption.
When you are unsure, ask your state tax agency or a tax preparer before you charge or skip tax. A free calculator handles the arithmetic, but it cannot tell you whether a sale is taxable.
Common mistakes
The most frequent errors are using the wrong rate, taxing items that are exempt, forgetting to tax shipping where it is taxable, and recording the tax as income. Another is using an old rate after it changes.
Set up your point of sale or accounting software with the correct rates and review them at least once a year. If you sell in more than one place, check whether you need to register or collect elsewhere, and ask your tax agency or a preparer to confirm.
Common questions
How do I find my sales tax rate?
Your state or local tax agency publishes the current rate for each location.
Is sales tax income to my business?
No. You collect it on behalf of the state. Record it as a liability and pay it on schedule.
Which way should I round?
Round to the nearest cent unless your tax agency or system says otherwise, and be consistent.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.