A successful business owner should have the knowledge of how to back out sales tax from gross receipts. You may be wondering what it is? It is the reversing of sales tax to determine the real sales value.  

Accurate calculation of sales tax is key part of financial reporting because it ensures compliance with tax laws, and avoid costly mistakes. Since businesses often get their payments with sales tax included, calculating net sales before sales tax manually can be frustrating and the chances of making mistakes are always there. 

This is where TaxCloud comes in. It is a sales tax compliance software which simplifies this tedious process for business and helps them avoid making tax-related mistakes. The best part? There is a free 30-day trial.

This article will explain how to back out sales tax using these simple steps and how TaxCloud can make the process even easier.

Step 1: Identify the Total Sales Amount

The first step in back out sales tax from gross receipts is to determine the total sales amount or the gross sales amount. 

This is the price you received from a transaction and includes both the price of the goods or services and the sales tax. Calculating the total sales amount is important because figure is the foundation of your backing out sales tax. 

Let’s say a customer buys an item for $108 (with a sales tax of 8%) from. The gross sales amount will be $108. It is essential that you determine the price because it be used in the formula to reverse the tax and determine the pre-tax amount.

Step 2: Determine the Sales Tax Rate

The next step in back out sales tax is to set the applicable sales tax rate for the transaction. This rate varies because of tax jurisdiction as this is usually set by the local authorities .

Let’s say that the sales tax rate in your area is set at 8%, you would use it in the next step to calculate net sales before tax amount.

The calculation can be problematic since different cities and states often have specific sales tax rates. Therefore, businesses can struggle to keep up with the correct sales tax rate when operating in different jurisdictions. 

This is where using TaxCloud comes to your aid. The software determines the correct sales tax rate based on your location and the type of transaction. So, you don’t have to worry about looking up tax rates for each sale manually.

Step 3: Apply the Formula to Back Out Sales Tax

Now that the total sales and the sales tax rate are calculated, it’s time to apply the formula to back out the sales tax. The formula is straightforward:

Net Sales = Total Sales/1 + Sales Tax Rate

Remember, the net sales amount is what you received from the transaction which was not subjected to tax. The total sales represent the entire amount received, including tax.

For example, a company’s total sales amount was $108 with sales tax rate being 8%. The formula would be like this:

Net Sales = $108/1 + 0.08 = 108/1.08 = 100

The net sales amount, or should we say the pre-tax price of the item, is $100 in this case.

It is necessary to understand the back out sales tax formula for businesses that have to come with reverse sales tax calculations from their gross sales amount for accurate reporting.

Step 4: Verify the Calculation

Business owners have to verify the calculations to ensure accuracy. Remember, even tiny mistakes can cause discrepancies in your financial reporting or tax filings. 

You can avoid making costly errors and comply with local taxation laws through proper verification. There are two ways to authenticate your calculations. 

• Manual
• Using a cutting-edge bookkeeping software

The manual verification techniques require you to double-check the math for ensuring everything adds up correctly. However, businesses usually opt for an accounting software for this purpose because it completes with little to no chance of error.

You can ensure accuracy by integrating a solution like TaxCloud into your accounting process. It is designed to handle sales tax calculation like backing out sales tax using its automation feature, ensuring accuracy and compliance.

Step 5: Automate Sales Tax Calculations with TaxCloud

TaxCloud is a sales tax compliance software which automates sales tax calculations, reducing manual errors and saving businesses valuable time. It simplifies the complex landscape of sales tax compliance across the United States.

The software stands out for performing automated calculations in real-time. It determines the sales tax rates in over 13,000 jurisdictions. This helps businesses in complying with local taxation laws. This capability minimises the risk of human error and speeds up the checkout process for customers.

The software is packed with features that automate the sales tax-related tasks. This lets businesses focus on growth rather than getting bogged down by tax compliance issues. Users can also use it to generate return-ready sales tax reports and handle the tax filing and remittance on their behalf. 

TaxCloud can be easily integrated with an eCommerce platform or ERP system, helping users manage their entire sales tax process from a centralized location. TaxCloud integration boosts operations while ensuring that brands remain compliant with evolving tax regulations without constant supervision.

Final Thoughts

Backing out sales tax may seem daunting at first, but you can confidently determine the net sales from any gross sales amount by using these five strategies. Remember, accurate calculations are important for keeping your financial records in order and operating within the legal frameworks.

TaxCloud will help you save time and reduce the chances of making manual errors, ensuring that your business operates within the guidelines of your local tax-regulatory authority. It handles everything tax-related, from calculating the correct rates to backing out sales tax for accurate reporting.

Get started with a free 30-day trial of TaxCloud today and simplify sales tax calculations for your business.