How to find the percentage of sales tax

Anyone who’s been shopping in the United States knows that the price on an item isn’t always the total amount you have to pay. Most states have their own sales tax, which can vary from state to state, and sometimes between cities and counties as well. If you’re traveling, it can be hard to predict how much things will cost from at each destination. For businesses, it’s necessary to keep track of sales tax charged, because you're responsible for the collection and remittance of these taxes.

Sales Tax Formulas

Sales taxes are given in percentages of the sale price. For example, a state might charge a 4 percent sales tax, and the county might charge 1.5 percent. Since percent means a portion out of 100, you can then use these rates to back-calculate what sales tax would have been on a bill. The method used depends on which portions of the cost you have available. The team at Calculator Soup explains that the formula for sales tax is:

Sales Tax Amount = Net Price x (Sales Tax Percentage / 100).

Using this example, the total sales tax rate would be 4 + 1.5 = 5.5 percent, meaning that taxes add another 5.5 percent of the sale price onto the bill the customer must pay. Since taxes are a percentage out of 100, divide 5.5/100 to get 0.055 as the tax rate. If you have a sales price and need to calculate the total taxes that will be charged: sales price x tax rate = taxes owed. For example, on an item costing ​$50​, the buyer would owe ($50)x(0.055) = ​$2.75​ owed in taxes. The total bill would be ​$52.75​.

More Sales Tax Calculations

If you have a final cost receipt and need to determine what portion of it is taxes: take the sales tax rate and add 1 to represent the total amount being charged. In this example, this gives 1.055.

Look at the receipt and determine the total final bill price; for this example, let’s say the total bill was ​$100​. Divide the total bill by the total rate to determine the initial sales price: ($100) / (1.055) = ​$94.79​. Then subtract the sales price from the final bill price to determine the amount that was charged as taxes: in this case, $100 - $94.79 = ​$5.21​ charged in taxes.

If you have the sale price and the final cost, and want to determine the tax rate, you can use a reverse sales tax calculator. Alternatively, you may subtract the sale price from the final cost to determine the amount paid in taxes. For this example, let’s say the item cost ​$200​ and the final amount charged was ​$213​, meaning ​$13​ was paid in sales tax. Then, divide the sales tax by the original cost to determine the tax percentage rate. In this case, ($13) / ($200) = 0.065. You can multiply this rate by 100 to determine that in that area, the sales tax is 6.5 percent.

Taxes On Your Receipt

If you have a printed receipt from a store, it’s likely they’ve already separated out the amount charged in sales tax for you. Some stores will print what the sales tax percentage is in that locale as well. If you see a receipt with “Tax 1” and “Tax 2”, the store is probably differentiating tax rates that go to two different government bodies; for example, city and state, or county and state. You can turn to a tax rate calculator for help.

As the team at Thomson Reuters explains, businesses are required to keep track of the taxes they collect, so whether or not taxes are shown together or separate usually depends on the method a business is using to sum up and track their taxes charged. Some systems use the register and receipt, while others might use a spreadsheet.

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Are you a small business owner that wants to better understand how to calculate sales tax? Maybe you are a consumer who wants to know how to calculate sales tax and know how much the product will end up actually costing you. Today, we will give a simple explanation of how sales tax is calculated and reflected in the financial records.

How to calculate sales tax

All your sales taxes are represented in a percentage format and all percentages are directly related to decimals. In other words, you can change a percentage to decimal for our calculation. To find an amount of sales tax, you would just multiply the cost of a particular item by a sales tax rate in a decimal format. Then, you can find out the total price that you usually see on receipts by adding the sales tax amount to the cost of the item you are buying.

You might just have the receipts with the total item’s value and sales tax rate that is applied to taxable items. What is the item sold for and how much tax was paid on it? For this, you would need to have the sales tax rate in a decimal format once again. Then, you should divide the total amount, which reflects the price and the sales tax on these items, by the sales tax rate in decimal format plus one. This would give you the item’s price. From here, you can calculate the sales tax amount as explained above.

Examples of how to calculate sales tax

Now, let’s walk through an example of how to calculate sales tax for any business and the final price of a product.

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Example 1

For instance, you are buying a laptop for $1,599 and the sales tax rate in New Jersey is 4%.

Method 1

1. To start the calculation, you are going to change the 4% into a decimal format. Its decimal equivalent is 0.04.
2. Now, you should multiply the taxable amount (sales price) by 0.04 (sales tax). This basic multiplication will give as a result of $63.96.
3. Next, you need to add this tax value to the price of our laptop. Thus, the final price of the item that you will need to pay to get your laptop would be $1,662.96. From a business point of you, you would charge the customer $1,662.96 and $63.96 from this amount will go to sales taxes. In your accounting records, you will have $1,599 under your Sales Revenue and $63.96 under your Sales Tax Payable account.

Method 2

Let’s look at how to calculate sales tax using another method.

1. When you purchase an item, you pay for 100% of the item plus you pay for whatever the sales tax rate is, which is 4% in our particular case. In other words, you will be paying 104% of the laptop’s price.
2. As with the first method, you would need to get your sales tax rate into a decimal format, which gives as 1.04.
3. In the next step, you would multiply the sales price by 1.04. This will give you $1,662.96.

As you can see, you arrived at the same total amount that will be shown on your receipt. However, from a business point of view, looking at the total amount on the receipts is not sufficient to make detailed bookkeeping records because there are no separate numbers for the sales tax and sales revenue. Thus, this method is more suitable for customer who is trying to calculate the final item’s price.

Example 2

In this example, you are going to learn how to calculate the sales tax amount and item’s sale price if you are given just the totals from the receipts. For instance, you know that you paid $900 for an item (for business owners, you received $900) and the sales tax rate in your location is 5.5%.

1. As mentioned in our explanation earlier, you would need to convert the sales tax rate to decimals and add 1 to it. In our case, you will get 1.055.
2. Your next step would be to multiply the total amount by 1.055. This would give us c, which is your item’s price.
3. The sales tax amount would be $853.08 multiplied by the sales tax rate of 5.5% (or 0.055). Doing a simple calculation, you get $46.92 in sales taxes. To check that you did the calculation right just add $46.92 to $853.08.

Now, you know the exact numbers for your bookkeeping records.

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Author: Charles Lutwidge

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