Invoices & Sales Tax
Bill correctly, add or remove a stated tax, and handle early-payment discounts.
In your head, jot if needed · no calculator why?
Opens at level 17. You're level 1. You can read and practice here now.
the idea
An invoice is the bill you send a customer. Each line is hours times a rate, units times a price, or a flat fee. The lines add up to the subtotal, and any discount comes off that.
Sales tax sits on top, at a stated rate. The tax is a percent of the price before tax, so adding it multiplies the price by 1 plus the rate, and taking it back out divides by that same number.
The tax is not yours. You collect it for the government and owe it until you pay it over, so it is a liability, not revenue.
techniques
Multiply by 1 plus the rate
- Write the rate as a decimal: 8% is 0.08.
- The tax is the price times the rate.
- The total is the price times (1 plus the rate).
worked example
Assume a sales tax rate of 5%. On a $240 sale, what does the customer pay in total?
- Tax: $240 × 0.05 = $12.
- Total: $240 + $12 = $252.
- In one step: $240 × 1.05 = $252.
Answer: $252
Divide to back out the tax
- The total is the price plus the tax: 110% of the price for a 10% tax.
- Divide the total by that share as a decimal, 1.1 here.
- Check by adding the tax back on.
worked example
A receipt total of $330 includes an assumed 10% sales tax. What was the price before tax?
- The total is 110% of the price.
- Price: $330 ÷ 1.1 = $300.
- Check: $300 + $300 × 0.1 = $330.
Answer: $300
Early-payment terms
- Compare the day you pay with the discount window.
- Inside the window, take the percent off the invoice.
- Outside it, pay the full amount.
worked example
Terms: 2% off if paid within 10 days, otherwise the full amount is due in 30 days. You pay a $1,500 invoice on day 6. How much do you pay?
- Day 6 is inside the window.
- Pay: $1,500 − $1,500 × 0.02 = $1,470.
Answer: $1,470
watch out for
- Taking the tax percent off a total that already includes tax. The tax was a percent of the smaller price, so divide.
- Giving only the tax when the question asks what the customer pays in total.
- Counting sales tax as revenue. It belongs to the government.
practice
Invoice total
worked example
An invoice has $330 of shipping, 9 hours of installation at $55 an hour, and 7 posters at $39.75 each. What is the invoice total before tax?
Answer: $1,103.25
- Lines: $330; 9 × $55 = $495; 7 × $39.75 = $278.25.
- Total: $330 + $495 + $278.25 = $1,103.25.
Add sales tax
worked example
Assume a sales tax rate of 7.5%. On a $410 sale, what does the customer pay in total?
Answer: $440.75
- Tax = $410 × 7.5% = $30.75; total = $410 + $30.75 = $440.75.
- Or in one step: $410 × 1.075 = $440.75.
Back out the tax
worked example
A receipt total of $434.50 includes an assumed 10% sales tax. What was the price before tax?
Answer: $395.00
- The total is 110% of the pre-tax price, so price = $434.50 ÷ 1.1 = $395.
- Check: $395 × 10% = $39.50 of tax; $395 + $39.50 = $434.50.
Early-payment discount
worked example
Terms: 3% off if paid within 10 days, otherwise the full amount is due in 30 days. You pay a $6,350 invoice on day 1. How much do you pay?
Answer: $6,159.50
- Day 1 is inside the 10-day window, so take 3% off: $6,350 − $190.50 = $6,159.50.
Sales tax isn't your revenue
worked example
This month you collected $5,292: $4,900 of sales plus $392 of sales tax (at an assumed 8%). How much of the $5,292 is your revenue?
Answer: $4,900.00
- Sales tax is collected on behalf of the government and owed to it, so it's a liability until paid over.
- Revenue is $5,292 − $392 = $4,900.