Setting up single and combined tax rates is crucial for accurate financial records and tax compliance. This guide will walk you through configuring these rates in Karbon, ensuring you can manage both simple and complex tax scenarios efficiently.
Tax Rates
Your account will have a set of base tax rates (core rates) applied based on the country of your account:
Australia | New Zealand | UK | Canada | Other (e.g. US) |
GST 10% (Default) | GST 15% (Default) | Standard VAT 20% (Default) | GST 5% (Default) | Tax Exempt 0% |
GST Exempt 0% | GST Exempt 0% | VAT Exempt 0% | Exempt 0% | No Tax Set (Fallback rate) |
Zero Rated (Fallback rate) | Zero Rated (Fallback rate) | Zero Rated (Fallback rate) | No Tax Set (Fallback rate) |
|
Please keep in mind:
The fallback rate is the rate that will be applied if there is no default set (manually changed)
For the US, there are many tax rate combinations (e.g. state and county).
For Canada, there is one tax rate but additional tax rates will need to be manually added if needed.
Single Tax Rates
To add additional single tax rates for your jurisdiction:
Go to Settings > Billing.
Click Add Tax Rate.
Fill in the name and rate.
Save the new tax rate.
Combined Tax Rates
As a combined rate shown on the invoice:
Example: In Canada, HST is made up of PST + GST.
Add Single Tax Rates: 1. PST (7%) and 2. GST (5%).
Create a Combined Tax Rate using PST and GST.
Select Show as Combined Rate = 12%.
On the invoice, it appears as HST 12%.
As a combined tax rate that will be shown as separate on the invoice:
Example: In the US, an invoice in Marin County, California, may include Federal, State, and County taxes.
Create Single Tax Rates: 1. Federal Tax (7.75%), 2. State Tax (7.25%), 3. County Tax (0.25%).
Create a Combined Tax Rate using these Single Rates.
Select Show as Separate Components.
On the invoice, each rate is applied and recorded separately, even though applied as one rate.
Compound Rates:
A compound tax is calculated on top of other applicable taxes on the line item. Only one of the tax rates in the combined modal can be chosen as the compound rate.
When a combined rate includes a compound rate, the summed rate is displayed in the tax table summary. When applied to the invoice, the effective rate is applied. This method aligns with how accountants expect compound rates to work and is consistent with Xero and QuickBooks Online (QBO).
Example:
Combined Rate: Tax Rate 1 (10%) and Tax Rate 2 (10% - Compound)
Displayed Rate: 20% in the tax rate table
How compound rates are applied on the invoice:
Invoice of $100
Tax Rate 1 - 10%: Subtotal $110 (100 x 10%)
Tax Rate 2 - 10%: Subtotal $121 ($110 x 10%)
Total = $121