Compound Tax Examples
These examples help you understand compound tax calculation and how to enter related tax codes.
The following are examples of compound taxes and the entry that you make in the Tax Code to Include in Basis field on the Tax Codes tab in .
Compound Tax with Two Taxes
- Tax Code A has a tax rate of 10%.
- Tax Code B has a tax rate of 5% and includes Tax Code A in its basis calculation. (Enter Tax Code A in the Tax Code to Include in Basis field for Tax Code B.)
- Cost of the item being taxed (net amount of the transaction) = $1,000
- Both Tax Code A and Tax Code B are entered for the $1,000 net amount transaction.
The taxes are calculated as follows:
| Tax | Calculation | Amount |
|---|---|---|
| Tax Code A (10% tax rate) | 1,000 * .10 | $100 |
| Tax Code B (5% tax rate) | ((1,000 + 100) * .05) | $55 |
| Total Taxes Calculated | 100 + 55 | $155 |
Compound Tax with Three Taxes
- Tax Code 1 has a tax rate of 5%.
- Tax Code 2 has a tax rate of 6% and includes Tax Code 1 in its basis calculation. (Enter Tax Code 1 in the Tax Code to Include in Basis field for Tax Code 2.)
- Tax Code 3 has a tax rate of 4% and includes Tax Code 1 in its basis calculation. (Enter Tax Code 1 in the Tax Code to Include in Basis field for Tax Code 3.
- Cost of the item being taxed (net amount of the transaction) = $100.
- All three tax codes are entered for the $100 net amount transaction.
| Tax | Calculation | Amount |
|---|---|---|
| Tax Code 1 (5% tax rate) | 100 * .05 | $5.00 |
| Tax Code 2 (6% tax rate) | ((100 + 5) * .06) | $6.30 |
| Tax Code 3 (4% tax rate) | ((100 + 5) * .04) | $4.20 |
| Total Taxes Calculated | 5 + 6.30 + 4.20 | $15.50 |