What is a Tax Invoice, and How to Create One Step-by-Step?
December 13, 2022
As a tax-registered business owner in the US, you must issue tax invoices so that you can send them to the relevant authorities at the end of each fiscal year. But what exactly is a tax invoice, and what should be included in it?
In this article, we’ll tell you all about this document and show you how to create one with an online generator in a few simple steps!
So, let’s dive right in!
What is a Tax Invoice?
A tax invoice is a legal document that you, as a seller of a service or product, must give to the buyer when collecting payments for taxable sales.
If you’re rendering a service, you need to provide your client with a tax invoice 30 days after the service takes place. On the other hand, if you’re selling a product, you can hand them the invoice at the time of payment or delivery of the product.
Most importantly, you are obligated by law to send tax invoices to the relevant tax authorities at the end of each fiscal year.
But what makes this document different from your standard invoices?
Essentially, besides listing the price of your services and products, it also displays the amount of tax payable and includes taxes such as:
- Harmonized Sales Tax (HST)
- Goods and Services Tax (GST)
- Value-Added Tax (VAT)
Why is a Tax Invoice Important?
It’s important for a business owner to have a tax invoice since they can use it to:
- Separately show taxes from the profits
- Support a tax-registered business’s claim for the deduction of input tax from the VAT liability
- Determine the time in which your claim for input tax can be lodged based on the date included on the invoice
- Figure out exactly which purchases are going to be included in a taxable time period
Lastly, submitting tax invoices to the authorities helps them identify which companies and businesses are evading tax. This is a significant issue in the US, as the state annually loses $1 trillion because of unpaid taxes.
What Information is Included in a Tax Invoice?
As you’re going to be submitting your tax invoice to the government, you need to make sure you include all essential information in it. If you don’t, you or your buyers/clients won’t be able to claim the tax credits due.
For this reason, make sure to include the following information in your tax invoice:
#1. The Words “Tax Invoice”
The first thing you want to do when creating this document is to add the words “tax invoice” at the top of it.
By doing this, you will make your tax invoice stand out from the rest of your invoices. This can be beneficial for you later on when you’re gathering tax invoices to submit to the authorities.
#2. Invoice Date and Number
Next, you need to specify the date when the tax invoice was written and handed out to the client/buyer.
After adding the date to your invoice, you also need to give it a unique number, which will help you align profits and expenses to specific invoices easier later on. An invoice number is also required by law in some states.
Note that your invoice numbering system should be in chronological order. For example, for your first tax invoice, you should use "001," for the second, “002,” and so on. By giving your invoices sequential numbers, you minimize the chances of losing track of them.
If you want to be even more organized, you can also add the last two numbers of the year the invoice is issued next to the three-digit invoice number.
Let’s say that you are writing an invoice for 2022, and its number is 002. You can add “22” in front of "002," so it ends up like this: "22002." This way, you’ll know both the year the invoice was issued and its number.
#3. Client and Company Information
In this section of your tax invoice, you need to provide your client’s name, physical and email addresses, place of residence, ZIP code, and phone number.
Then you need to enter the same information about your company, including the Tax Identification Number (TIN). This is an identification number used by the IRS to administer tax laws. You need it to file your tax returns correctly and claim any treaty benefits.
Some of the taxpayer identification numbers you can use in this section are:
- Social Security Number (SSN)
- Employer Identification Number (EIN)
- Preparer Taxpayer Identification Number (PTIN)
- Individual Taxpayer Identification Number (ITIN)
- Taxpayer Identification Number for Pending U.S. Adoptions (ATIN)
#4. Payment Details
Once you’ve added all the required client and company information, you need to specify:
- Your preferred payment method. This can be either cash, credit cards, payment systems such as PayPal, or even a direct transfer.
- When you want to be paid. You can select any payment date up to a year after issuing the tax invoice.
- Whether you’re offering any discounts. The two most common discount types you can offer in this section are “percent” and “flat amount” discounts.
- The total price of your services/goods. Your client needs to know the net price of your services/goods, which includes the total sum before taxes and after discounts are applied.
#5. Description of the Goods or Services and Taxes
Here, you need to list all the goods or services you’re charging the billed party for. Be as detailed as possible in this section, specify the quantity for each of the items, and add the taxes applied for them.
Finally, you must add the tax payable, or the total amount of taxes you need to pay for the sales of your items, as part of the transaction.
For example, suppose you are selling $200 worth of products or services and you collect a 10% sales tax. According to these numbers, you should list:
- The subtotal of all items you listed in the invoice
- The tax payable is 10% (or $20 in this case)
- The combined total, which is $220
Best Practices for Tax Invoicing
Now that you know exactly what to include in your tax invoice, here’s what you should do if you want to ensure a solid invoicing process:
- Check the tax rules in your state. The rules on what you should include in a tax invoice are different in every state. Hence, you should consult with your local tax authorities before or after making this document to ensure you don’t miss out on anything.
- Make sure your invoice is easy to read. When making your tax invoice, you should avoid piling up information without order, as your client needs to easily digest everything you write down.
- Keep track of your invoices. After making and submitting your tax invoices, you should collect them in a specific folder or cabinet so that you can easily access them and find what you need quickly when the time comes. Arguably the best place to keep your records would be cloud storage, such as Google Drive, for example, as it's safe from data breaches, natural disasters, and cyber attacks.
How to Make a Tax Invoice
Without a doubt, the easiest way to make a tax invoice is to use an online generator. Why waste time creating this document from scratch via Excel or Word when you can get a template that you can easily fill out and be done with it in no time?
The biggest benefit of using an online generator is that it’s super simple to use. To get a tax invoice with its help, you only need to:
- Fill in the required details in the template
- Tick the “Tax” box to include taxes
- Preview your document
- Download your invoice in PDF form
Once you’re done, you’ll instantly be able to print out your tax invoice or send it to your client via email.
As a small business owner, you are obligated to provide tax authorities with tax invoices at the end of each fiscal year. Although paperwork can be headache-inducing, making a tax invoice doesn’t have to be hard.
Use our online invoice maker, fill out the template, download it, and feel free to use it whenever you need such documents!
- A tax invoice is a document that you, as a seller of a service or product, are required to provide to your customer for taxable payments.
- Besides being legally obligated to provide a tax invoice to your customers, a tax invoice can also help you determine the time in which your claim for input tax can be lodged.
- A tax invoice usually includes the words “tax invoice,” a unique number, company information, payment details, and a breakdown of the goods and services sold.
- The easiest way to make a tax invoice is to use an online generator, as you’ll only need to fill out a template to get the document.
- When filling out your tax invoice, you should check tax rules in your state and make sure your document is easily readable.