Two balances on your balance sheet are money you are holding for someone else. Sales tax you collected from customers belongs to the state. Income tax, Social Security and Medicare you withheld from paychecks belong to the IRS. Both sit in your operating account looking like cash, and both come due on a schedule that ignores your bank balance. The books track them in Sales Tax Payable and Payroll Liabilities, and the Sales Tax Liability report in QuickBooks Online shows what you owe by jurisdiction. The habit that keeps owners out of trouble is to subtract both balances from cash before calling anything available, in every company you own.
Why the IRS calls it a trust fund
Trust fund taxes are the federal income tax, Social Security and Medicare that you withhold from an employee's paycheck. The employee has already paid them. You are holding the money until the deposit date, hence the word trust. It never belonged to the business.
Sales tax payable is the same idea with a different owner. You added the tax to the invoice, the customer paid it, and the state expects it on the filing date. Every dollar of it in your checking account is the state's dollar with your name on the statement.
The distinction matters when the money is late. A late income tax bill is a debt of the business. A late trust fund deposit is treated as money you kept that belonged to someone else, and the penalties are built on that view, with no corporate shield in the way.
Where each one lives in QuickBooks Online
Sales Tax Payable is the liability account on the balance sheet that QuickBooks Online credits every time you save an invoice or sales receipt with tax on it. It goes down when you record a sales tax payment through the sales tax center. On a Tuesday afternoon its balance is the tax you have collected and not yet sent, provided every taxable sale went through a sales form.
The Sales Tax Liability report is the report behind that account. It shows gross sales, non-taxable sales, taxable sales and the tax amount, broken out by agency and jurisdiction, for whatever period you choose. It is what you or your bookkeeper use to fill in the state return. Intuit's help article on the report includes a line worth reading twice: transactions that are not sales forms, such as bank deposits and journal entries, are not included. If your bookkeeper records a week of sales as one deposit, or your point-of-sale system posts a journal entry, the report and the account are both light, and the state return is wrong by the same amount. A QuickBooks Community thread from March 2023 on this report is a long chain of owners trying to get it to show what the state form asks for, and most answers come down to how the sales were entered.
Payroll Liabilities is the equivalent account for withheld payroll tax, plus the employer's own share of Social Security and Medicare and any unemployment tax, if payroll runs through QuickBooks Payroll. The Payroll Tax Liability report lists what is owed to each agency and when. If payroll runs through Gusto, ADP or another provider, the liability may sit in that provider's system instead, and your balance sheet only shows it if someone posts the entry. Ask your bookkeeper which it is.
The available-cash line
Available cash is the bank balance minus Sales Tax Payable minus Payroll Liabilities minus any payroll deposit that falls due before the next customer money lands. It is the only cash figure that should decide a draw, a purchase or a bonus.
On a Tuesday in May the owner of a landscaping company with 31 staff sees $61,400 in the operating account. The quarter's Sales Tax Payable shows $8,900, due on the 20th of next month. Payroll ran last Friday, so Payroll Liabilities shows $11,200 of withheld and employer tax that has to be deposited by this Friday. The owner has a $14,000 draw in mind, because the balance looks healthy and April's P&L showed a good month.
Subtract the two balances and the account holds $41,300 that is actually the company's. The next payroll, in nine days, takes about $19,600 of net pay, and the tax on that run follows a few days later. So the $14,000 draw leaves roughly $7,700 before any customer pays, in a business whose customers pay in 30 to 45 days. The draw is not impossible. It would be funded by receivables that have not landed yet, and April's P&L had nothing to say about that, for the reasons covered in why net income doesn't match your bank balance. The owner who runs this subtraction takes $6,000 and waits. The one who does not takes $14,000 and borrows Friday's deposit from the IRS.
What late costs
The federal side is published and tiered. The IRS Failure to Deposit Penalty page, updated 24 February 2026, sets the penalty as a percentage of the late deposit.
| Days late | Penalty on the deposit |
|---|---|
| 1 to 5 days | 2% |
| 6 to 15 days | 5% |
| More than 15 days | 10% |
| More than 10 days after the first IRS notice | 15% |
Those are the mild consequences. The Trust Fund Recovery Penalty is the one to understand. The IRS page on it, updated October 2025, says the penalty is equal to the unpaid balance of the trust fund tax, and it is assessed against the responsible person: whoever had the duty to collect and pay the tax and paid something else instead. That is usually the owner, an officer, or anyone who signs checks and decides which bills get paid first. You have 60 days to appeal after the notice letter. An LLC or a corporation makes no difference, because the penalty is personal.
The state side is less uniform and, in our experience, quicker. The Tax Foundation's January 2026 rate table counts 45 states with a statewide sales tax, with combined state and local averages up to 10.11% in Louisiana, 9.61% in Tennessee and 9.51% in Washington. Sales taxes are 32% of state tax collections, which is why states watch them closely.
Intuit's Business Ownership in 2026 report, from a December 2025 survey of 1,305 owners, found that 77% experience tax anxiety. Most of that is about the income tax bill in April. The taxes that can reach an owner personally are the ones in these two accounts, and fewer owners watch them.
Several companies, one pool of cash
Three companies means three Sales Tax Payable balances and three payroll liability balances. Most owners see one pool of cash.
The construction company is short for Friday's payroll. The owner moves $18,000 across from the retail company, which happens to be holding the quarter's sales tax. The bookkeeper records a distribution from one and a contribution to the other, because nobody set up an intercompany loan. The retail company pays its sales tax late and gets the notice, and its responsible person is the same person who moved the money. The intercompany side of this is covered in owner draw vs salary vs distribution.
The habit that works is a separate tax account per entity, swept weekly. Each Friday the bookkeeper reads Sales Tax Payable and Payroll Liabilities in each file and moves that total into the entity's tax account. The operating account then only shows money the business can spend. It costs one extra bank account per company and ten minutes a week. One QuickBooks file per company is the other half of it, at $115 a month per file for QuickBooks Online Plus at March 2026 list prices, per NerdWallet, which is cheap against one penalty.
Seeing the total across companies is the part nobody has time for, because somebody has to open three files, read two accounts in each, and add. Navigator shows cash across every connected bank account each morning with Sales Tax Payable and Payroll Liabilities netted out, so the figure in the morning brief is available cash rather than the bank balance, per company and in total, on the base plan. It reads each QuickBooks Online file as it stands, so if a liability account is wrong, the available-cash figure is wrong by the same amount.
The rule of thumb we would retire
The common advice is to set aside a percentage of revenue for taxes, often 30%, and we think that is the wrong rule for these two taxes, because the right number is whatever the two liability accounts say today, and a percentage guess is nearly always too much or too little. Percentages have a place for income tax, which is a different problem, covered in how much to set aside for quarterly estimated taxes. Neither tax is an estimate. They are known amounts with known due dates.
What the subtraction cannot do is tell you the accounts are right. If sales come in as journal entries, or payroll runs outside QuickBooks and nobody posts the liability, both balances are understated and the available-cash line is too generous. The check is a reconciliation once a quarter: Sales Tax Payable against the last return you filed, Payroll Liabilities against the payroll provider's statement. The subtraction also says nothing about next month. For that you need a 13-week cash forecast with the deposit dates on it, or at least the one-hour version.
Questions owners ask
What is the Sales Tax Liability report in QuickBooks Online?
It is the report behind the Sales Tax Payable account. For any period it shows gross sales, non-taxable sales, taxable sales and the tax collected, split by agency and jurisdiction, and it is what your bookkeeper uses to fill in the state return. Only sales forms feed it. Sales recorded as bank deposits or journal entries are left out, so the report can be lower than what you actually collected.
Is sales tax collected income?
No. When a customer pays a $1,000 invoice with $80 of tax, $1,000 is your revenue and $80 goes to a liability account, because it belongs to the state. QuickBooks Online does this automatically on invoices and sales receipts. If sales are entered another way, the tax can land in income by mistake, which overstates revenue and understates what you owe.
What are trust fund taxes?
They are the federal income tax, Social Security and Medicare you withhold from employee paychecks. The IRS uses the word because the money was the employee's, and you hold it in trust until the deposit date. Sales tax works the same way for the state. Late trust fund taxes carry heavier consequences than a late income tax bill, including personal liability for the owner.
What happens if I pay payroll taxes late?
The IRS failure-to-deposit penalty, per its page updated in February 2026, is 2% of the deposit if it is one to five days late, 5% at six to fifteen days, 10% past fifteen days, and 15% if it is still unpaid more than ten days after the first notice. If the withheld tax is never paid, the Trust Fund Recovery Penalty makes the responsible person liable for the full amount.
Should I keep sales tax in a separate bank account?
It helps, especially if you own more than one company. A separate account per entity, swept every Friday for the sales tax and payroll tax balances on the balance sheet, means the operating account only ever shows money the business can spend. It does not fix the books, though. The liability accounts still have to be right, and the sweep only works if someone reads them.
Related
If the question behind this one is how much should be left after the subtraction, how much cash reserve a business should have puts a number on it. The draw in the example is easier to size once you have read owner draw vs salary vs distribution. And if you want the deposit dates on a calendar with the rest of your cash, the one-hour cash flow forecast is where to start.
If you would like to know whether your liability accounts tie to what you have filed, the free accounting health check reads each QuickBooks Online file and tells you: navigatorhq.ai/health-check.
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Published . Last updated . Reviewed by a CFO on the Navigator team.