Whether you're toting up sales tax, excise taxes or the "sin tax" on items like cigarettes, all taxes are calculated as percentages. When you calculate the after-tax cost for goods or services, you need two pieces of information: The tax rate (which is expressed as a percentage) and the before-tax price of the item being taxed. The calculation is simple enough that you can do it with pencil and paper, but of course using a calculator makes it faster.
Convert the Tax Rate to Decimal Form
Divide the percentage tax rate by 100 to convert it to a decimal. So if you're calculating a 7 percent tax rate, you'd have 7 ÷ 100 = 0.07. If your tax rate is already expressed as a decimal, you can skip this step.
Multiply by the Tax Rate
Multiply the item's pre-tax price by the tax rate, expressed as a decimal. So if the item in question costs $25 and is taxed at a 7 percent rate, you have $25 × 0.07 = $1.75. This is the amount of tax to be added to the item's price.
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Add the Tax to the Original Price
Add the tax amount to the original item's price. To conclude the example, you have $25 + $1.75 = $26.75 as the post-tax price.
Checking Your Work
You can check your work by dividing the post-tax price by 1 (which represents 100 percent of the pre-tax price, converted into decimal form) plus the tax rate expressed as a decimal. In the example just shown, that means dividing by 1 + 0.07 = 1.07. Because the post-tax price represents 107 percent of the original price, dividing by that percentage (expressed in decimal form) brings you back to the pre-tax price.
A Shortcut for Calculators
If you're working this problem with a calculator, you can use the "check your work" concept above as a shortcut. Instead of multiplying the original price by the tax rate and then adding that to the pre-tax price, simply multiply the pre-tax rate by 1 + the tax rate expressed as a decimal. So in the original example, you'd multiply the pre-tax price of $25 by 1.07 to get $26.75. If the pre-tax cost of an item was $40 and the tax rate was 8 percent, you'd calculate $40 × 1.08 = $43.20.