Almost every country taxes the sale of goods and services. Depending on where you live, you may see it called VAT, GST or sales tax. Whether you run a small business, shop online or just want to understand a receipt, you will sometimes need to add tax to a price or work backwards to find the price before tax. This guide shows both, with the formula that avoids a very common mistake.
VAT vs sales tax
Sales tax (common in the United States) is charged only at the final sale to the consumer. The price on the shelf usually does not include it, and it is added at the till.
Value-added tax (VAT), or goods and services tax (GST), is used across Europe and in many other countries. It is collected at each stage of the supply chain, with businesses reclaiming the VAT they paid on their purchases, so the tax effectively falls on the final consumer. Consumer prices in these countries normally already include VAT.
Tax rates differ by country, region and type of product. Many places have a standard rate and reduced rates for items such as food, books or medicine. Always check the rate that applies to you with your tax authority.
How to add tax to a price
Multiply the net price (before tax) by the tax rate to find the tax, then add it. Or do it in one step:
Gross price = net price × (1 + tax rate)
Example: A product costs 100 before tax and the VAT rate is 21%. Tax = 100 × 0.21 = 21. Gross price = 100 × 1.21 = 121.
How to remove tax from a total
If the price you see already includes tax and you need the amount before tax, divide by (1 + tax rate):
Net price = gross price ÷ (1 + tax rate)
Example: A receipt shows 121 including 21% VAT. Net price = 121 ÷ 1.21 = 100. The tax is 121 − 100 = 21.
The common mistake
Many people try to remove tax by subtracting the percentage from the total: 21% of 121 is 25.41, so 121 − 25.41 = 95.59. This is wrong. The tax was calculated on the net price of 100, not on the 121 total, so it is 21, not 25.41. Subtracting the percentage from the gross amount always gives too low a net price. The correct method is to divide by 1.21.
Quick reference: the VAT fraction
The share of a gross price that is tax equals rate ÷ (1 + rate):
- At 21%: 21 ÷ 121 ≈ 17.36% of the gross price is VAT.
- At 20%: 20 ÷ 120 = one sixth, or 16.67%.
- At 10%: 10 ÷ 110 = one eleventh, or 9.09%.
Practical situations
- Freelancers and small businesses: invoices must show net price, tax and total clearly, and rules on when you must register depend on your country.
- Online shopping: when buying from another country, tax or import duties may be added at checkout or on delivery.
- Comparing prices: make sure you compare the same basis, either all with tax or all without.
- Expenses: if you can reclaim VAT as a business, you need the net amount and the tax shown separately.
- Discounts: check whether a discount applies before or after tax, as the final price may differ.
Rounding
Tax is normally rounded to the nearest cent. On invoices with many lines, rounding each line or only the total can produce slightly different amounts; follow the rules of your jurisdiction and keep consistent.
Calculate it instantly
Our Sales Tax & VAT Calculator lets you enter any amount and rate and choose whether to add tax or remove it, showing the net price, the tax and the gross price. It is a calculation tool only and does not replace professional tax advice.