What is Merchant Processing Fees?

Each card payment carries costs. The issuing bank charges interchange, the card network charges assessments and the payment processor adds its markup. Together they typically take a percentage of each sale plus a per-transaction fee.

Pricing models

• Flat rate: one percentage plus a fixed amount per transaction; simple to understand
• Interchange-plus: actual interchange plus a stated processor markup; more transparent for larger volumes
• Tiered: transactions grouped into qualified and non-qualified rates; harder to compare
• Monthly fees: statement, PCI compliance, gateway and terminal fees

Recording fees correctly

Many processors deposit net amounts after fees. Recording only the deposit understates sales and hides fees. Instead:

1. Record gross sales from the processor report
2. Record fees as an expense
3. Match the net deposit to the bank

A clearing account makes this straightforward.

Why gross matters for tax

Processors report gross payments on Form 1099-K. If your books show only net deposits, your recorded income will be lower than the 1099-K, which can prompt IRS questions. The IRS's Form 1099-K page explains what the form reports. Fees are generally deductible business expenses.

Reviewing costs

Calculate your effective rate: total fees ÷ total card volume. Review it annually and compare offers. Surcharging and cash discounting have card network and state rules; check before adopting them.

See also chargebacks, credit card reconciliation and our restaurant bookkeeping page.

Related terms

• Chargebacks: A chargeback is a reversal of a card payment initiated by the cardholder's bank, often after a customer disputes a transaction.

Browse more definitions in the small business glossary.