Are Merchant Service Fees Tax Deductible?
Merchant service fees are a tax-deductible cost of running your business. These credit card fees pay the costs associated with authenticating each credit card, maintaining the card processing infrastructure and assuming some liability for credit fraud. The Internal Revenue Service recognizes merchant service fees as an essential operating cost, so your company can deduct these fees on its tax return.
Merchant Fee Tax Deductions
Your business can deduct the full cost of merchant fees on Schedule C. These tax deductions do not directly affect your company’s total tax bill. Instead, this tax deduction is subtracted from your gross earnings, which allows you to pay taxes on less of your business’s income.
The Importance of Excellent Record Keeping
It is important to keep track of your company’s records so you can refer back to them to deduct the maximum amount of fees. According to the IRS, you are responsible for keeping accurate merchant fee records if you want to claim the deduction. A merchant processor will send you a Form 1099-K, Payment Card and Third Party Network Transactions, that lists the total gross amount of credit card transactions. They also provide this information to the IRS. If your business offers more than one service, the credit card processor may classify your company’s earnings under more than one merchant category code. In this case, your business may receive one Form 1099-K for each applicable merchant category code.
Filling out the 1099-K
When you receive your Form 1099-K, you’ll need to verify that the numbers match your independent records of gross income. The Form 1099-K will list any federal and state tax withholdings, but it will not list the merchant fees you paid to the credit card processor. Your company will have to use its independent record of the fees to file for a tax deduction.
Sometimes, the gross income on your Form 1099-K can be deceiving. If you allow your customers to use debit cards to receive cash back, this money will be reported as gross income on your Form 1099-K. You do not have to report this money as income, but your company must keep records identifying this money as cash back to a customer. Depending on when you receive your Form 1099-K, your gross income may count transactions that later became chargebacks and refunds.
Unusual circumstances that affect your business’s gross income will also affect the merchant fees charged. Therefore, verify your Form 1099-K and merchant fee records simultaneously to ensure accuracy. Then you can confidently forward this information to your accountant during tax time.
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