Are payment processing fees tax deductible?

Credit card fees are complicated. And taxes? Even more so.

Luckily, they don’t have to be. In this guide, we’ll help you navigate tax season with all the knowledge you need to save more money and boost your bottom line.

Understanding your credit card processing fees

Tax season is all about checks and balances. So, to ensure your bases are covered, let’s review all the types of fees merchants face in the world of payment processing.

Remember: People often use “credit card processing” as an all-encompassing term, but not all fee types are strictly related to credit cards. Debit card transactions also incur their own fees, although these are usually lower. Why? Because the money is immediately available. With a credit card payment, there’s a greater risk of the customer not paying their bill — so, the rates are higher. 

Nonetheless, here’s what you can expect to pay:

• Interchange fee: The interchange fee usually constitutes the biggest portion of your payment processing expenses. The customer’s card network (i.e., the credit card company) determines the exact rate, and the card issuer (i.e., the customer’s bank) passes this on to you as a small percentage of each transaction amount.
  
• Assessment fee: Credit card networks charge an assessment fee for each transaction as a way of covering their operating costs. Normally, this is a lower rate than the interchange fee.
  
• Transaction fee: Payment processors also charge a markup in exchange for processing credit and debit card payments. This fee is usually a small percentage of the transaction, but as a negotiable rate, it can vary from one provider to another.
  
• Merchant fee: A merchant fee is what you pay in exchange for merchant services, such as loyalty programs, point of sale (POS) systems or virtual terminals.
  
• Additional: You may also pay fees for other events and services, like chargebacks, payment gateways, noncompliance, or transactions with insufficient funds. 

Ultimately, what you pay depends on several factors. This includes the transaction type (online vs. in-person), card type (credit, debit, gift card, etc.) and your business’ size. Sometimes, merchants attempt to offset these costs by passing them on to customers as a surcharge or convenience fee. Others try to save as much as they can by writing them off on their tax return — also called a “deduction.”

What is a tax deduction?

The Internal Revenue Service (IRS) defines “tax deduction” as an amount of money you can deduct from your taxable gross income. In other words, a deduction lowers the amount you owe the government.

Businesses often use the tax deduction system to boost their bottom line at year’s end. By writing off any expense made in the course of doing business — credit card fees included — you can lower your tax liability. 

Which credit card fees are tax deductible?

Fortunately for merchants, credit card fees, payment processing fees, and merchant services fees are all generally tax deductible. Why? Because they’re considered a necessary business expense that can’t be avoided — but more on that later. 

For now, here’s a non-exhaustive list of deductible fee types:

• Flat rate fees (also known as a fixed fee)
• Markup fees
• Chargeback fees
• Batch fees
• POS software fees
• Non-sufficient funds fees
• Payment gateway fees
• Per-transaction fees
• Authorization fees
• Payment card industry (PCI) compliance fees
• Statement fees

How to ensure credit card processing fees are tax-deductible

Although most payment processing fees are eligible, it’s best to know which charges qualify for a deduction. Otherwise, you may run into trouble down the road. 

In Canada, payment processing fees fall under the category of “Management and Administration Fees.” As a rule of thumb, you can deduct any business expense you incur to earn income, which means any fees you receive as a result of accepting payments would qualify. 

For the United States, the Internal Revenue Service says merchants can only deduct charges if they meet certain criteria. Per IRS guidelines, they must be:

• Ordinary and necessary: An expense must be both “ordinary” and “necessary” to qualify for a deduction. In other words, it must be common and accepted in your industry, but also helpful and appropriate for your business.
  
• A business expense: Expenses are either business or personal. In short, personal expenses are illegal to deduct from your professional gross income, but a business expense would qualify for a deduction.
  
• Current: Generally, an expense is only deductible in the tax year it occurs. So, you can’t write off credit card fees you paid two years ago, but last year’s are fair game. 

It’s also worth noting you can deduct 100% of business credit card expenses if they’re related to business purposes. But, if you use a personal credit card for business expenses, you can only deduct a percentage of the fee equal to the percentage of card spending for the business. 

More simply, if 5% of your personal credit card use is for business expenses, you can deduct 5% of the credit card’s annual fee on your tax return. 

How to write off payment processing fees

Doing your taxes is hard work. Mistakes can cost you more money in the long run, so keep the following best practices in mind when filing your paperwork:

• Keep accurate records: Bookkeeping and organization are essential to your taxes. Find a safe place to house invoices, receipts and other important documents, as these will be key to substantiating your deductions. These items will help you prove each expense was business-related and not for personal use.
  
• Separate business and personal expenses: Don’t get in the habit of using your personal credit card for business expenses or vice versa. Keeping them separate will go a long way toward simplifying your taxes and deducting as much as you can at the end of the year. Plus, with a POS system, you can use built-in accounting capabilities to make categorizing fees easy.
  
• Consult a tax professional: Like merchant services and payment processing, taxes are usually best left to the experts. Qualified professionals and accountants have the specialized knowledge to explain complexities and refine your strategy come tax season. Better yet, they know the laws better than anyone and can identify deductions you might not otherwise have noticed.
  
• Stay updated: Keep your ear to the ground and watch out for new tax policies in your country and/or jurisdiction. Knowing the latest updates can help ensure you’re compliant with relevant laws while making the most of your potential deductions. 

Common mistakes to avoid

Now that you know what to do, let’s talk about what you should avoid. Steer clear of these common mistakes and the problems they might create:

• Using a business card for personal expenses: Don’t give yourself more work by creating a nightmarish paper trail you’ll inevitably have to follow if you make this mistake. Mixing business with personal expenditures can make your taxes much more difficult than need be. Accidentally or not, the IRS doesn’t allow you to deduct personal expenses from your business income — so best to avoid this altogether.
  
• Double-dipping: Some merchants mistakenly deduct credit card fees twice, once as a separate expense and again as part of the cost of goods sold. This may cause an overstatement of deductions and trigger an audit.
  
• Forgetting about reimbursements: If a third party, for whatever reason, reimburses a merchant for their credit card processing fees, the business owner can’t deduct those fees as a business expense. 

Save more with Sekure

There’s no doubt about it: Payment processing is a very confusing part of doing business. But, as a vital part of the digital age, it’s also one of the most important.

Associated fees may undermine your profitability, but there are plenty of ways to put more dollars back into your business — tax deductions being just one example. At Sekure Payment Experts, we help you unlock a world of additional possibilities. 

Whether it be saving on equipment rentals or negotiating lower rates, our Payment Experts provide customized solutions to your unique business problems. We’ll eliminate hidden fees and advocate on your behalf, working behind the scenes to make your payment experience as smooth and affordable as possible. 

Ready to start saving? Talk to our Payment Experts today to get started.