Electronic payment methods are gaining significant traction: global payments revenue is expected to reach $2.4 trillion by 2029. As more businesses expand their ecommerce footprint and accept higher volumes of digital payments, understanding the tax implications of payment processing fees is important for maximizing deductions and reducing overall tax liability.

Payment processing fees are generally considered a deductible business expense. Below, we’ll discuss how payment processing fees impact business taxes, giving you the knowledge to receive every tax benefit your business qualifies for. By understanding best practices for deducting these fees, you can refine your business’s tax strategy and maximize your financial outcomes.

What’s in this article?

• What are payment processing fees?
  
• Are payment processing fees tax-deductible?
  
• Are transaction fees tax-deductible?
  
• Are merchant fees tax-deductible?
  
• How to claim payment processing and transaction fees as a business expense on your tax return
  
• Best practices for writing off payment processing fees
  
• How Stripe Payments can help
  

What are payment processing fees?

Payment processing fees are charges that businesses must pay in exchange for using payment processing services, which facilitate the transactions between the business and its customers. These services allow businesses to accept credit and debit cards, digital wallets, mobile payments, and other electronic payments.

These fees often involve several components:

• Interchange fees: Issuing banks charge interchange fees, and this type of fee typically constitutes the largest portion of the payment processing fees. They are set by the card networks and are generally nonnegotiable. They often range between 1% and 3% of the transaction amount plus a flat fee.

• Assessment fees: The card networks charge assessment fees. They're smaller than interchange fees, but also tend to be nonnegotiable. These typically range from about 0.10% to 0.15% of the transaction total.

• Processor markup: This is the fee charged by the payment processor, which is the company providing the service of processing card transactions for the business. This fee is often negotiable and can vary greatly from one processor to another. It is often presented as a percentage of the transaction total plus a flat fee.

Some payment processors also charge additional fees for services such as chargeback handling, payment gateway access, or PCI compliance, among others. The exact amount of these fees can vary depending on several factors, such as the type of transaction (in-person vs. online), the type of card used (debit vs. credit, rewards card vs. nonrewards card), and the nature of the business.

Are payment processing fees tax-deductible?

Payment processing fees are generally considered to be a necessary business expense and are tax-deductible in many jurisdictions, including the United States. This includes fees for credit card transactions, online payment platforms, and even bank fees related to business transactions.

These fees would typically fall under the category of “bank fees” or similar on Schedule C (Form 1040), Profit or Loss from Business for sole proprietors and freelancers or the corresponding part of the tax return for corporations, partnerships, or other business entities.

IRS Publication 535 provides general guidance on what can be considered a deductible business expense. Here are some key points from this document:

• Ordinary and necessary expenses: To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is defined as one that is common and accepted in your trade or business. A necessary expense is defined as one that is helpful and appropriate for your trade or business.

• Current expenses vs. capital expenses: Business expenses are usually deductible in the year they are incurred. However, if the expense results in a benefit that will last longer than one year (like the purchase of equipment), it may have to be capitalized and depreciated over time, rather than deducted all at once.

• Personal vs. business expenses: Only the business portion of an expense is deductible. If an expense is partly personal and partly business, it needs to be divided appropriately.

Are transaction fees tax-deductible?

Transaction fees incurred through a payment processor are generally tax-deductible, since they are also considered to be ordinary and necessary expenses directly related to the operation of your business. This includes cryptocurrency transaction fees, which are also tax-deductible. By deducting transaction fees, you can reduce your taxable income, resulting in tax savings.

Keep accurate records of transaction fees if you plan to deduct them on your business’s taxes. This means retaining invoices, receipts, and statements provided by the payment processor as evidence of the fees paid. These records will help substantiate your deductions and support your tax filings.

Are merchant fees tax-deductible?

Merchant fees incurred by businesses are generally tax-deductible. These fees are considered to be ordinary and necessary expenses directly associated with the operation of your business. When you accept credit card payments from customers, you can deduct the fees charged by the payment processor or merchant services provider, reducing your taxable income and increasing tax savings.

Again, to ensure accurate deductions, maintain records of the merchant fees you incur. Keep invoices, receipts, or statements provided by your payment processor or merchant services provider as documentation of the fees paid, to support your deduction in case of a tax audit.

Tax laws can differ depending on your jurisdiction. While federal tax laws typically allow for the deduction of payment processing fees, it’s still a good idea to consult with a tax professional or accountant who is familiar with the specific tax rules and regulations in the places where you do business.

How to claim payment processing and transaction fees as a business expense on your tax return

Here’s how to claim these tax-deductible fees:

• Categorize the fees correctly: Payment processing fees are generally classified as an ordinary and necessary business expense and will typically be recorded under “bank charges,” “merchant fees,” or “payment processing fees” in your books.

• Gather documentation: Collect monthly statements from your payments provider showing all fees charged throughout the tax year. Most providers offer an annual fee summary.

• Record the fees in your accounting software: Ensure all fees are logged in your bookkeeping system under the appropriate expense category so they flow correctly into your financial statements.

• Deduct on the correct tax form: For sole proprietors, report on Schedule C (Form 1040) under “Other Expenses.” For partnerships and S-corps, report on Form 1065 or Form 1120-S, respectively. C-corps report on Form 1120.

• Speak with a tax professional: Processing fees are generally straightforward to deduct, but if your fees are substantial or your business structure is complex, a tax professional can ensure they’re categorized optimally and that nothing is missed.

Best practices for writing off payment processing fees

When deducting payment processing fees from your taxes—or preparing for the next tax season—here are some best practices you can follow to make tax time smoother:

• Accurate recordkeeping: It’s important to keep invoices, receipts, and any other supporting documentation to substantiate your deductions. A good rule: if you’re going to deduct any expense on your taxes, you need to have documentation. Establish processes that make accumulating and organizing this documentation a regular part of your business operations so you don’t have to search for it at tax time.

• Separate business and personal expenses: Clearly distinguish between business and personal expenses related to payment processing. Deduct only the fees that are directly associated with your business operations. Keeping separate bank accounts or using accounting software can assist in tracking and categorizing expenses correctly.

• Classify expenses correctly: Use the appropriate tax forms and categories when reporting payment processing fees. For example, in the US, sole proprietors report these fees under “bank fees” on Schedule C (Form 1040). The correct form for a limited liability company (LLC) to report these fees in the US depends on how the LLC is structured and taxed. A single-member LLC reports the fees on Schedule C (Form 1040), a multimember LLC does so on form 1065, an LLC taxed as an S-Corp uses Form 1120-S, and an LLC taxed as a C-Corp uses form 1120. LLCs would typically report the fees under “bank fees.”

• Consult with a tax professional: Articles like this one provide basic information, not personalized guidance, and aren’t a substitution for the advice of a tax expert. Work with a qualified tax professional or accountant who specializes in business taxes to help you work through the complexities of tax laws, identify eligible deductions, and refine your tax strategy.

• Stay informed: Tax policies are not static parts of doing business—they tend to change from year to year. Stay updated on relevant tax regulations and guidelines, subscribe to official tax resources, attend seminars or webinars, and consult reputable sources to stay informed about changes that could affect the deductibility of payment processing fees. In the US, there are generally few limitations on deducting processing fees for businesses, except for specific cases, such as when a business is classified as a passive activity or when processing fees are tied to the acquisition of a long-term asset. However, limitations could always change, so it’s important to stay aware.

How Stripe Payments can help

Stripe Payments enables businesses to set up and accept 125+ payment methods, including ACH Credit Transfers. It provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Reconcile payments automatically: Easily reconcile ACH Credit Transfers to a specific payment or invoice with an automatic reconciliation engine that uses virtual bank accounts for each customer and tools for troubleshooting.

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• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs and Link, Stripe’s digital wallet.

• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.

• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

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Learn more about how Stripe Payments can power your online and in-person payments, or get started today.