Card Processing & Fees Clearly Explained
We are nearing the time when cash-only small businesses will be making their final curtain call. For years, some small businesses dealt in cash or checks because getting an account to process credit cards could be difficult, and costly.
Credit — and debit — card processing, however, has become nearly as ubiquitous as the cards themselves. And an expanded array of payment processors have made it reasonable and simple for even very small businesses to accept credit card payments.
That’s a very good thing for businesses, and not just because they don’t need to turn away sales because they don’t take cards. Customers that pay with a credit card can spend as much as 83% more than they would with cash. And for payments involving a tip, gratuities averaged 13% higher than when tipping with cash.
But credit card processing does come with card processing fees. The good news is that, as a business expense, these fees are deductible. And, if you’re wondering exactly how to account for these fees, that’s what we’re going to discuss in this article.
If you ask the average business owner how to account for these fees, you’re likely to get one of two answers – either as a “cost of goods sold (COGS)” or as a business expense. Here’s the kicker. Both are correct.
The reality is, either way can be an effective way to keep track of credit card processing fees for accounting purposes.
There are some general rules that can help you determine which method might be clearest for your particular business.
If your business is primarily online, consider accounting for the fees as a cost of goods sold. Why? Because if you’re selling online, you aren’t making sales if you aren’t taking a credit card. You don’t really have an option for other payment methods, so it’s truly a cost of selling your goods.
If your business is brick and mortar and you can take other payment methods, consider entering it into your ledger as a profit and loss (P&L) line item. This will allow you to keep this expense separate from your goods.
For instance, if you run a restaurant, keeping card processing fees separate from the costs of food items will give you a better understanding over time of your actual costs to make certain menu items.
If you choose to record it as an expense, add it to your ledger as a business expense as you would for loan interest, liability insurance, legal fees, accounting, and so forth.
Does that mean if you run an online business making chocolate you must record it as a cost of goods sold? Or if you have a storefront selling t-shirts and other pre-made items that you have to record these fees as expenses? Of course not. Use the method that makes the most sense to you.
But no matter which method you chose, make sure you are reporting those fees. Credit card companies report your sales at the end of the year. And if you only record the portion of the sale that you receive — and don’t account for the credit card processing fees somewhere in your ledger — you may end up with a visit from the IRS.
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