Are Payment Processing Fees Tax Deductible?
For businesses, payment processing fees are a deductible expense. Learn how to properly substantiate these costs to accurately lower your taxable income.
Yes, payment processing fees are tax deductible for businesses in the United States. These charges, incurred when accepting electronic payments from customers, are considered a standard cost of conducting business. Whether the fees come from credit card transactions, online payment platforms like PayPal or Square, or other merchant services, they reduce a business’s taxable income. This deduction is available because these costs are directly related to the operation and revenue generation of the enterprise.
The “Ordinary and Necessary” Expense Rule
The ability to deduct payment processing fees hinges on a fundamental principle of U.S. tax law known as the “ordinary and necessary” expense rule. To be deductible, a business expense must meet both of these conditions as defined by the Internal Revenue Service (IRS). This rule, detailed in IRS Publication 535, Business Expenses, serves as the primary guideline for determining which business expenditures can lower a company’s tax liability.
An “ordinary” expense is common and accepted within your industry. A “necessary” expense is helpful and appropriate for your business. Since accepting digital payments is a standard practice for facilitating sales, the associated processing fees meet both criteria.
Documentation and Reporting for the Deduction
Properly substantiating your deduction for payment processing fees requires meticulous record-keeping throughout the year. The primary sources for this information are the monthly statements provided by your payment processors, such as Stripe, Square, or PayPal. These documents detail the gross transaction amounts and subtract the fees charged for each sale, providing a clear record of your expenses. Bank statements showing deposits from these processors can serve as a secondary confirmation of the net amounts received.
A key document related to this process is Form 1099-K, Payment Card and Third Party Network Transactions. This form is sent by payment settlement entities to both the business and the IRS, but the reporting requirements vary. For third-party networks like PayPal or Square, a Form 1099-K is issued for payments for goods and services exceeding $2,500 for the 2025 tax year. In contrast, payment card companies that process credit or debit card transactions must report all payments, regardless of the total amount.
Form 1099-K reports the gross amount of the payment transactions processed on your behalf, not your net income. The figure on this form does not have the processing fees subtracted from it. Therefore, you must separately calculate the total payment processing fees for the year using your processor statements and deduct them as a business expense. For example, if your Form 1099-K shows $100,000 in gross transactions and your monthly statements show you paid $3,000 in fees, your actual revenue from those sales is $97,000, and the $3,000 is your deductible expense.
How to Claim the Deduction on Your Tax Return
Once you have calculated the total amount of payment processing fees paid for the tax year, the next step is to report this figure on the correct tax form. The specific form and line number depend on your business’s legal structure. It is important to have your total calculated before beginning your tax return preparation, as the forms require a single summary number for this expense category.
For sole proprietors and single-member LLCs who file their business taxes on their personal return, the deduction is claimed on Schedule C (Form 1040), Profit or Loss from Business. These fees are typically reported on the line designated for “Commissions and fees.” Some business owners may also categorize these costs under “Bank fees,” which is also an acceptable practice.
Partnerships and S corporations report these expenses on their separate business tax returns. Partnerships use Form 1065, U.S. Return of Partnership Income, while S corporations use Form 1120-S, U.S. Income Tax Return for an S Corporation. On these forms, the fees are listed as an expense, which reduces the business’s net income before that income is passed through to the individual partners or shareholders on their Schedule K-1 forms.