How to Deduct Credit Card Processing Fees

Credit card processing fees are the costs a business pays to a third-party provider to handle customer payments made by credit or debit cards. These fees are charged by merchant service providers or payment platforms like Square and Stripe for each transaction. For any business that accepts card payments, these charges are a standard operational cost and a deductible business expense that can reduce your taxable income.

Confirming the Expense is Deductible

The Internal Revenue Service (IRS) allows businesses to deduct expenses that are both “ordinary and necessary” in their trade or business. An ordinary expense is one that is common and accepted in your industry, while a necessary expense is one that is helpful and appropriate for your business. Credit card processing fees fit this description for nearly any modern business that accepts payments from customers.

This deduction is available to all business entities, including sole proprietorships, LLCs, partnerships, and corporations. The main requirement is the separation of business and personal finances. Only fees from business-related transactions are deductible; if a personal expense is paid with a business card, its associated fee cannot be claimed.

Maintaining separate bank accounts and credit cards for business use is the most effective way to simplify record-keeping and prevent the commingling of funds. The IRS requires this clear distinction to substantiate business deductions during an audit.

Calculating Your Total Processing Fees

To accurately determine the total amount of your deductible credit card processing fees, you must gather specific financial documents from the tax year. The key documents include monthly statements from your merchant services provider and year-end reports from any payment service providers you use, such as Stripe, PayPal, or Square. Business bank account statements can also help reconcile these amounts.

On these statements, you will need to locate the line items that detail the fees you have paid. These are often labeled as “processing fees,” “transaction costs,” “merchant fees,” or “bank service charges.” Some processors may also charge separate monthly or annual fees, which are also deductible.

Once you have located these figures on your monthly statements or year-end summaries, you must sum them to get a total for the entire tax year. You may also receive a Form 1099-K, which reports your gross transaction volume. For payments processed through third-party platforms like PayPal or Stripe, you will receive this form only if your transactions exceed a certain threshold, which the IRS has set at $5,000 for the 2024 tax year. While this form reports gross sales, your own statements will show the fees deducted from those sales, allowing you to calculate the precise amount you paid in fees over the year. This final sum is the number you will use when filing your taxes.

How to Report the Deduction on Tax Forms

After calculating the total amount of your credit card processing fees for the year, the next step is to report this figure on the correct tax form for your business structure. You are not required to submit your merchant statements with your return, but you must keep them as records in case of an audit.

For sole proprietors and single-member LLCs who file taxes as a disregarded entity, the deduction is reported on Schedule C (Form 1040), Profit or Loss from Business. You can include the total on Line 10, which is designated for “Commissions and fees.” Alternatively, you can list it in Part V, “Other Expenses,” with a clear description such as “Credit Card Processing Fees.”

Partnerships report their deductions on Form 1065, U.S. Return of Partnership Income. S corporations use Form 1120-S, U.S. Income Tax Return for an S Corporation, and C corporations use Form 1120, U.S. Corporation Income Tax Return. For each of these entities, the expense is reported in the “Deductions” section of their respective form.