Yes, Square fees are tax deductible. The processing fees Square charges on your card sales are ordinary and necessary business expenses under Section 162 of the Internal Revenue Code, which means every dollar comes off your taxable income in the year the transactions occur.1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions The deduction is available whether you file as a sole proprietor, partnership, LLC, S-corp, or C-corp.
Why the Deduction Applies
An expense qualifies when it’s common in your line of work and helpful to running it. Paying a processor to accept credit and debit cards is about as routine as business costs get. You can’t collect the revenue without paying the fee, so the link to income is direct.
The same treatment applies to Stripe, PayPal, Clover, and any other processor. Because Square withholds its cut from each sale before depositing the remainder, the fees are effectively paid at the moment of the transaction and belong on the return for that year.
Where to Report Square Fees
Sole Proprietors and Single-Member LLCs
Report the fees on Schedule C (Form 1040), Line 10, “Commissions and fees.” That line is built for costs paid to others in connection with generating revenue, which fits payment processing precisely.2Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
If your preparer prefers a different category, the alternative is Part V, which flows to Line 27b. Label the entry “Merchant Processing Fees” so there’s no ambiguity. Don’t use Line 17—that line is reserved for legal and professional services like accountants and attorneys.2Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
Corporations and Partnerships
C-corporations claim the deduction on Form 1120 under Line 26, “Other Deductions,” with an attached statement identifying the expense. S-corporations use Form 1120-S the same way. Partnerships report on Form 1065, and the resulting income or loss passes through to each partner on Schedule K-1.3Internal Revenue Service. Instructions for Form 1120 (2025)
Whatever your entity, keep processing fees as a standalone line rather than blending them into unrelated costs. A clean audit trail matters if the IRS ever asks.
Reconciling Your 1099-K
This is where most Square sellers trip up. Square reports the gross amount of all payments you received on Form 1099-K. That figure includes the fees Square already withheld before depositing funds into your account, and it does not subtract refunds or chargebacks either.4Internal Revenue Service. Form 1099-K FAQs – General Information
For 2026, Square is required to issue a 1099-K when your gross payment volume exceeds $20,000 and you have more than 200 transactions in the year.5Internal Revenue Service. 2026 Publication 1099 If you don’t hit the threshold and don’t receive one, you still owe tax on the income and can still deduct the fees.
Report the full gross amount from the 1099-K as revenue, then deduct the processing fees separately as a business expense. The IRS explicitly treats fees, credits, refunds, shipping costs, and discounts as amounts that can be subtracted from the gross figure.6Internal Revenue Service. What to Do With Form 1099-K Reporting only the net deposits that hit your bank account would understate your gross income, and the IRS matching system would flag the mismatch against the 1099-K.
What to Keep for Records
Square’s Dashboard makes documentation straightforward. Pull the Sales Summary report, filter by the tax year, and export it. The report breaks out fees charged throughout the year, and the total you claim as a deduction should match that figure.
Any gap between your accounting software and Square’s records is worth resolving before you file. Cross-reference the annual fee total against your bank statements, which show the net deposits after Square takes its cut. The IRS accepts electronic records as long as they’re accurate, legible, and retrievable on request.7Internal Revenue Service. Revenue Procedure 97-22 Hold onto these records for at least three years from the date you file the return.8Internal Revenue Service. How Long Should I Keep Records
What About Hardware, Loans, and Subscriptions
The processing fees are the main deduction, but not everything you pay Square follows the same rule.
Hardware. Readers, terminals, stands, and POS systems are tangible property, so the IRS treats them as assets rather than immediate expenses.1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions In practice you can still deduct the full cost up front for most Square gear by making the de minimis safe harbor election, which covers items costing $2,500 or less.9Internal Revenue Service. Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement – Notice 2015-82 Virtually all Square hardware falls under that ceiling. For anything above it, Section 179 or 100% bonus depreciation (made permanent for property acquired after January 19, 2025) can expense the full cost in year one.10Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
Square Loans. Square Loans use a single flat fee instead of an interest rate, and repayment comes out of a fixed percentage of daily card sales.11Square. Small Business Loans and Business Financing – Square Loans The IRS looks at economic substance rather than the label, so that fee is generally deductible as business interest expense. Small businesses with average annual gross receipts of $32 million or less over the prior three years face no cap on how much business interest they can deduct.12Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense The timing gets nuanced: because the total cost is known up front but repayment stretches over time, the deduction may need to be spread across the repayment period rather than taken in a lump sum. Ask your preparer, especially if the loan straddles two tax years.
Subscriptions. Monthly software like Square Payroll, Square Appointments, or Square for Restaurants is an ordinary business expense, deductible in full in the year you pay it. On Schedule C, subscriptions typically fit on Line 18 (“Office expense”) or in Part V, depending on their nature.2Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Keep them separate from your transaction fees so your “Commissions and fees” line reflects only the per-sale costs.