Yes, a business can write off credit card processing fees. The IRS treats them as an ordinary and necessary cost of doing business, which means every dollar your processor takes off the top of a sale reduces your taxable income when you report it correctly. The catch is not whether you can deduct the fees but how you record them and where they land on your return.1Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses2Internal Revenue Service. Ordinary and Necessary
What Counts as a Processing Fee
What your processor deducts from each sale isn’t a single charge. It’s a bundle, and all of it is deductible:
- Interchange fees paid to the bank that issued your customer’s card. This is the largest slice, and rates vary by card type, merchant category, and how the transaction is processed.3Mastercard. Mastercard 2024-2025 U.S. Region Interchange Programs and Rates4Federal Reserve Board. Regulation II – Average Debit Card Interchange Fee by Payment Card Network
- Assessment fees paid to the card network (Visa, Mastercard, and so on) for using its payment rails.
- Processor markup on top of interchange and assessments.
- Chargeback fees when a customer disputes a transaction, whether or not you win the dispute.
- Monthly gateway fees and PCI compliance charges.
- Foreign transaction or cross-border fees on international sales.
Per-transaction charges rise and fall with your sales volume; monthly gateway, PCI, and account-minimum charges are flat. Both are fully deductible. Keeping the two groups separate in your books makes the year-end numbers easier to reconcile.
Record Gross Sales and Fees Separately
This is where small businesses trip themselves up. When a processor settles a transaction, it deposits the sale amount minus its cut. A $500 sale at 2.9% plus $0.30 puts $485.20 in your bank account. If you book $485.20 as revenue and move on, you’ve understated both income and expenses.
The correct entry records $500 as gross revenue and $14.80 as a separate processing fee expense. Same net effect on your bottom line, very different picture on your return.
The reason this matters is Form 1099-K. Your processor reports the gross dollar amount of your card transactions to you and to the IRS every year, before any deduction for fees, refunds, or chargebacks. For businesses accepting card payments directly, there is no minimum threshold that exempts you from this reporting.5Internal Revenue Service. Instructions for Form 1099-K6Internal Revenue Service. Understanding Your Form 1099-K If your reported gross revenue comes in below the 1099-K figure, the IRS notices. The processing fee deduction is what bridges the 1099-K gross to the net you actually received.
Where to Report the Deduction
The line depends on your entity type.
Schedule C (Sole Proprietors and Single-Member LLCs)
You have two acceptable options. Report processing fees on Line 10, “Commissions and fees,” since they’re fees paid to a third party tied directly to your sales. Or report them on Line 27b, “Other expenses,” and itemize them in Part V of Schedule C with a description like “Credit Card Processing Fees” or “Merchant Service Fees.”7Internal Revenue Service. 2025 Schedule C (Form 1040) Pick one and stay with it year to year.
Corporations and Partnerships
C-corporations (Form 1120) and S-corporations (Form 1120-S) generally report processing fees in “Other Deductions,” with an attached statement identifying the expense. Partnerships report them on Line 21 of Form 1065, also labeled “Other deductions,” with a supporting statement. The deduction reduces ordinary income at the partnership level, which then flows to each partner’s Schedule K-1.8Internal Revenue Service. Form 1065 – U.S. Return of Partnership Income
Whatever entity you file under, hold onto your monthly processor statements. They’re your primary documentation if the IRS asks. Reconcile them against your bank deposits and internal books each month rather than trying to piece it together at tax time.
When to Claim the Deduction
Timing follows your accounting method.
Under the cash method, you deduct expenses when they’re paid. Because the processor takes its cut before the deposit hits your account, the fee is effectively paid the moment the transaction settles. You deduct it in the same year the sale occurred. Most small businesses use the cash method, and after the Tax Cuts and Jobs Act, businesses with average annual gross receipts of $25 million or less (indexed for inflation) can use it even if they carry inventory.9Internal Revenue Service. Publication 538 – Accounting Periods and Methods10Internal Revenue Service. IRS Issues Proposed Regulations for TCJAs Simplified Tax Accounting Rules for Small Businesses
Under the accrual method, you deduct when the liability is fixed and determinable and economic performance has occurred. For processing fees, economic performance happens when the processor completes the transaction.11Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction So a transaction on December 30 that settles January 3 still produces a fee deduction in the year the transaction happened, provided your treatment is consistent year over year.
Equipment Isn’t a Processing Fee
Several costs look like processing fees but follow different rules. Mixing them together is a common bookkeeping mistake:
- Card readers, terminals, and POS systems you purchase are capital expenditures. Depreciate them on Form 4562, or, more commonly for small businesses, expense the full cost in the year of purchase under Section 179. Bonus depreciation, recently restored to 100% for qualified property, is another route to writing the full cost off in year one.12Internal Revenue Service. About Form 4562, Depreciation and Amortization
- Leased terminals or POS equipment produce rent expense, deductible in the year paid.
- Interest or factor fees on a merchant cash advance are interest expense, not processing fees, and are subject to their own limitations.
Chargebacks and Refunded Sales
When a customer disputes a charge, the processor reverses the transaction and typically hits you with a chargeback fee. That fee is deductible whether or not you win the dispute. If you lose, the reversed sale reduces your gross income naturally; if you win, the revenue is restored but the fee you paid remains deductible.
Refunds work differently and catch a lot of owners by surprise. Many processors no longer return the original processing fee when you refund a customer. You send back the full purchase price, but your processor keeps its cut of the original transaction. That retained fee is still a legitimate deduction. You paid it to process a real sale, and the later reversal doesn’t undo the expense. Make sure your books capture these retained fees rather than netting them away silently.
Surcharges and Cash Discounts
Some businesses recover processing costs by adding a surcharge on credit card transactions or offering a discount for cash. The tax mechanics are simple; the state law layer is not.
A surcharge you collect from a customer is revenue. Report it as part of gross sales, and separately deduct the full processing fee as an expense. The surcharge doesn’t reduce your deduction; it’s income that happens to cover the cost.
Cash discount programs flip the framing. You post higher prices and give a discount to customers paying cash or debit. The higher posted price is your revenue, the discount reduces it, and you still deduct processing fees on the card transactions that pay full price.
On the compliance side, credit card surcharging is prohibited or restricted in several states, including Connecticut, Kansas, Maine, Massachusetts, and Oklahoma. States that allow it generally cap the amount and require advance disclosure. Visa and Mastercard impose their own caps, and surcharges can never be applied to debit or prepaid cards regardless of state. Cash discount programs face fewer restrictions because the differential is framed as a discount off a posted price rather than a penalty for using a card, but any program should be checked against your state’s consumer protection rules before rollout.