1. What are payment processing fees?
2. Examples of payment processing fees
3. Average payment processing fee
4. Processing fee comparison chart
5. Are payment processing fees tax deductible?
6. How to lower your payment processing fees

Nearly everybody pays with credit cards these days. For businesses to accept these credit card payments they need to interact with a payment processing company which, as most things do, comes with a payment processing fee. And though payment processing fees are just a part of accepting credit card payments, understanding the nuances of these fees can only be beneficial to your business. 

What are payment processing fees and why do they matter?

A payment processing fee is a fee that businesses pay to their designated credit card company–as well as their financial service providers–that allows them to both authorize and process credit and debit card transactions. Virtually every payment made via credit or debit card incurs a fee. And though this fee is divided between the trio of financial institutions required to make it, if it doesn’t get paid, there isn’t any processing of the payment.

 

That said, depending on the financial institutions that you rely on for payment processing, the fee can vary slightly. And though the amount can be inconsequential to a larger business, those businesses on the smaller side of things can be affected by higher fees. 

Examples of Payment Processing Fees

When a credit card is processed there are three fees that makeup what is referred to as the “merchant discount rate” or more commonly, the payment processing fee:

 

Interchange Fee

The biggest part of the payment processing fee is given to the issuing bank, or the bank that manages the credit card that’s being used in the payment. Chase, Citi, Wells Fargo, and Bank of America are all examples of issuing banks that will be paid the interchange fee.

 

Assessment Fee

This part of the fee is given to the actual credit or debit card network. Examples of card networks are Visa, Mastercard, and Discover.

 

Payment Processor Fee

The final third of the fee goes to the actual payment processing company. This is the company that manages the details and logistics of how companies process their payments. Companies like Square or Stripe are payment processing companies.

 

In general, businesses should look for companies that offer the lowest payment processing fees, but should also consider their business model and how the payment processing company works within that business model.

Average Payment Processing Fee for Merchants

Payment processing fees can vary, but they typically land somewhere between 1.5% and 3.5% of the total amount of the transaction. For example: if your customer buys a new scarf for $10 the %1.5 transaction fee would be $1.50. Fees will either be deducted in one lump sum at the end of the payment period or the amount of the payment being made to your business will be curtailed based on what you owe.

Payment Processing Fees Comparison Chart

 

Stripe Payment Processing Fees

• 2.9% + $.30
• Additional fees/rates will be incurred for other processes like terminal or recurring billing.

 

Square Payment Processing Fees

• 2.6% + 10¢ (contactless) – 3.5% + 15¢ (existing cards on file)

 

Quickbooks Payment Processing Fees

• 2.4% swiped, 2.9% invoiced, 3.4% keyed-in + 25¢ per transaction

 

Shopify Payment Processing Fees

• Tier 1: 2.4% + 30¢ + $299 per month
• Tier 2: 2.6% + 30¢ + $79 per month
• Tier 3: 2.9% + 30¢ + $29 per month

 

Paypal Payment Processing Fees

• Online payment processing fees: 2.9%, also an extra fee based on currency.
• In-person transactions: 2.7%.

Are payment processing fees tax deductible?

The IRS recognizes payment processing fees as an “essential operating cost”. Meaning, accrued fees can be deducted when tax time rolls around. On their website, the Internal Revenue Service has a detailed, and evolving, breakdown of what can and cannot be deducted. In general merchant processing fees are considered deductible and this can be done on Line 17 of their Schedule C tax form. More so, your payment processor needs to submit a 1099-K before January 31st. This deduction will be applied to your gross earnings. 

And remember: a business’s payment processing fees are tax deductible, but those associated with an individual’s processing fees are decidedly not. 

How to Lower Your Payment Processing Fees

If you can lower your payment process fee, your business can make a larger amount of profit. To help you do so, we’ve included a few tips:

Charge your customers.

There’s no actual way to avoid payment processing fees, but they can be passed along to your customer by adding a surcharge to their bill. There are a handful of companies–like Plastiq–that will add in the fee automatically to their invoices.

In-person payment processing.

Because there’s less chance of fraud with an in-person payment and payment processors have to do less because of that, they tend to come with far lower processing fees. Though there may be more upfront costs for setting up point of service systems or credit card readers, in the long run, money can be saved through accepting physical payments.

Allow ACH payments.

ACH payments are an extremely reliable payment method. Because of this they mostly come with virtually zero fees attached. By providing customers the opportunity to pay via ACH transfers, you can balance out the sometimes hefty fees associated with credit card processing.

Secure your payments.

By making sure your business is PCI compliant within 60 days of registering, you’ll avoid the hefty fees incurred by those companies who are not up-to-date on fraud protection. This noncompliance fee is an avoidable cost that will amp up your overall processing fee. Either way, ensuring your PCI compliance is a step in the right direction in terms of securing your payment processing. 

If you’re accepting credit cards or debit cards you’re going to be incurring some sort of fee. And though this fee can be passed on entirely or lowered considerably, understanding the minutia of payment processing fees is undeniably helpful for any and all businesses.