Using Stripe or PayPal? You might be overpaying the IRS.

If you accept payments through Stripe, PayPal, or similar processors, you might be missing a crucial step in your bookkeeping. Many small business owners record the full amount received as income, without properly accounting for merchant processing fees. This mistake can lead to paying more taxes than necessary and potentially even trigger an IRS audit if the numbers don’t match the 1099 forms sent by payment processors.

Small business owner reviewing payment statements and fees

Why Merchant Fees Matter for Your Taxes

When a customer pays you $100 through Stripe or PayPal, you don’t actually receive the full $100. The processor deducts a fee, often around 2.9% plus 30 cents per transaction. So, you might get $96.80 deposited into your bank account. If you record $100 as income without subtracting the $3.20 fee, your reported income is higher than what you actually earned.

The IRS expects you to report net income, which means your income after expenses like merchant fees. If you don’t deduct these fees, you pay taxes on money you never received. Over time, this can add up to hundreds or thousands of dollars in overpaid taxes.

How Incorrect Fee Tracking Can Trigger an Audit

Payment processors send you a 1099-K form at the end of the year. This form reports your gross payment volume — the total amount processed before fees. If your books show income that doesn’t match the 1099-K, the IRS may flag your return for review.

For example, if your books show $50,000 in income but your 1099-K reports $55,000, the IRS will want to know why. Without proper documentation of merchant fees, you might struggle to explain the difference. This mismatch can lead to time-consuming audits and potential penalties.

How to Record Merchant Fees Correctly

The key is to separate the gross sales from the fees in your accounting system. Here’s a simple way to do it:

• Record the full payment amount as income.

• Record the merchant fees as an expense.

• The net deposit (income minus fees) matches your bank statement.

  
  

Example

A customer pays $100 via Stripe. Stripe charges $3.20 in fees.

Account	Debit	Credit
Bank Account	$96.80
Merchant Fees	$3.20
Sales Income		$100

This method keeps your income accurate and shows the fees as a legitimate business expense.

Tools and Tips to Simplify Tracking

Many small business owners use accounting software like QuickBooks, Xero, or Wave. These tools can connect directly to your payment processors and bank accounts to automatically import transactions. Here’s how to make the most of them:

• Use bank feeds to import deposits and fees.

• Match transactions to avoid duplicates.

• Create a merchant fees expense account to track fees separately.

• Reconcile monthly to catch errors early.

What to Do If You’ve Been Overpaying Taxes

If you discover you haven’t been deducting merchant fees properly in past years, you can file an amended tax return. This process lets you correct your income and claim refunds for overpaid taxes. Consult a tax professional to guide you through the amendment process.

Avoiding Common Mistakes

• Don’t ignore small fees. Even small percentages add up.

• Don’t mix merchant fees with other expenses like shipping or supplies.

• Don’t rely solely on bank deposits as income.

• Keep detailed records of all payment processor statements.

  
  

Your Next Step:

Check your latest payment processor statements and compare them to your books. You might find opportunities to save money and avoid headaches down the road.

If you’re unsure about your bookkeeping, consider hiring a professional. Accurate records protect your business and keep your finances healthy.