Merchant Fees and Form 1099-K: What Small Businesses Need to Know

If you accept credit cards, use PayPal, or sell on platforms like Amazon and Shopify, there's a good chance you'll encounter Form 1099-K at tax time. And if you're not careful about how you handle the numbers on that form, you could end up overpaying your taxes—or worse, triggering an IRS audit.

The core problem is surprisingly simple: the IRS sees your gross sales, but your bank account only shows net deposits after merchant fees are subtracted. That gap can cause real headaches if your books don't tell the full story.

Here's everything you need to know about merchant fees, Form 1099-K, and how to keep your tax reporting clean.

What Is Form 1099-K?

Form 1099-K is an IRS information return that third-party payment processors use to report the gross amount of payment transactions they handle for you during the calendar year. Think of it as the payment processor telling the IRS, "Here's how much money flowed through this merchant's account."

Payment processors that may send you a 1099-K include:

• Credit card processors (Square, Stripe, Clover)
• Online payment platforms (PayPal, Venmo for Business)
• E-commerce marketplaces (Amazon, Shopify, Etsy, eBay)
• Point-of-sale systems that handle card transactions

The key word here is gross. The amount on your 1099-K reflects total sales before any fees, refunds, chargebacks, or other deductions are taken out.

Current Reporting Thresholds

The reporting threshold for Form 1099-K has been a moving target in recent years. After multiple delays and proposed changes, the IRS—following the passage of the One Big Beautiful Bill—has confirmed that the threshold for 2025 and beyond stands at:

• More than $20,000 in gross payments, AND
• More than 200 transactions during the calendar year

Both conditions must be met for a payment processor to be required to send you a 1099-K. If you process $25,000 through Stripe but only have 150 transactions, you won't receive the form from that processor.

Keep in mind that even if you don't receive a 1099-K, you're still legally required to report all business income on your tax return. The form is an information document, not a threshold for what's taxable.

The Gross vs. Net Problem

This is where most small business owners run into trouble.

Let's say you run an online store and process $50,000 in sales through Stripe over the year. Stripe charges you a 2.9% + $0.30 processing fee on each transaction. After fees, your actual bank deposits total around $48,300.

Your 1099-K will show $50,000—the gross amount. But your bank statements show $48,300. That $1,700 gap represents your merchant processing fees.

If you simply report the $48,300 from your bank deposits as income, the IRS will see a discrepancy. Their records (from the 1099-K) say you earned $50,000, but your return says $48,300. That mismatch is one of the most common triggers for automated IRS notices.

How to Handle It Correctly

The solution is straightforward:

1. Report your gross income on your tax return to match the 1099-K amount ($50,000)
2. Deduct merchant fees as a business expense ($1,700)
3. Your net result is the same ($48,300), but now everything reconciles

On Schedule C (for sole proprietors), you'd report $50,000 on the gross receipts line and include $1,700 under "Other expenses" or a dedicated line for merchant/processing fees.

What Counts as a Merchant Fee?

Merchant fees come in several forms, and all of them are generally deductible as ordinary and necessary business expenses under IRS Section 162:

Per-Transaction Fees

These are the most common fees. Every time a customer swipes, taps, or enters their card number online, you pay a percentage plus a flat fee. For example, Stripe charges 2.9% + $0.30 per transaction.

Monthly and Annual Fees

Some processors charge recurring fees for account maintenance, PCI compliance, statement generation, or access to their payment gateway.

Chargeback Fees

When a customer disputes a charge and wins, you not only lose the sale amount but typically pay a chargeback fee ranging from $15 to $100 per incident.

Equipment and Software Fees

Terminal rentals, POS system subscriptions, and payment gateway software fees all qualify as deductible business expenses.

International Transaction Fees

If you accept payments in foreign currencies, processors often add a 1% to 3% surcharge on top of standard processing fees.

All of these fees should be tracked separately in your books so you can deduct them properly and reconcile your income with your 1099-K.

How to Reconcile Your 1099-K

Reconciling your 1099-K with your actual records is an essential step before filing taxes. Here's a practical approach:

Step 1: Gather Your Documents

Pull together:

• Your Form 1099-K from each payment processor
• Monthly or annual merchant statements from each processor
• Your bank statements showing deposits
• Your internal sales records or accounting software reports

Step 2: Calculate Your True Gross

Start with the 1099-K amount and verify it against your merchant statements. The gross sales reported should match the total of all transactions processed, including:

• Successful sales
• Sales that were later refunded
• Sales with chargebacks

Step 3: Identify All Deductions

From that gross amount, separately categorize:

• Processing fees (the biggest line item for most businesses)
• Refunds and returns issued through the processor
• Chargebacks lost during the year
• Other platform fees (marketplace commissions, listing fees)

Step 4: Verify the Math

Your gross sales (1099-K amount) minus all fees and adjustments should roughly equal your net bank deposits. If there's still a discrepancy, check for:

• Timing differences (transactions processed in December but deposited in January)
• Reserve holds by the processor
• Multiple 1099-Ks from different processors that need to be combined

Common Mistakes to Avoid

Reporting Net Instead of Gross Income

This is the number one mistake. If you report only what hit your bank account, the IRS computers will flag the difference. Always start with gross and deduct fees as expenses.

Mixing Personal and Business Transactions

If you use the same PayPal or Venmo account for both personal and business transactions, your 1099-K will include personal payments that aren't taxable business income. The fix: use separate accounts for business and personal, or meticulously document which transactions are which.

Ignoring 1099-Ks from Multiple Processors

If you sell on Amazon, Etsy, and your own Shopify store, you may receive three separate 1099-K forms. Each one needs to be accounted for. The IRS receives copies of all of them.

Forgetting to Deduct Refunds

If a customer returned a $200 item but the original sale was included in your 1099-K gross amount, you need to account for that refund. Otherwise, you're paying taxes on income you returned.

Poor Record-Keeping Throughout the Year

Scrambling to reconstruct records at tax time leads to errors. Download your merchant statements monthly, or better yet, connect your payment processors to your accounting system so transactions are recorded automatically.

Shared Payment Terminals

If you share a credit card terminal with another business or individual, the 1099-K will include transactions that aren't yours. You'll need documentation to separate your transactions from theirs on your tax return.

What to Do If Your 1099-K Is Wrong

It happens. Maybe the gross amount doesn't match your records, or personal transactions were included. Here's what to do:

1. Contact the payment processor first and request a corrected form
2. Don't wait to file—if the processor is slow to correct it, file your return with the correct amounts based on your own records
3. Document the discrepancy thoroughly in case the IRS asks questions
4. Report correctly on your return—you're not required to match an incorrect 1099-K, but you should be able to explain the difference

The IRS provides specific guidance: if you receive a 1099-K that includes incorrect amounts, report your actual income and keep records that support your numbers.

State-Level Considerations

Some states have their own 1099-K reporting thresholds that differ from the federal level. States like Massachusetts, Vermont, Virginia, and Maryland have lower thresholds, meaning you could receive a state-level 1099-K even if you don't meet the federal criteria. Check your state's requirements to avoid surprises.

Best Practices for Managing Merchant Fees Year-Round

Rather than dealing with all of this at tax time, build good habits throughout the year:

• Separate your accounts: Use dedicated business bank accounts and payment processors
• Record gross revenue: Enter the full sale amount in your books, not the net deposit
• Track fees as they occur: Categorize every processing fee as a deductible expense
• Reconcile monthly: Compare merchant statements to bank deposits each month to catch discrepancies early
• Save your statements: Keep digital copies of all merchant processor reports for at least three years
• Review 1099-Ks promptly: When they arrive in January, compare them to your records immediately so you have time to address any issues

Keep Your Finances Organized from Day One

Tracking merchant fees and reconciling 1099-K forms is much easier when your bookkeeping system is set up correctly from the start. Beancount.io provides plain-text accounting that gives you complete transparency over every transaction, fee, and adjustment—no black boxes, no hidden rounding. Get started for free and see why developers and finance professionals trust plain-text accounting for precise financial tracking.