Business owners are constantly assessing their costs, especially when it comes to tax payments and payment operations, and many wonder: Are credit card processing fees cost of goods sold? As many businesses use online merchant services and nearly every customer transaction goes through a third-party processor, understanding where this fee falls on the income statement and what it means for your business is critical.
What Are Credit Card Processing Fees?
Credit card processing fees are the charges assessed every time a customer swipes/dips/taps their debit or credit card for payment. These fees are subtracted from what companies receive from payment processors, the acquiring bank, the networks of the cards, and any other service provider involved in a transaction. Credit card processing fees typically have a percentage per transaction (interchange and assessment fees) as well as a per-transaction fee assessed[1]. For those businesses relying on online merchant services, credit card processing fees are unavoidable and can significantly reduce profit margins if not appropriately accounted for.
What Is Cost of Goods Sold (COGS)?
Cost of Goods Sold is identified as the cost associated with creating the products or services sold by your company. These are materials, labor, and overhead for manufacturing. For those white-label ecommerce retailers who operate online at all, this is the wholesale cost of purchase price of what is sold to a customer and the shipping incurred to get a product out to a customer[2]. Understanding the cost of goods sold is crucial because it impacts gross profit; it’s a deduction from revenue on the income statement, but other expenses are not deductions, which is why it’s important to assess whether credit card processing fees are associated.
Are Credit Card Processing Fees Cost of Goods Sold?
Not technically. Credit card processing fees are not considered COGS (cost of goods sold). They’re operating expenses. The IRS makes the distinction between what it takes to create goods and what it takes to access the means to sell those goods. Thus, credit card processing and online merchant services fall under selling or administrative expenses, not COGS.
Why the Classification Matters
It’s important to know whether credit card processing fees are considered COGS for tax purposes and for operational budget tracking. If someone were to think that processing fees are related to operations, when it comes time to pull information for taxes, gross profits could be off or, better yet, deductions can be lost. When credit card processing fees are appropriately considered operating expenses, it allows owners to better understand what’s really necessary to properly allocate for the total cost of selling. This is critical for e-commerce businesses that rely upon online merchant services to determine per-sale profit and operational projections for the future.
How It Affects Profit Margins and Tax Deductions
Yet when credit card processing fees are assessed through merchant services, they don’t count as COGS, even though they’re tax-deductible business expenses[3]. This means that for net income purposes, they can be assessed as deductions to reduce overall tax liability. Yet when considering them as COGS, it inaccurately lowers gross expenses and confuses investors who rely upon your financial success for their own business operations. The goal is to have clean books to best assess what’s truly necessary for operational enhancements that may reduce costs.
An Industry Breakdown: Assessment Fees by Sector
The percentage and type of credit card processing fees change slightly by industry, but the journal entry is universal. Therefore, whether you operate a retail business, operate with SaaS, subscription, or professional services, this fee is a normal expense of operating your business, not an expense relative to the product sold. For those businesses that use merchant online processors, this fee can be assessed automatically via certain reporting and is thus easier to allocate and monitor via accounting software.
What's in a Fee
Credit card processing fees include:
- Interchange fees (paid to banks associated with the issuing banks)
- Assessment fees (paid to card networks)
- Markup fees (paid to your processor).
Depending on the type of card, number of transactions, and risk, these are all assessed by various third parties. Knowing who you’re paying and how much helps you renegotiate and ensures proper accounting software classification.
Why They Differ from Cost of Goods Sold
Cost of Goods Sold (COGS) encompasses expenses that are attributed to materials, manufacturer expenditures, or purchases required for goods sold. Payment for expenses required to conduct a sale, credit card processing fees, are part of sales expenses. Sales expenses include POS charges, e-commerce fees, advertising expenses, and shipping. Since payment processing happens during a sale as opposed to a supply chain operation, it cannot fall under COGS.
How Online Merchant Services Provide Fee Reporting
Most online merchant services offer fee summaries at a per-transaction level with daily or monthly reports. This helps the accounting department attribute these expenses to proper fee classifications. Some merchant services even allow for CSV downloads or integration into QuickBooks or Xero for better reconciliation. These checkpoint efforts keep everything above board and “CPA ready” for audits[4].
How Accountants Classify Processing Fees
In general, CPAs and financial professionals suggest taking all credit card processing fees and attributing them to one classification of operating expenses. This can be “merchant fees,” “payment processing,” or “transaction fees.” As long as these same fee classifications are used in varying periods of reporting, the financial statements will be more accurate, and tax time will be easier. This is also the safety net step to avoid IRS bright red flags while keeping investors apprised.
What it Means For SaaS Companies
If a company offers subscription services, expect any recurring transaction fees as well. If your online merchant services charge a higher fee per month for monthly billing, that could eat into your margins quite quickly. Any processing fees charged monthly need to be considered on the income statement and assessed like any other overhead expense. These analytics allow SaaS companies to better understand customer lifetime value (CLV) adjustments based on payment processing information.
How to Reduce Credit Card Processing Fees
Companies can negotiate, switch companies or utilize ACH services or eChecks to reduce these fees. Many online merchant services will implement a dual pricing fee that passes credit card processing to the customer, for example. Any implementation of fraud prevention can reduce chargebacks, which, in turn, helps keep processing fees down due to decreased red flags. Regular assessment can keep you from paying more for specific transactions.
How To Track Fees In Your Accounting Software
For accounting software like QuickBooks or FreshBooks, it’s important that processing fees remain separate from COGS. Most accounting platforms offer you the capability to create a custom expense category for merchant fees. The best way to track online merchant services fees is through automation—bank feeds or integration directly with your online merchant services provider will ensure that all and only merchant services fees are captured and classified. That level of detail will help with forecasting, budgeting, and compliance.
When To Consult A Tax Professional
Once your business or transaction volume reaches a certain level, a tax professional can ensure that fees are appropriately categorized and advise whether your business is qualified to take this fee as a deduction. Similarly, tax professionals can assess how your business reconciles merchant service fees against gross revenue and advise your chart of accounts setup. For ecommerce brands and service providers utilizing online merchant services, it’s always worth it to hire a tax professional for year-end or quarterly assessments of your accounting efforts.
FAQ
Q: Are credit card processing fees cost of goods sold?
A: No, they’re typically classified as operating expenses and not COGS. Processing fees relate to how a product is sold, not how it was made or acquired.
Q: Can I deduct credit card processing fees on my taxes?
A: Yes. Credit card processing fees are deductible as a business expense even if they aren’t considered COGS. Accurate categorization will allow for accurate deductions and tax submissions.
Q: Where should I categorize credit card processing fees on my accounting software?
A: The majority of businesses categorize them as merchant fees or payment processing fees within the expenses category. Just make sure you use the same language so reports and reconciliation are seamless.
Q: Why does it matter if these fees are included in COGS or operating expenses?
A: In the event you ever get audited or have to send something to the IRS, operating expenses will raise a red flag. Don’t do anything that would give investors pause with your company’s numbers. You want to be able to present your gross profit margin in the most truthful way.
Q: Are merchant services fees for online payment different than payment processors in person?
A: Yes, online is usually higher due to fraud risks and convenience. But as far as processing it as COGS or not, it doesn’t matter.
Q: What are some ways I can reduce my credit card processing fees?
A: You can negotiate, implement fraud tools to minimize chargebacks, or offer ACH payments. Some merchant services for online transactions have dual pricing if the customer agrees to pay a service fee[5].
Conclusion
So, are credit card processing fees cost of goods sold? No, but they are important to the nature of your expenses. Accepting credit cards is part of doing business; properly categorizing them as operating expenses will facilitate correct financial reporting, easier tax deductions and better in-business decision making. With clear and consistent merchant services from Payment Nerds for online transactions, familiarization with your statements and the above accounting practices, you’ll be able to better manage expenses and protect your margins in even the most competitive marketplace.
Sources
- IRS. “Publication 535: Business Expenses.” Accessed August 2025.
- Investopedia. “Cost of Goods Sold (COGS): What It Is & How to Calculate It.” Accessed August 2025.
- QuickBooks. “How to Categorize Merchant Fees and Credit Card Processing Costs.” Accessed August 2025.
- Bankrate. “Reducing Payment Processing Fees for Small Businesses.” Accessed August 2025.
- Merchant Maverick. “Best Online Merchant Services for Small Business.” Accessed August 2025.
