If you’re running an ecommerce business and using third-party payment processors (think Amazon, Shopify, Square), chances are you’re familiar with the merchant fees that come with using these payment providers.
Here’s the tricky thing about these fees: the merchant account deposits your net sales in your bank account and it’s not always easy to determine what these fees are or how much your gross sales are by simply looking at your bank statement.
Why does this matter? The IRS expects you to report your gross income (income that you earned before any fees were deducted) on all sales, which means you need to know exactly how much your merchant fees are to add these to your net sales to calculate gross.
What is a merchant fee?
Merchant fees, also known as transaction or seller fees, can include anything from shipping, advertising, or hosting—anything the merchant account charges you for making a sale on their platform.
When you make a sale, the merchant account deposits your net sales into your bank account. This means they’ve already deducted any fees from your gross sales.
For example, if you sell $100 (your gross) worth of product on Amazon and they charge you $25 in fees, only $75 (your net) is going to be deposited into your bank account.
You’ll need to record gross sales and these fees in your bookkeeping for the IRS. Another reason you’ll want to keep track of merchant fees: they’re tax deductible.
Form 1099-K is prepared by third-party processors like PayPal and Amazon to report the payment transactions they process for sellers in the calendar year. The merchant account reports your gross sales (this includes revenue from card payments that were refunded) and files a copy of the 1099-K with the IRS.
However, the merchant account only prepares this form if you meet the following threshold:
Over $20K in transactions in the calendar year; and
Over 200 transactions in the calendar year.
The amount on Form 1099-K will be different than the amount that was deposited into your bank account. In addition to merchant fees, you may have refunds, chargebacks, or holds. These are all deducted from your gross sales before the final net amount gets deposited into your bank account.
Bookkeeping for merchant fees
Luckily, your merchant provider has sales reports online that will show in detail the gross sales, fees, returns, chargebacks, and any other related costs (no need to hit that panic button!). But you need to include all of that information in your bookkeeping.
Let’s take a look at an example below of what these reports could look like and how it gets applied to your books:
Above, we have an example of Amazon’s seller report. This is for a specific date range and outlines all sales, refunds, fees, and rebates.
Here we have an example of what a merchant adjustment might look like in your bookkeeping. This adjustment grosses up your net sales and includes all merchant fees, returns, and other expenses such as shipping.
Say you sell party supplies on Amazon. You make a sale and $100 is deposited into your bank account. You have $10 of operating expenses so your net profit is $90.
$100 (Net Revenue) - $10 (Operating Expenses) = $90 (Net Profit)
Now, let’s take a look at these numbers when you adjust for gross sales and merchant fees in your bookkeeping:
The $100 sale you made on Amazon cost you $10 in merchant fees. You or your bookkeeper would gross up your sales to $110 and include the $10 merchant fee as an additional operating expense.
$110 Revenue (Gross Revenue) - $10 (Operating Expenses) - $10 (Merchant Fee) = $90 (Net Profit)
After this adjustment is complete, you now have your gross revenue and any other associated merchant fees on your books, which is exactly what the IRS is looking for.
In the event that you don’t meet the Form 1099-K threshold (and are off the hook from having to file the form), you’ll have your gross sales number handy come tax time.
When to call in the pros
Worried about doing these adjustments correctly? Try Bench—we’ll take care of your bookkeeping for you (including merchant fees). Plus, if you currently use Square, Stripe, or Shopify, you get 20% off your first 6 months and a dedicated bookkeeper who will do all the heavy lifting for you.