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Handling Credit Card Processing Fees (or PayPal Fees) in QuickBooks

February 15th, 2010 Posted in Freshbooks, QuickBooks

There is always that never ending problem, where you just don’t get all of your income :-(

Many merchant accounts (these are the people that permit you to accept credit cards) just take a monthly debit out of your bank account at the end of the month, these are easy to account for, you simply enter a withdrawal in your account register for the amount debited and categorize it as Merchant Processing Fees, which should be a COGS or an Expense (this varies by where you are located and your industry, check with your accountant if you are unsure).

However, what about those merchant accounts that take the percentage before you even get the money, similar to Paypal? This makes it more difficult to track, however, I do have an answer.

(I want to say that I recommend that the following is done even if your fees get debited as a whole so that you can process the flow of your income.)

1. Open up a new bank account inside of QuickBooks, call it Merchant Account, or PayPal, or Google Checkout (whoever your processor is). Don’t hesitate to set up multiple, as a matter of fact many of my clients have multiple, so I set up an account titled ‘Merchant Accounts’ and then I have sub accounts titled PayPal, Google Checkout, Chase Paymentech under the main ‘Merchant Accounts’ account.

2. When you receive your payment for services (via Invoices or Cash Receipts) don’t deposit directly into your checking account, deposit it into the merchant account it goes into, because let’s be honest, it is not in your checking account yet.

3. As the monies show up in your checking account, transfer the funds from your merchant account to your bank account. This also makes it easier for PayPal when you may accumulate funds in the account and only make random transfers from the PayPal account.

4. Accounting for your fees/costs – can be done in one of three ways:

  • If you get lump sum fees at the end of the month debited from your checking account, don’t worry about doing anything differently, just record that transaction once it posts.
  • If you are using a service like Google Checkout or PayPal you can ‘see’ how much they take out via their transaction reports, so at the same time you make that transfer from your ‘merchant’ bank account in QuickBooks to your ‘checking’ bank account in QuickBooks – you can make a withdrawal entry from your ‘merchant’ checking account for your merchant processing fees.
  • If you are using a more standard merchant services provider, you rarely get daily reports, and rather get monthly reports, at the end of every month when you get your reports, take the cost of the fees they charged you off of the statement and make a lump sum withdrawal from your ‘merchant’ bank account for your merchant processing fees. This is a good way to reconcile too, making sure you received all your monies, because at the end of the month after you enter the fees, the only thing left in your account should be any undeposited recent payments.

For my FreshBooks followers:

I promised you a follow up to my recent ‘making FreshBooks and QuickBooks play nicely posts’ – if you have not read them yet, check them out:

Making FreshBooks work with QuickBooks and vice versa Part 1

Making FreshBooks work with QuickBooks and vice versa Part 2

My suggestion for you all in regards to credit card processing fees is to do the same thing that I suggest above – create additional accounts for your merchant processing accounts and rather than depositing the payments received directly to your bank account, place them in their appropriate merchant account as the ‘middle man’ before it hits your bank account, and follow one of the three options above for recording the appropriate fees.

Do you have any questions or specific circumstances that I did not help you with? Feel free to comment on the post with your question(s) and I will respond personally!

Stay tuned, in the upcoming week I am going to talk about allocating Sales Tax in QuickBooks for FreshBooks users, incorporating it into my previously suggested methods for recording receivables and revenue.

32 Responses to “Handling Credit Card Processing Fees (or PayPal Fees) in QuickBooks”

  1. Fed Says:

    Thanks so much finally someone answers this question completely and a way I feel comfortable with.

    Thank You, Thank You, Thank You


  2. Ross Says:

    Great info. Like you suggested, I set up bank accounts in QB for Google Checkout, Merchant Processor, and Amazon Sales. Here’s where I’m stuck: In QB 2010, after downloading transactions with the direct connection to my bank, I’m brought to the Downloaded Transactions screen. It looks like this: http://comforta.net/QBdownloadedtrans.png
    You can see the three transaction types on the left. What do I do now? When I click on a transaction on the left, then the “Received From” pull-down on the right, I’m not shown the bank account I set up in QB. What should I do?
    Thank you.


  3. Heather Says:

    Hi Ross!

    It’s not the ‘received from’ section. It is the ‘account’ section. You can leave the received from blank and basically transfer INTO your BoA from Google checkout, Merchant Processor or Amazon Sales. I hope that clarifies for you. Let me know if not.


  4. Robbi Thiboutot Says:

    I have a completely new small business that is promoting homemade baby toys on the web and I am trying to find a great resourse to locate reasonable merchant accounts providers which might use me although my company simply began some time ago.


  5. Kristian Says:

    Questions:

    1) Which total is subject to sales tax? The total sales BEFORE Paypal fees, or the total AFTER Paypal fees have been removed?

    2) If customers prepay for taxable items, do I calculate sales tax liabilities based on the amount paid in Paypal, or on EARNED sales revenue as items are delivered.

    Thanks!


  6. Heather Says:

    1) If you are charging your customer the paypal fees, then depending on the sales tax laws in your state, you may have to charge sales tax. However, if you are absorbing the fees, then Paypal fees are an expense, so no they are not subject to sales tax. The basic rule of thumb is, if you collect sales tax, then you must report it and pay it to your state.

    2) Same thing here really. Regardless of when you charge the sales tax, you must report it and pay it to the state. You can charge it upfront and have the customer pay in full and then record it on the invoices as the product is delivered.

    Thanks!


  7. Phyllis Mccrimmon Says:

    Simply want to say your article is as surprising. The clarity in your post is simply great and i can assume you are an expert on this subject. Well with your permission let me to grab your RSS feed to keep updated with forthcoming post. Thanks a million and please continue the enjoyable work.


  8. Ryan Says:

    Got a question. You say at the same time you transfer, you can make a withdrawal entry for the Paypal Fees. Could you describe a little more on how/where you input a withdrawal entry?


  9. Heather Says:

    Thank you so much Phyllis! You are welcome grab the RSS feed. :)


  10. Heather Says:

    Sure Ryan! From the merchant account, you would enter a Check for the amount of the fees, allocating it to whatever account you have set up for tracking merchant processing fees. That could be a cost of goods sold account or an expense account depending on how you handle them.


  11. Wayne Says:

    Hi,

    My only problem with this is that it shows all your revenue as received in your balance sheet, when in reality it’s a recievable from the merchant company until such time as its paid. This may be several days later.

    Shouldnt it be set up as a receivable rather than a bank account?

    Wayne


  12. Heather Says:

    Hi Wayne,

    The merchant bank account is actually a clearing account. Payments made go into the merchant bank account and then when those monies are deposited in to a checking/savings account, the monies are just transferred from the merchant account to the checking/savings account. So it is income – payment for your receivables owed. The fees are treated the same way banking fees are – a debit from the account to the appropriate expense account.

    Make sense?


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  15. Josh Morgan Says:

    I’m glad I found these answers on how to create a clearing acct. to handle Pay Pal/Google Checkout and other merchants. Thank you for explaining this.

    One thing I cannot figure out is how to account for refunds through these merchants, especially refunds that are issued after I have already collected the money, (and w/ your method already transferred through the clearing acct.)

    Could you provide detail on how refunds should be handled? Would be great. Thanks.

    Also, do you recommend using a Zero Sum Sales Summary Method for recording Daily Sales?


  16. Casandra Says:

    Thanks for your help! This made things very clear.


  17. Kelly B Says:

    Great approach to handling this! Thanks for the idea and explanation. I’m wondering how you might suggest handling a 10% reserve on merchant services transactions (after the discount) that is withheld for 6 months. I would consider the 10% reserve amounts a current asset, but not include it in my sales (IRS cash basis accounting) until it is actually received by the business. I am thinking I would still use an additional clearing checking account in Quickbooks as you describe, and just deduct the 10% there and record it in a current asset account until it is actually released and received. Thoughts? Thanks again!


  18. Heather Says:

    Hi Kelly,

    Yes you could do that. Another way to handle those reserve monies is to create a sub account to your merchant bank account. You would then transfer the monies held in reserve to that sub reserve account, then when the monies are released, you transfer it back to the main account. Your bank accounts are basically asset accounts anyway, so having the sub account helps you to keep track of what is in reserve.

    Either way works!


  19. Mary Says:

    I’m wondering if there is a way to also record the merchant service charge against the customer’s acct. I want to be able to keep track of the actual revenue per account after the fees have been deducted. For example: if a customer pays me 400.00 for services rendered but paypal charged me 13.00 in fees, the actual revenue is $387. Is there a way to make a GL entry for this so it is reflected at the acct level?


  20. Heather Says:

    There really isn’t a way to record the fees at the A/R account level. If you did, the account would always show a balance owed and you don’t want that. However, what you can do is create sub accounts under your Paypal Processing Fee expense account for each client and then record the fees when you pay them in these accounts. This way you’ll have a total of those fees and can deduct it from the revenue total for each customer.

    Remember, the paypal fees are an expense of doing business and therefore tax deductible, so you want to keep that recorded as an expense.


  21. Anton Says:

    Hi,
    I just purchased QB, and I’m trying to enter my historical info into QB. i am confused on how to handle the paypal orders & fees. From what I can gather, I would enter the sale as an invoice, and record the payment in receive payments, using the paypal acct that i’ve set up. So, all of the payments & fees will be sitting in that paypal acct, until I transfer the funds to my bank acct. Here’s the problem, how do I deposit the funds against the orders, when the amounts to be deposited are incorrect? Do I subtract the paypal fees, and then make the deposit? Do the fees that I’ve written checks for remain in the paypal acct? Please help!


  22. Aaron Says:

    Ok, I just figured this out for myself and I’m posting it in the two places that I was looking for help. Here’s what I did and it accounts perfectly. I had previously made an expense item under “Dues and Subscriptions” called “Credit Card Processing Fee” and manually subtracted it like others had in previous post. But you will need this item for later.

    In QB, click List -> Item List -> New ->

    Under “Type” select “Other Charge” from the drop down box

    Under “Item Name/Number” input whatever you want to call it, I chose “Squareup” since I use Square as my cc processor

    Leave everything blank until you get to Description and describe it for your CPA so they aren’t scratching their heads.

    HERE IS THE IMPORTANT PART. Under “Price” put in your cc processing rate as a negative. Ex: Square charges me 2.75%, so I put in this box “-2.75%”

    Under “Account” select “Dues and Subcriptions:Credit Card Processing Fee”

    Click “OK”

    Now when making an invoice, select or type “Squareup” or whatever you named it as an item and hit enter and it automatically subtracts the desired 2.75% from my total and appropriately accounts for the expense. You will get a popup the first time you use it telling you it is associated with an expense account but check “Don’t show me this again” from the dialog box and it won’t bother you again.
    Using this method I have found it to be seamless with matching transactions downloaded from my bank, it properly allocates the charged amount from the credit card processor with me knowing the exact amount before hand, and it retains the expense account records so that the fees can be deducted from my taxes. PLUS…it’s easy to setup and input.
    I hope this helps. Have a great day.

    Aaron


  23. whitney Says:

    Aaron or Heather, Wondering how to put the $0.15 additional charge in that item I’ve just created for when I pay a 3.5% fee +$0.15? Do i need to create an item that is just separate for $0.15?
    Thanks!


  24. Admin Says:

    Hi Whitney! You can just add the $0.15 to same item you have the 3.5% fee in.


  25. Braden Says:

    Aaron, I did something similar entering a negative amount on the sales receipt for Paypal fees. Yes, the accounting worked out until I tried to do my sales taxes. The Paypal fees were non taxable and negative. So what happened was the “non taxable sales” being negative, increased my “taxable sales”. Since QB figures “taxable sales” as “total sales” minus “non taxable sales” my taxable sales were greater than my total sales! By subtracting a negative it actually adds to it.

    You might want to revisit this if you have sales tax liability.


  26. Sandra Says:

    I have an issue when it comes to accounting for fees charged by Square. We are a property management company and on rare occasions take payments via square. After doing some research, I found out that the gross transaction amounts are reported to the IRS on a 1099-K. As I understand it, that includes the fee Square charges (money we never actually receive). Since these fees show as income, I somehow need to expense them. How does everyone else handle this in Quickbooks?


  27. Admin Says:

    You can handle these just like any other merchant processing fees. We have an article that has some options on how to record these in Quickbooks.


  28. Steve Says:

    My company is Cash Basis.

    Do I record revenue when our merchant processor receives it or only when it hits our bank account?

    If it’s only when our cash hits the bank, do we not record the “reserve” that the merchant holds for chargebacks/cancellations?


  29. Admin Says:

    For proper bookkeeping, you should have a Merchant Bank account where you record revenue when it’s received from the merchant processor and then enter a transfer for funds as they are deposited into your bank account.

    You could even put in a sub account called Reserved Fund to the parent Merchant account and transfer the funds in reserve so you can keep track of those funds as well. You would just transfer the funds back and forth as they are held and then released.


  30. Mark Says:

    Thank you! I wish the QB help were as easy to navigate and as clear as your postings! This solution is perfect for how I record my payments from Square. Appreciate it!


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