If you own or operate a small business, there are some significant advantages to accepting credit card payments for your products or services. Clearly, as we know from our own experiences with purchasing, it’s a real convenience for your customers. Studies show that only about 23% of point-of-sale transactions use cash, and people actually spend more when they have the convenience of a credit card. So by accepting cards, you have a real opportunity to increase your customer base and increase gross sales dramatically.
Credit cards can also make accounting easier for you, as the software you are using should automatically record the transaction into the proper accounts, as opposed to payments made by cash or check, which you have to manually enter into the system.
Disadvantages of Accepting Credit Cards
However, this convenience does come with a price, most obviously in the fees. Whether you choose a merchant account or a payment service provider (PSP) such as PayPal or Square, you will have transaction fees and a variety of other fees, depending on the service you choose or the volume of your sales. You may also have to pay for hardware or software for processing the credit cards.
Additionally, you will need to reconcile your records with the reports from the bank or PSP. The IRS requires credit card payment settlement service providers to complete a 1099-K form, reporting gross annual sales if a merchant’s account has over 200 transactions or over $20,000 worth of transactions in a year.
Check your records against the reports from your bank or PSP. Keep in mind, too, that these reports do not net out refunds, chargebacks, or cash back to the consumer that decrease your gross income from credit card sales. Thus, your gross income reported by the service provider will likely be overstated. You will need to set up separate accounts for gross receipts, chargebacks, and other possible categories in order to accurately report your income from credit card sales to the IRS.
Be sure to provide your correct name, address, and EIN or TIN to the credit card service provider in order to avoid backup withholding of up to 28%.
Don’t let these drawbacks automatically discourage you from accepting credit cards, as the benefits can certainly outweigh these issues for many small businesses. Evaluate your particular product, clientele, and sales volume to decide if it’s best for you. Contact us at our Willow Grove, PA office and we can help you make the best decision, evaluate whether you should get a merchant account, PSP, or both, and set up your accounts to easily and accurately reflect your increased sales from credit cards.