How to Record Credit Card Processing Fees in QuickBooks Online

Recording credit card processing fees correctly in QuickBooks Online is one of those small details that makes a big difference in the accuracy of your financial statements. While it might seem straightforward, getting it wrong can distort your gross revenue and make bank reconciliations a real chore. This guide breaks down the best methods for handling these fees, ensuring your books are clean, accurate, and easy to manage.

Why Correctly Recording Processing Fees Matters

Before jumping into the step-by-step instructions, it’s important to understand why this process is so fundamental. When a customer pays you $100 with a credit card, you don't receive $100. Your payment processor (like Stripe, Square, or PayPal) takes a small cut, say $3, and deposits the net amount of $97 into your bank account.

If you simply record the $97 deposit as revenue, you're understating your sales by $3. Over thousands of transactions, this can significantly misrepresent your company's actual top-line revenue. The correct approach is to record the full $100 as income and the $3 as an expense. This accomplishes two crucial things:

• Accurate Revenue Reporting: It shows the true volume of sales your business generated before accounting for payment collection costs. This gives you, your investors, and your stakeholders a clear picture of business performance.
• Proper Expense Tracking: Merchant fees are a cost of doing business and are tax-deductible. By isolating them in their own expense account, you can analyze these costs, monitor if they are increasing, and ensure you're claiming the full deduction at tax time.

Failing to separate fees from revenue doesn’t just create messy books; it obscures visibility into a key operating expense and skews your gross income figures.

Step 1: Set Up Your Chart of Accounts for Success

The first step in any method is ensuring you have the right account to track your processing fees. If you don't already have one, creating it is simple. This account will house all the fees your merchant provider charges, making them easy to identify on your Profit and Loss statement.

Here’s how to set up the expense account in QuickBooks Online:

1. Navigate to the Gear icon on the top right and select Chart of Accounts under Your Company.
2. Click the green New button at the top right.
3. A new window will appear. For Account Type, select Expenses. Some businesses may categorize these fees under Cost of Goods Sold (COGS) if they are considered a direct cost of a sale. For most service-based businesses, Expenses is the appropriate choice.
4. Under the Detail Type, the most fitting option is Bank Charges. This will work perfectly fine.
5. For the Name, use something clear and descriptive like "Credit Card Processing Fees," "Merchant Fees," or "Payment Processor Fees."
6. Click Save and Close.

With this account created, you're now ready to record the fees using the method that best fits your workflow.

Method 1: Recording Net Deposits from the Bank Feed (The Most Common Method)

This is the most common scenario for businesses using third-party processors like Square, Stripe, or PayPal. These services typically bundle a day's worth of sales, deduct the fees, and deposit a single net amount into your bank account. The key to handling this correctly is to use the Bank Deposit function in QuickBooks to reconcile the full sales amount with the smaller bank deposit.

First, it's critical that your sales are recorded properly. Whether you use invoices or sales receipts, make sure the money received from those transactions is being directed to the "Undeposited Funds" account in QuickBooks. This is a special temporary account that holds payments you've received but haven't deposited into the bank yet. This step is non-negotiable for this method to work.

Let's walk through an example. Suppose you had three sales today:

• Sale 1: $50.00
• Sale 2: $100.00
• Sale 3: $75.00

Your total gross sales are $225.00. The processor charged $6.50 in fees, so the deposit that hits your bank account is $218.50. Here’s how to record it:

Step-by-Step Guide:

1. Click the + New button on the top left and select Bank Deposit under Other.
2. At the top of the Bank Deposit screen, choose the bank account where the funds were actually deposited from the dropdown menu. Ensure the Date matches the date of the deposit.
3. In the "Select the payments included in this deposit" section, you will see a list of payments sitting in your Undeposited Funds account. Check the boxes for the three sales that make up your batch deposit ($50, $100, and $75). You’ll see the Payout Total in the upper right corner will now display $225.00. This doesn't match the deposit amount yet, but we're about to fix that.
4. Now, scroll down to the "Add funds to this deposit" section at the bottom of the screen. This is where you will account for the fee deduction.
5. On the first available line, in the "ACCOUNT" column, select the "Credit Card Processing Fees" expense account you created earlier.
6. In the "AMOUNT" column on that same line, enter the total fee as a negative number. For our example, you would enter -6.50.
7. Take a look at the top right again. You will see that the total deposit amount has now changed to $218.50. This perfectly matches the net amount that landed in your bank account.
8. Click Save and Close.

Now, when you go to your bank feed, QuickBooks will recognize that the deposit you just created matches the transaction downloaded from your bank. All you need to do is click "Match." This method ensures your gross income is recorded correctly at $225 and your processing fees are expensed at $6.50.

Method 2: Using a Journal Entry for Batched Monthly Fees

Some merchant processors operate differently. They might deposit the full, gross amount of each day's sales into your account and then, at the end of the month, withdraw their total fees in one lump sum. If this is how your processor works, a journal entry is the cleanest way to record the expense.

This method is simpler because your daily bank deposits will match your daily sales in QuickBooks perfectly. You just need to account for that single fee withdrawal at the end of the month.

For example, you see a withdrawal of $375 from your checking account on the last day of the month labeled "Merchant Fees."

Step-by-Step Guide:

1. Click the + New button and select Journal Entry under Other.
2. Set the Journal Date to the date the fee was withdrawn from your bank account.
3. On the first line (the debit), select your "Credit Card Processing Fees" expense account from the Account dropdown. Enter the total fee amount in the DEBITS column (e.g., $375). A debit increases an expense account.
4. On the second line (the credit), select the bank account from which the fee was withdrawn (e.g., Business Checking). Enter the same amount in the CREDITS column ($375). A credit decreases a bank account.
5. Ensure the Debits and Credits columns total to the same amount at the bottom.
6. Add a memo for clarity, such as "Credit Card Fees for [Month]."
7. Click Save and Close.

Once you’ve saved the journal entry, you can go to your bank feed and match the $375 withdrawal with the entry you just created.

Method 3: Automating the Process with QuickBooks Payments

If you prefer a more hands-off approach, using Intuit's own payment processor, QuickBooks Payments, automates this entire workflow. Because it’s integrated directly within the QuickBooks ecosystem, the software does all the heavy lifting for you.

Here’s how it works:

1. You send an invoice to a client with QuickBooks Payments enabled.
2. Your client pays the invoice directly through the link using their credit card or ACH.
3. QuickBooks automatically records the full invoice amount as paid, closing out the receivable.
4. Simultaneously, it records the processing fee as a separate expense transaction. The fee is debited from your bank account and categorized into an automatically-created expense account (usually named "QuickBooks Payments Fees" or something similar).
5. The net deposit amount appears in your bank account, and QuickBooks Online automatically matches it to the sales and fee transactions it already created.

The beauty of this system is that it requires no manual work with deposits or journal entries. The gross income and expense are correctly split behind the scenes, ensuring both accuracy and efficiency.

Final Thoughts

Correctly recording credit card fees, whether through a bank deposit with a negative line item, a journal entry, or a connected app, is a cornerstone of maintaining clean and reliable books. Mastering this process stops revenue understatement in its tracks and gives you a clear view of your operational costs.

Staying on top of detailed workflows like this is one thing, but when complex questions about tax deductibility or state-specific merchant regulations arise, the research can quickly become a bottleneck. We built Feather AI to eliminate that friction, giving accounting professionals instant, citation-backed answers to their tax questions so they can focus on advising clients and growing their practice.