What's the Proper Accounting Procedure for Online Payment Processors?

online payment processors

Many businesses are now using online payment processors to handle their transactions. While they're often cheaper and more convenient than traditional payment processors, they may require slight adjustments from your traditional accounting methods. Here's how to properly record these transactions.

When Should You Record Income From Online Payment Processors?

When you record income from online payment processors depends on whether you are using accrual or cash-basis accounting.

In accrual-basis accounting, you should immediately record all sales as income. If you make a sale on December 31, 2016, report that income for 2016 even if the payment processor doesn't send you the funds until 2017.

In cash-basis accounting, it depends on when you are in control of the funds.

  • If you use a payment processor that functions like a bank account, you should consider your payment processor a cash account and record the sale when the payment processor has the money. This applies to payment processors like PayPal that let you hold funds, send money to other people/businesses, and choose when to transfer funds to another account.
  • If you use a payment processor that functions like a check in the mail, you should consider your payment processor as an accounts receivable account and record the sale when the money is in your bank account. This applies to payment processors like Stripe that automatically sweep funds to your bank account on a set schedule and don't allow you to access the funds before that.

    How Do You Handle Processing Fees?

    Many businesses incorrectly count only the net funds they receive from their payment processor as sales. You should report your gross revenue as sales and deduct the payment processor fees as an expense. When using double-entry accounting, you should have a cash or accounts receivable account for funds held by the payment processor and an expense account for payment processor fees.

    Enter each transaction as follows:

    1. Debit your payment processor cash account for the full amount of the sale.
    2. Credit your sales income account for the full amount of the sale.
    3. Credit your payment processor cash account for the payment processor fee.
    4. Debit your payment processor fee expense account for the payment processor fee.
    5. When you withdraw funds to your bank account, credit your payment processor cash account for the amount of the transfer.
    6. Debit the bank account for the amount of the transfer.

    This is a lot of entries to make, but it's the only way to accurately keep your books. Outsourced accounting services and accounting technology specialists can help connect your payment processor and bank accounts to automatically create the entries for you. When setup properly, this should nearly eliminate hand entry and tedious bookkeeping requirements as well as reduce the risk of inaccurate data.

    What Do You Do If You Receive a Form 1099-K?

    If you accept more than $20,000 in payments and have over 200 transactions through a payment processor, you'll receive a Form 1099-K at the end of the year. This form is for informational purposes only, and you don't enter it into a line on your tax return.

    Revenue reported on the 1099-K should already be included in your sales totals. Use the appropriate expense lines to enter any returns, fees, or other reductions to the revenue. If any of the revenue on your 1099-K was not from sales, such as an owner making an additional investment with their personal credit card, do not add that revenue to sales. Omit it or include it on the appropriate line on your tax return.

    Form 1099-K only comes into play as a source of information for the IRS if they decide to audit your business. If you use a professional tax advisor, outsourced bookkeeping service or have other strong accounting controls in place, you'll be able to easily show that you correctly reported your profits and losses.

    Solid record keeping, proper data entry controls and automated systems should all serve to support your general payment processing needs.