Credit card processing fees keep climbing, and many small businesses are turning to credit card surcharges as a way to pass those costs to customers. While this practice helps offset merchant fees, it raises an important accounting question: How should credit card surcharges be recorded under U.S. GAAP (Generally Accepted Accounting Principles)?
Getting the accounting right matters for more than just accurate books—it also affects compliance with ASC guidance, tax reporting, and financial transparency. This guide breaks down GAAP accounting rules for surcharges in plain English, with examples that small business owners and accountants can apply right away.
What Are Credit Card Surcharges?
A credit card surcharge is an extra percentage fee added to a customer’s bill when they choose to pay with a credit card. Businesses use it to recover the cost of merchant processing fees (typically 2%–4%).
Surcharges vs. Convenience Fees
It’s easy to confuse surcharges with convenience fees, but GAAP and card networks treat them differently:
- Surcharge: Added only when a customer pays with a credit card. Example: $100 item + 3% surcharge = $103 total.
- Convenience Fee: A flat charge for using a non-standard payment method (e.g., paying tuition online instead of by check).
- Key Point: Under Visa, Mastercard, and American Express rules, a surcharge is tied directly to card use, while a convenience fee is about payment method convenience.
GAAP Rules on Recording Surcharges
The main accounting issue is whether a surcharge is revenue or merely a recovery of expenses. Under U.S. GAAP:
- Surcharges are considered revenue – ASC 606 (Revenue from Contracts with Customers) requires that all amounts charged to customers in exchange for goods or services are recognized as revenue. A surcharge increases the transaction price.
- Merchant processing fees are expenses – The cost charged by Visa, Mastercard, or AmEx is a separate expense for the business.
- Netting is not permitted – GAAP does not allow offsetting surcharge income against merchant fee expenses. They must be presented separately for clarity.
In practice:
- Surcharge = revenue (customer pays extra).
- Merchant fee = expense (processor charges business).
This ensures that financial reporting accurately shows both sides of the transaction.
Journal Entry Examples
Let’s look at a practical example to see how surcharges are recorded.
Example Transaction
- Customer purchase: $100
- Credit card surcharge: 3% ($3)
- Merchant processing fee: 2.9% ($2.90)
Step 1: Record the sale and surcharge revenue
Debit: Accounts Receivable / Cash $103
Credit: Sales Revenue $100
Credit: Surcharge Revenue $3
Step 2: Record the merchant fee expense
Debit: Merchant Fee Expense $2.90
Credit: Cash / Bank $2.90
Net effect to the business:
- Sales revenue: $100
- Surcharge revenue: $3
- Total revenue recognized: $103
- Merchant expense: $2.90
- Net cash received: $100.10
Tip: Keep “Surcharge Revenue” in a separate account from “Sales Revenue” to avoid inflating your core business sales.
Compliance Considerations
GAAP isn’t the only rulebook—businesses must also comply with card network policies and state laws.
Visa/Mastercard Rules
- Surcharge must be clearly disclosed on receipts.
- Cannot exceed the actual cost of acceptance (usually capped at 3%).
- Cannot apply surcharges to debit or prepaid cards.
State Laws
Some states restrict or ban credit card surcharges altogether. As of 2025, most states allow surcharging, but check your local law since enforcement varies.
Why This Matters
Improper surcharge practices can lead to:
- Chargebacks from customers
- Fines from card networks
- Misstated financials under GAAP
Best Practices for Businesses
To keep accounting and compliance in line with GAAP, follow these steps:
- Create separate ledger accounts
- Sales Revenue
- Surcharge Revenue
- Merchant Fee Expense
- Disclose surcharges clearly on invoices and receipts.
- Stay updated on state laws before applying surcharges.
- Consult your accountant to ensure surcharges are reported correctly in financial statements.
- Avoid netting surcharge revenue against merchant fees in your income statement.
FAQ: GAAP and Credit Card Surcharges
1. Are credit card surcharges considered income under GAAP?
Yes. Under ASC 606, any amount billed to the customer (including surcharges) is recognized as revenue.
2. Should surcharges offset merchant fees in accounting?
No. GAAP requires that surcharge revenue and merchant fees be recorded separately. Offsetting is not allowed.
3. What states restrict credit card surcharges?
Rules vary. States like Connecticut and Massachusetts historically banned surcharges, but many restrictions have been challenged in court. Always check state-specific laws before applying surcharges.
4. How do I record surcharges in QuickBooks?
Set up a separate income account called “Surcharge Revenue.” Record merchant fees in “Merchant Processing Fees” under expenses.
5. Are surcharges taxable revenue?
Yes. Since surcharges are revenue under GAAP, they may also be subject to sales tax in certain states. Check with your tax advisor.
6. What happens if surcharges are misclassified in financials?
Misstating surcharge revenue as an expense offset could overstate or understate both revenue and expenses, leading to inaccurate financial reporting and potential compliance issues.
Read Also- FFNHelp Charge on Credit Card
Conclusion
Credit card surcharges are becoming more common as businesses try to offset rising processing fees. But under GAAP accounting, they must be treated as revenue, while merchant fees remain expenses.
For small businesses, the best approach is to:
- Keep surcharges in a separate income account,
- Record merchant fees as expenses,
- Follow card network rules and state laws.
By handling surcharges properly, businesses not only stay GAAP-compliant but also ensure accurate, transparent financial reporting.
Emma Rose is a U.S.-based personal finance writer and a regular contributor at Cardix.us. She focuses on topics like credit cards, credit scores, and everyday money management. Emma’s writing makes complex financial concepts simple and practical, helping readers make smarter credit and spending decisions with confidence.
