Yes, Square fees are tax deductible. The processing fees Square withholds from your card sales qualify as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code, so every dollar reduces your taxable income for the year the transactions occurred.1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions The deduction is available whether you file as a sole proprietor, partnership, LLC, S-corporation, or C-corporation.
Why Processing Fees Qualify
The IRS allows a deduction for any expense that is both ordinary (common in your type of business) and necessary (helpful and appropriate for running it).1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions Paying a processor to accept cards is about as routine as business costs get, and you can’t collect the revenue without paying the fee. The same treatment applies to Stripe, PayPal, Clover, and any other processor you use alongside or instead of Square.
Timing is simple. Because Square withholds its cut from each sale before depositing the remainder in your bank account, the fees are incurred in the year the transactions happen. You deduct them in that same year.
Where to Report Square Fees on Your Return
Sole Proprietors and Single-Member LLCs
Report Square fees on Schedule C (Form 1040). The cleanest placement is Line 10, “Commissions and fees,” which is designed for costs paid to others in connection with generating revenue.2Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
If your preparer uses a different category, the alternative is Part V (Line 48), where you list ordinary business expenses not captured elsewhere; the Part V total flows to Line 27b. Label the entry “Merchant Processing Fees” so the character of the deduction is obvious if the return is examined. Don’t use Line 17, which the IRS reserves for fees paid to accountants and attorneys.2Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
Corporations and Partnerships
C-corporations report the fees on Form 1120, Line 26, “Other Deductions,” with an attached statement identifying the expense. S-corporations do the same on Form 1120-S. Partnerships deduct the fees on Form 1065, and the resulting income or loss passes through to each partner on Schedule K-1.3Internal Revenue Service. Instructions for Form 1120 (2025)
Whatever entity you file for, keep processing fees as a standalone line item in your books rather than folding them into unrelated costs. A clean audit trail is worth the small bookkeeping effort.
Reconciling the Deduction With Your 1099-K
This is where most Square sellers trip up. Square reports the gross amount of all payments you received on Form 1099-K, meaning the figure includes the processing fees Square already withheld before depositing funds.4Internal Revenue Service. Form 1099-K FAQs – General Information The 1099-K does not subtract fees, refunds, or chargebacks.
The correct approach is to report the full gross amount from the 1099-K as revenue, then deduct the processing fees separately as a business expense. The IRS states that fees, credits, refunds, shipping costs, and discounts are not taxable income and can be subtracted from the gross amount.5Internal Revenue Service. What to Do With Form 1099-K If you instead report only the net deposits that hit your bank account, your gross income is understated and the IRS matching system will flag the mismatch.
For 2026, Square is required to issue a 1099-K if your gross payment volume exceeds $20,000 and you have more than 200 transactions during the year.6Internal Revenue Service. 2026 Publication 1099 Falling below the threshold does not change anything about the deduction. You still owe tax on the income, and you still deduct the fees.
What to Keep and for How Long
Square’s Dashboard includes a Sales Summary report that you can filter by date range and export. It breaks out the fees charged during the period. Pull the annual version at year-end, save it with your tax workpapers, and make sure the fee total you deduct matches the figure in that report.
Cross-check against your bank statements too. The deposits show the net amount after Square’s cut, so the gap between your Square gross and your bank deposits should line up with the fee total you’re deducting. Any discrepancy is worth resolving before you file.
Electronic records are fine. The IRS accepts downloaded reports and digital statements as long as they are accurate, legible, and retrievable on request.7Internal Revenue Service. Revenue Procedure 97-22 Keep the records for at least three years from the date you file.8Internal Revenue Service. How Long Should I Keep Records If you have ever underreported income by more than 25%, the IRS has six years to audit, so hanging on to records longer is a reasonable precaution.
Other Square Charges Follow Different Rules
Not everything Square bills you for is treated the same way as a transaction fee. Three categories are worth knowing about before you file.
Hardware
Readers, terminals, stands, and POS systems are tangible property, which the IRS treats as assets rather than operating expenses.1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions You can still write off the full cost in most cases, usually under the de minimis safe harbor election, which lets you deduct any item costing $2,500 or less in the year of purchase without a depreciation schedule.9Internal Revenue Service. Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement – Notice 2015-82 You make the election annually by attaching a statement to your return. Larger purchases can be expensed up front through Section 179 or 100% bonus depreciation; anything not expensed immediately is depreciated over five years, the standard recovery period for office and technology equipment.10Internal Revenue Service. Publication 946 (2025) – How To Depreciate Property
Square Loans
Square Loans charge a single flat fee set at the time you borrow rather than a running interest rate, and repayment happens as a fixed percentage of your daily card sales.11Square. Small Business Loans and Business Financing – Square Loans The IRS looks at the economic substance of a transaction rather than its label, so that flat fee is generally deductible as business interest. Small businesses with average annual gross receipts of $32 million or less over the prior three years face no cap on the business interest deduction.12Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Because the full cost is known up front but repayment spreads over time, the deduction may need to be spread across the repayment period rather than taken in a lump sum. Confirm the timing with your preparer, especially if the loan crosses two tax years.
Software Subscriptions
Monthly subscriptions like Square Payroll, Square Appointments, and Square for Restaurants are ordinary business expenses, deductible in full in the year you pay them under the same Section 162 logic as the transaction fees.1Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions Keep them categorized separately from your transaction fees so your “Commissions and fees” line stays clean.