TL;DR: Yes, as an ordinary and necessary business expense under IRC §162(a). The part that actually costs businesses money is different: Treasury regulations require your processor to report your gross payment volume "without regard to any adjustments for... fees." So the 1099-K shows money you never received, and if you do not deduct the fees separately you pay tax on them.
The one-sentence answer: ACH and card processing fees are deductible business expenses, and the risk is not the deduction being denied but the deduction being forgotten because your bank deposit already looked net.
Nobody searches this question because they doubt the answer.
They search it because a 1099-K arrived showing a bigger number than their bank statement, and they want to know what to do about the gap.
That gap is the fees. Here is the authority for deducting them, where they go, and the specific bookkeeping mistake that turns a deductible expense into overstated income.
What is the actual legal basis?
The statute, not an IRS publication.
IRC §162(a) provides that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." That is a two-part test. The expense must be ordinary, meaning common and accepted in your line of business, and necessary, meaning appropriate and helpful to it.
The subsection then lists compensation, travel and rent as examples. Those are illustrative rather than exhaustive, which matters here because payment processing fees are not named anywhere in the statute.
They do not need to be. A fee charged by a bank or processor to move money you are owed is about as clean a fit for "ordinary and necessary" as a business expense gets.
Why can't I find this in an IRS publication?
Because the publication people cite for it no longer exists, and its replacement does not mention these fees.
The IRS states on its Guide to Business Expense Resources page: "We have discontinued Publication 535, Business Expenses; the last revision was for 2022." Publication 535 is the document almost every article on this topic still points to.
Its practical successor for small businesses is Publication 334, Tax Guide for Small Business. The current edition, for use in preparing 2025 returns, covers business expenses in general and enumerates categories including car and truck expenses, depreciation, employees' pay, insurance, interest, legal and professional fees, rent, taxes, and travel and meals. Bank fees and payment processing fees are not among the categories it addresses specifically.
So if you are looking for a line in an IRS publication that says "ACH fees are deductible," you will not find one. The authority is the general standard in §162(a), and that is sufficient. Absence from a publication's list of examples is not absence of deductibility.
What does the 1099-K actually report?
Your gross volume, explicitly before fees, and this is where the money is lost.
IRC §6050W requires payment settlement entities to report "the gross amount of the reportable payment transactions" for each participating payee. The statute does not define what gross means in relation to fees. The regulation does, and it is unambiguous.
Under 26 CFR §1.6050W-1, gross amount means "the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts."
Fees are named. So are refunds and chargebacks.
The consequence is direct. If you processed $400,000 and paid $9,000 in processing fees, your 1099-K reports $400,000. Your bank received roughly $391,000. Report the $391,000 as revenue and your return will not reconcile with the form the IRS already holds. Report $400,000 without deducting the $9,000 and you have paid tax on $9,000 you never touched.
Both errors are common and they come from the same cause: the deposit landing in the account was already net.
Which businesses get caught by this?
Anyone whose processor settles net rather than billing separately.
Two settlement models exist. Under gross settlement your processor deposits the full sale and invoices fees separately, usually monthly. The fee then appears as an obvious expense on a statement you have to look at.
Under net settlement the processor deducts fees before depositing. Your bank feed shows one number, that number is net, and nothing in your accounting software announces that a deductible expense just happened invisibly.
Net settlement is the common arrangement in card processing and increasingly in ACH. If your bookkeeping is built from bank feed imports, this is the exact mechanism by which the deduction disappears.
The fix is bookkeeping rather than tax planning: record gross revenue and the fee as separate entries, reconciled to the processor's monthly statement rather than to the deposit.
Where do the fees go on the return?
For a sole proprietor, Schedule C, and there is no dedicated line.
The 2025 Schedule C instructions direct filers completing Line 1, gross receipts, to check any Forms 1099 received for business income reportable on that line, and reference Form 1099-K specifically. That is the gross figure.
Processing and bank fees have no line of their own on Schedule C. They are ordinarily reported among other expenses in Part V, which totals to Line 27a. The absence of a named line is itself worth knowing, because it is why these costs get grouped inconsistently or dropped entirely.
Partnerships and corporations report on Form 1065 and Form 1120 respectively, with the same underlying §162 basis and the same requirement to reconcile against gross receipts.
How much is actually at stake?
Enough to matter, and it scales with volume rather than with profit.
For context on magnitude, the interchange benchmarks coded into our own savings calculator use an average credit interchange of 1.81% plus $0.10 per transaction, sourced from Motley Fool and Kansas City Fed data, and regulated debit interchange of 0.05% plus $0.21 per transaction under the Federal Reserve's Regulation II. Interchange is the wholesale component; your total processing cost sits above it.
ACH is cheaper by orders of magnitude at the network level. The Federal Reserve's FedACH schedule, effective 1 January 2026, charges a bank $0.0035 per standard item. What you pay your processor is a separate negotiation, but the point for tax purposes is the same regardless of the amount: whatever it is, it is deductible, and whatever it is, it is included in the gross figure on your 1099-K.
A business processing $1,000,000 a year at a blended 2.5% is looking at $25,000 of deductible expense. Missing it entirely is a five-figure error.
What about the reporting thresholds?
They affect whether you receive a form, not whether you owe tax.
The IRS states that third party settlement organisations, meaning payment apps and online marketplaces, must report on Form 1099-K when payments for goods or services exceed $20,000 in more than 200 transactions. Payment card companies report "no matter how many payments you got or how much they were for."
More importantly, the IRS is explicit that "whether or not you receive a Form 1099-K, you must still report any income on your tax return." No form does not mean no income, and it does not mean no deduction either.
Thresholds in this area have changed repeatedly in recent years. Confirm the current figure for the tax year you are filing rather than relying on any article, including this one.
Frequently Asked Questions
Are chargeback fees and returned-item fees also deductible?
They face the same §162 test and would ordinarily meet it, being both common and helpful to a business that accepts electronic payment. Note that the 1099-K regulation names refunded amounts alongside fees as adjustments not taken into account, so refunds create the same reconciliation gap as fees and need the same separate treatment.
When do I deduct the fee, in the month charged or the month of the sale?
That depends on your accounting method and is exactly the kind of question to put to your accountant rather than an article. The general principle is that cash-method taxpayers deduct when paid and accrual-method taxpayers when incurred, but application to netted fees involves detail worth getting right once.
My processor nets the fees. Do I report revenue gross or net?
Gross, with the fee deducted separately. Reporting net understates both revenue and expenses, which usually produces the same taxable income but will not reconcile with the 1099-K the IRS holds. Mismatches invite correspondence you do not want.
Does it matter if the fee is paid by my customer through a surcharge?
Yes, and it changes the analysis on both sides. If a customer pays a surcharge that passes through to the processor, the amounts involved and their treatment differ from a fee you absorb. Surcharging is also separately regulated by state law and card network rules. Take advice before treating pass-through fees as though they were your own expense.
Should I ask my processor for an annual fee summary?
Yes, and most will produce one. It is the single most useful document for this purpose because it states total fees for the year in one place, which is precisely what a bank feed built from net deposits cannot tell you.
If your 1099-K has ever shown a larger figure than your deposits and nobody explained why, the difference was fees, and it was deductible. A processor annual summary and a reconciliation against gross receipts is an afternoon of work that occasionally finds a five-figure omission.
See ACH fees explained for the full fee anatomy, ACH vs wire transfer costs for the rail comparison, or get a statement review.
Sources
- Internal Revenue Code § 162(a), Trade or business expenses — "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business"; enumerates compensation, travel and rentals as illustrative examples. law.cornell.edu
- Internal Revenue Service, Guide to Business Expense Resources — "We have discontinued Publication 535, Business Expenses; the last revision was for 2022." irs.gov
- Internal Revenue Service, Publication 334, Tax Guide for Small Business, edition for use in preparing 2025 returns — addresses business expenses generally and enumerates categories including car and truck expenses, depreciation, employees' pay, insurance, interest, legal and professional fees, rent, taxes, and travel and meals; does not specifically address bank or payment processing fees. irs.gov
- Internal Revenue Code § 6050W — requires payment settlement entities to report "the gross amount of the reportable payment transactions" with respect to each participating payee; statute does not define gross amount in relation to fees. law.cornell.edu
- 26 CFR § 1.6050W-1 — gross amount means "the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts." law.cornell.edu
- Internal Revenue Service, Understanding Your Form 1099-K — third party settlement organisations must report when payments for goods or services exceed $20,000 in more than 200 transactions; payment card companies report "no matter how many payments you got or how much they were for"; "Whether or not you receive a Form 1099-K, you must still report any income on your tax return." irs.gov
- Internal Revenue Service, 2025 Instructions for Schedule C — Line 1 gross receipts, with direction to check Forms 1099 including Form 1099-K for business income reportable on that line; no dedicated line for bank or processing fees, which are ordinarily reported among other expenses in Part V. irs.gov
- Federal Reserve Financial Services, FedACH Services 2026 Fee Schedule, effective 1 January 2026 — standard forward or return item origination $0.0035. frbservices.org
- ClickWerxs savings calculator coded assumptions — average credit interchange of 1.81% plus $0.10 per transaction (Motley Fool / Kansas City Federal Reserve) and regulated debit interchange of 0.05% plus $0.21 per transaction (Federal Reserve Regulation II). First-party operator data; interchange is a wholesale component and not a total processing cost.
This post reflects publicly available regulatory information as of the publication date. Regulations vary by jurisdiction and change frequently. This is not legal advice. Consult qualified legal counsel before making compliance decisions for your business.
This is not tax advice and no part of it should be relied on in preparing a return. Tax treatment depends on your entity type, accounting method and facts. Reporting thresholds in this area have changed repeatedly and may have changed again since publication; verify against current IRS guidance for your filing year. Consult a qualified tax professional.
ClickWerxs facilitates merchant account applications and provides ongoing account management as an authorized representative of our banking and processing partners. Approval, rates, and terms are determined by the issuing processor and acquiring bank — ClickWerxs does not guarantee approval for any merchant account application. Processing rates and fee structures cited in this post reflect publicly available industry data and general ranges; your actual rate depends on your industry, volume, and card mix. For a custom quote, see clickwerxs.com/payments/get-a-quote.
Kaleb Dickhaut — Founder, ClickWerxs. Kaleb built ClickWerxs from the ground up, from payment processing ISO to the Command Center platform to the AI SEO methodology the blog runs on. He has onboarded hundreds of small businesses onto payment and CRM systems. linkedin.com/in/kaleb-dickhaut