Billing and Payments

Credit Card Surcharge Processing: What CPAs and Accountants Need to Know

John Lehman
March 09, 2020
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CPAs and accountants are all too familiar with the fact that it costs money to move money within our financial systems. Credit cards are no exception to this rule—if you accept credit card payments from your clients, you’ll inevitably have to pay processing fees with each transaction. Of course, as a business owner, you’re also looking for ways to off-set your costs and operate more efficiently.

Many businesses that accept credit cards use surcharges to account for this, but you may be wondering how beneficial this practice is (or if it's even legal for you to do so in your neck of the woods).

Below, we’ll break down exactly what surcharging means, its legal status in the U.S. by each state, and how the practice might affect your clients.

In this article:

What is a surcharge?

In the context of credit cards, surcharging is defined as adding up to 4 percent on credit card transactions to recoup payment processing costs. The practice became permissible to merchants in 2013 in the wake of a class action lawsuit against Visa and MasterCard.

It’s important to note that a surcharge is distinct from a convenience fee, which is a relatively older but similar term in the credit card lexicon. A convenience fee is a flat rate that can be added to both debit and credit card transactions. It’s a cost passed to the customer to give them the option of paying in a way that’s convenient to them, hence the name.

Surcharging has been outlawed as an anti-consumer practice in certain states. However, these laws were challenged in such states as New York and California, and other states may follow suit as time goes on.

Below is a list of each state’s surcharging laws (last updated March 2020). If you have any questions about your state’s surcharging laws, please contact your state attorney general.

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

  • Surcharge Prohibited: No
  • Credit/Debit Usage Discounts: Yes
  • Resources: Wis. Stat. 422.422

Wyoming

Credit card surcharging rules

If you choose to surcharge, you’re required to follow rules put in place by each credit card brand. We’ll discuss the most common rules below:

Notify the card brand of your intent to surcharge

Almost every major card brand requires you to notify them of your intention to surcharge. Most brands have a form you can fill out available on their website. Otherwise, you must provide a written letter to your account representative. More importantly, once notified, you must wait no less than 30 days before you start implementing surcharging.

Notify your clients of your intention to surcharge

You are also required to notify your customers or clients of your intention to surcharge (as soon as you are eligible to do so). For example, if using an online payments solution, you would have to include language on your payment page that clearly states your intentions to do so.

Do not surcharge more than the cost of your processing fee

This rule essentially means that you can only surcharge to recoup the losses sustained from processing fees—you cannot use surcharging as a means to profit. If, for example, your all-in rate is only 3 percent, you cannot apply a 4 percent surcharge.

Surcharges must be listed as separate line items

You cannot simply loop your surcharges into each transaction. Whenever a surcharge occurs, it must be listed separately on each invoice.

Potential downsides of passing processing fees directly to clients

Now that we’ve covered the basics, let’s explore some of the drawbacks if you’re thinking about surcharging. On one hand, the allure is clear: you want to recoup the costs of accepting credit card payments by transparently passing them on to your clients. After all, they’re the ones who want to pay with a credit card, right?

But the truth is, this approach can have unforeseen consequences.

Offering clients online payment processing is easy, convenient, and fast. If you add a surcharge that’s too high it can create a hurdle that makes clients stop and reevaluate how they’re paying you. They may decide to abandon the online payment process and opt to pay you by a slower method, like a paper check. Some clients could be so turned off by surcharges that they take their business elsewhere.

“It is very easy to shop around for almost anything these days, and if a merchant raises prices via an added fee, customers may be tempted to look for a better deal,” says Elaine Pofeldt of creditcards.com.

There’s also the deeper psychology of billing to consider. Even though some clients will pay the added cost, you risk building resentment within them over time if they feel like you’re nickel-and-diming them each time they see a surcharge as an additional line item on their receipt. The reality is, not many businesses pass on the cost of credit card processing to customers these days—it’s just not the norm, which makes it all the more jarring to your clients.

Another option for recouping these costs is to build them into your rates with a minor price increase across the board. A small rate increase of 1 or 2 percent isn’t likely to be felt by your clients and can help make the cost of accepting online payments more manageable for your firm. Of course, you’ll still have to ensure that your pricing is competitive compared with other CPAs in your area—if you end up charging more, you may scare off potential clients.

Because of these factors, many businesses avoid surcharging altogether, and accept payment processing as one of the costs of doing business in today’s economy. Instead of passing the costs to clients, these professionals absorb them into their businesses, taking them out of profit margins. In fact, they often find that the increase in cash flow from accepting online payments outweighs the cost of processing fees. The bottom line is, your clients will appreciate being able to pay with a more convenient payment option without being penalized for it.