Merchant Fee Netting

Merchant fee netting is what happens when a payment processor deducts its fees before paying you, so the deposit in your bank is smaller than the sale that generated it. It is the single most common cause of understated revenue in small-business books, because the bank feed shows only the net figure and nothing prompts you to look for the rest.

What It Breaks

If a customer pays $100 and the processor deposits $97.10, recording the deposit as revenue understates sales by $2.90 and omits a real expense of the same amount.

Four things go wrong at once. Revenue is understated, which affects every percentage calculated from it. Processing cost is invisible, so you cannot see what taking payment costs you — a figure that moves with card mix, average ticket and chargeback rate. Gross margin looks better than it is. And sales tax, tips and other pass-throughs inside the gross amount get absorbed into net revenue where they do not belong.

The error is small per transaction and strictly proportional to volume, so it grows exactly as the business grows.

The Fix

Record the gross sale as revenue and the fee as its own expense, working from the processor’s settlement report rather than the bank line. For anything beyond a handful of payments a month, use a clearing account: gross sales in, fees and refunds out, payouts out to the bank. The balance is then what the processor owes you, and it should match their dashboard.

Done this way, the effective processing rate becomes a number you can watch — and it is worth watching, because it drifts with card mix and it is one of the few costs where a conversation with the provider genuinely moves it.

The same treatment applies to every processor — Stripe, Square, PayPal, Toast — and to marketplaces, which net far more than fees.

What Goes Wrong Even When People Try

Fees pooled with bank charges. A volume-driven selling cost mixed with fixed account fees means neither figure is interpretable.

Refunds netted against fees. Refunds reduce revenue; fees are a cost. Collapsed together, both the refund rate and the fee rate disappear — and refund rate is usually the more useful of the two.

Month-end timing ignored. Processors pay on a delay, so there is always money collected and not yet paid out at month end. That is an asset, and in a growing business it grows rather than averaging out.

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