Payment Processing FAQ: Surcharges, 1099-K Forms, Held Funds and Refunds
Straight answers to common U.S. merchant questions about card surcharges, Form 1099-K reporting, frozen payouts, refunds and sales tax on card sales.
This page answers the questions merchants most often search for after they start accepting cards: whether you can add a surcharge, what Form 1099-K means for your taxes, why a provider might hold your money, how refunds and fees interact, and who owes sales tax. The answers are general information for the United States as of October 2026. Rules differ by state and by provider, and some change often, so use the official sources listed at the end and consult a professional for your own situation.
Can I add a surcharge for credit cards?
A surcharge is an extra fee added to a credit card sale to offset processing costs. It is allowed in many states, but with conditions. Card network rules require disclosure to the customer at the entrance or website, at checkout and on the receipt, apply a cap to the surcharge percentage, and generally prohibit surcharging on debit cards. A few states restrict or prohibit surcharges by statute. Because the list of restrictions and court challenges has changed over the years, confirm your state's rules with the state attorney general or a lawyer, and ask your provider for its surcharge program rules before charging anything.
A related approach is a cash discount: you list the card price as the regular price and offer a discount for cash or other methods. Card networks and some states treat discounts differently from surcharges, but disclosure and compliance rules still apply.
Worked example (illustrative). A $200 service at a 3% credit card surcharge adds $6.00, so the customer pays $206. If your processing cost on that card is 2.9% + $0.30, or $6.10, the surcharge nearly covers it. But the surcharge amount may be capped by network rules, and some customers will balk at the added line item, so weigh the effect on sales.
What is Form 1099-K and do I have to worry about it?
Form 1099-K reports payments received through payment cards and third-party settlement networks. Payment processors and some payment apps send it to the IRS and to you. For third-party network transactions, the federal reporting threshold has changed several times in recent years; legislation enacted in 2025 restored the earlier threshold of more than $20,000 in gross payments and more than 200 transactions for third-party settlement organizations. Payment card transactions processed by merchant acquirers are reported regardless of amount. Check the IRS site for the current rules and the instructions for the tax year you are filing.
Two practical points: a 1099-K reports gross payments, before fees and refunds, so your tax return should reflect your actual income and deduct allowable processing fees as business expenses; and receiving a 1099-K does not itself make money taxable, but business income is reportable whether or not you receive a form. Keep records that reconcile the form to your books, and talk to a tax professional if the amounts do not match.
Why would a provider hold or freeze my funds?
Providers may delay payouts, hold a reserve or freeze funds if they see a risk event. Typical triggers:
- A sudden spike in volume or average ticket compared with your application.
- A rise in refunds or chargebacks.
- Selling products different from those described on your application.
- Delivery times that leave customers waiting a long time after payment.
- Suspected fraud or compromised credentials.
- Failure to respond to verification requests.
What to do: read your agreement for the reserve clause, respond quickly to any information request, provide order records, tracking and customer communications, and ask for the release date in writing. If the hold is prolonged or you believe it is unjustified, escalate in writing, keep records and consider speaking with an attorney. Planning ahead with a cash buffer and informing the provider before large campaigns reduces the risk. See Common Payment Gateway Mistakes.
What happens to fees when I refund a sale?
It depends on the provider. Some return the percentage fee but keep the fixed per-transaction fee; others keep everything; some refund all fees. Check the fee schedule. In your accounting, record the refund as a reduction of revenue and the retained fee as an expense. For refunds, card rules generally expect you to refund to the same card used for the original purchase.
How long do payouts take?
Standard payout schedules often range from one to several business days after a transaction, and new accounts can be slower. Weekends and bank holidays do not count as business days. Instant payout features usually carry an extra percentage fee. Your provider's payout schedule is in your agreement and dashboard; see Merchant Account Approval Timeline.
Do I collect sales tax on card sales?
Whether a sale is taxable depends on the item, your location and the buyer's location, not on payment method. Since the Supreme Court's South Dakota v. Wayfair decision in 2018, states can require remote sellers to collect tax once they exceed economic nexus thresholds, which vary by state. Some payment providers offer tax calculation tools, but you remain responsible for correct collection and remittance. Check each state's department of revenue or a tax professional.
Are tips and processing fees deductible?
Processing fees are generally deductible business expenses. Tips handling for employees has additional payroll rules. Ask an accountant how to record them properly.
Can I store customers' card numbers?
Not as raw numbers on your own systems unless you meet the full PCI requirements, which is demanding. Use your provider's tokenization or customer vault so you keep only tokens. See PCI Compliance for Small Businesses.
What is the difference between authorization and capture?
An authorization places a hold on the customer's available funds; capture actually collects them. Merchants who ship later often authorize at order time and capture at shipment. Authorizations expire after a period that differs by card type and network, so capture promptly.
Quick reference table
| Question | Short answer | Where to confirm |
|---|---|---|
| Surcharging allowed? | Often yes, with caps, disclosure and state limits | State attorney general, provider rules |
| 1099-K threshold? | Check current IRS guidance; card transactions reported regardless | IRS |
| Held funds? | Triggered by risk events; read reserve clause | Your agreement |
| Fees on refunds? | Varies by provider | Fee schedule |
| Sales tax on card sales? | Same as any sale; remote seller rules apply | State revenue departments |
| Raw card storage? | Avoid; use tokens | PCI Security Standards Council |
When to consult a professional
A tax professional can reconcile your 1099-K with your income and advise on sales tax obligations across states. An attorney can advise on state surcharge laws, frozen funds disputes and contract terms.
FAQ
Can a provider keep my money indefinitely?
Agreements allow holds under certain conditions, but you can ask for the release terms in writing, escalate and seek legal advice if the hold seems unjustified.
Do I need to report cash sales too?
Business income is reportable whatever the payment method. Keep complete records.
Is a surcharge the same as a convenience fee?
Not necessarily. Convenience fees have separate network rules and typically apply to alternative payment channels. Ask your provider which rules apply.
Sources
- Internal Revenue Service — Form 1099-K guidance and instructions
- Federal Trade Commission — business guidance on pricing disclosures
- Consumer Financial Protection Bureau — consumer payment resources
- PCI Security Standards Council — card data security
