Square • Taxes & Tips
How Credit Card Processing Fees Impact Customer Tips and Sales Tax on Square
📌 Key Takeaways & Executive Summary
- Payment processors deduct 2.6% + 10¢ from the grand total charged, including customer tips and collected state sales tax.
- If a customer tips $10 on a card, Square deducts ~$0.26 in processing fees from that tip.
- In most US jurisdictions, federal law permits employers to deduct the actual credit card processing fee percentage from employee tips.
- Sales tax money collected also suffers processing fee deductions, meaning merchants must pay the full tax bill out of pocket.
Restaurant owners, hair stylists, and retail operators often assume payment processing fees apply solely to the food, drink, or service price. In reality, payment processors deduct their percentage fee from the total gross amount charged to the credit card—meaning credit card fees are deducted from collected state sales tax and employee gratuities as well.
The Gratuity Processing Dilemma
Suppose a client pays $100 for a salon service, adds $8.00 in sales tax, and leaves a $20.00 tip (Total charge: $128.00):
- Square Fee:
2.6% × $128.00 + $0.10 = $3.43. - Notice that the tip alone generated
2.6% × $20.00 = $0.52of that fee. - The sales tax generated
2.6% × $8.00 = $0.21of that fee.
💡 Legal Tip Deduction Rules
Under the federal Fair Labor Standards Act (FLSA), employers in the United States are legally permitted to deduct the actual, prorated percentage charged by the credit card processor (e.g., 2.6%) from the employee’s tip payout, provided it does not reduce the employee’s net earnings below minimum wage.
Verify Your In-Person Net Deductions
Calculate your true net payout after processing fees on your gross in-person transactions.
📚 Official Sources & Documentation