Accounting for merchant accounts/3rd party CC collections


Scenario: The owner of a Merchant account (credit-card processing) offers collection services to Clientele who wish to make credit card sales to their Customers.
Figures: Merchant - $100 fee for services (per order) Merchant - $65 cost for operating merchant account (per order) Clientele/Customer - $1200 sales (to keep it simple, product is sold at cost)
In English: The Merchant will collect $1200 from the Customer, and remit $1100 to the Clientele, per order. The Merchant has a cost of $65, so a GP of $35 per collection.
The questions: How is this accounted for on the Merchant's and Client's books? How much of the $1200 collected by the Merchant is considered taxable income? The entire $1200, or the $100 fee?
Thanks :)
-Holly
Reply to
Holly J. Sommer

This looks like a commission arrangement for selling "third party" bankcard services (and at one time Visa/MC had strict rules about it) but if the merchant has liability for frauds and uncollectable chargebacks then 1200 minus the 1100 could be taxable income but make sure everyone understands the Bankcard Assoc. rules - lots of lawsuits and frauds in this area!
Reply to
John

On Thu, 2 Jun 2005 00:09:00 -0500, "Holly J. Sommer" wrote:
This is similar to the secondary mortgage market... buying and selling a $250K mortgage but only making $5K on the transaction.
The Merchant would book $1200 in revenue, which would reflect what is coming into her bank account: DR Cash (for simplicity) CR Sales Then book $1100 remittance (COGS?) payout, which would also reflect the economic activity. She would also book a COGS of $65, which would leave the $35 in GP: DR Remittance Payout $1100 DR Service Fee $65 CR Cash $1165 In this scenario, only the $35 would be taxable income, assuming there were no other costs.
Client would book: DR A/R $1100 DR Processing Fees $100 CR Sales $1200
The account names could be different for your accounting / reporting system, but the DR's/CR's are whats important. Hope this helps.
Russell Tuncap, CMA, CPA
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Reply to
R

Thanks for the feedback, both of you. A little bell went off in the back of my head, though, and the word "factor" burbled up to the surface. Essentially, I was describing factoring. I have a followup question, though:
Do factors issue a 1099 to those from whom they purchased the receivable? My inclination is to say no. Just wondering what kind of tax reporting issues there may be, between the factor and the entity from whom they purchase the receivable. Obviously there will be revenue, but that doesn't necessarily mean a 1099 or W2 type situation exists.
Thanks.
-Holly
Reply to
Holly J. Sommer

If factors are only paying for the receivables themselves, they do not issue 1099's. 1099's are issued for services, not products. Receivables are an asset being bought and sold.
Hope this helps, Russell Tuncap, CMA, CPA
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Reply to
R

That's what I figured... I guess I just need to make sure that it's clear that receivables are being purchased only. What type of activities or arrangements might call that distinction into question?
Thanks :)
-Holly
Reply to
Holly J. Sommer

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