It doesn’t matter whether you operate a B2C retail location or a B2B consulting company, customers tend to like flexibility when it comes to paying, which often means paying on credit.
A merchant account can give you the tools needed to accept and reconcile different types of payments more efficiently.
Merchant accounts can often get confused with payment processing—which is only part of the merchant process. Here, we’ll break down what a merchant account is, how it works, and how you can apply for one today.
What is a merchant account?
Merchant accounts are specific accounts that give small businesses the ability to accept various customer payment methods more easily—most often debit and credit card payments.
With a merchant account, you can accept different types of credit cards and digital payments without managing multiple accounts across different payment methods.
Merchant accounts are run by merchant-acquiring banks that handle communication and transactions between customers and businesses.
A merchant account itself is not a transaction account
As a business owner, you won’t have direct access to the funds in your merchant account. You won’t be able to withdraw or deposit money. However, the merchant account will deposit money into your bank account—usually within 48 hours after the charges occur.
Think of your merchant account provider as a facilitator between credit card companies and your bank.
The merchant services provider will streamline your fee payments and customer charges so your finances stay organized for easier bookkeeping—and so you don’t have to manage all the heavy lifting.
Merchant accounts and merchant services aren’t always the same thing
It’s important to note that merchant accounts are not always synonymous with merchant services.
Square, one of the more notable names in the merchant space, does not provide a proper full-service merchant account.
While many of the functionalities are the same, Square is more specifically a payment service provider.
How does a merchant account work?
Credit card usage is actually quite complex when you view it from the position of the business. Here’s what happens when a customer charges a card to your business:
- Your business communicates the customer’s card information with the merchant bank.
- The merchant bank then contacts the card processor and the card issuer.
- The card issuer runs through a series of approval checks (like fund availability) and security reviews.
- Once reviewed, the approval is sent back to the merchant bank.
- The merchant bank authorizes the transaction and releases the funds to the business.
While this process seems complex, modern technology has sped up the process to happen in a matter of seconds.
During each step of the process, the business will accrue various processing fees and costs.
Your merchant account allows for all of this, and more, to be taken care of in one place, instead of you having to accept payment from customers and then pay back fees, declined payments, and other corrections later.
How does pricing work for a Merchant Account?
As you research merchant service providers, you may encounter different business models and payment structures.
There are two common ways to pay for merchant account services:
1. Flat Pricing
With this option, you’ll pay the same amount on every transaction. This typically exists as a percentage of the whole, plus an added fee.
For example, you can expect to pay between 1.7% and 3% plus a $0.25 fee per transaction.
If a customer makes a $100 order and you have a 2% fee agreement plus $0.25, then you would pay $2.25 to your merchant provider (each time that happens).
Flat pricing is the easiest to calculate—it’s also beneficial if you don’t expect your charges to fluctuate much within a set range.
Flat-rate pricing may not always be the best option for high-volume businesses, as it can get expensive over time.
2. Interchange Pricing
With interchange pricing, your business pays different rates depending on the type of cardused by the customer.
For example, MasterCard charges different rates than American Express, who charges different rates than Visa, and so on.
Consider how certain businesses don’t accept certain credit providers. That’s likely because they want to accept higher fees associated with those brands.
Some merchants offer hybrid payment structures including both flat and interchange pricing—though this is much less common.
What Fees Will You Pay With a Merchant Account?
Transaction fees are only one part of the cost associated with a merchant account. Additional fees and costs might include:
- Assessment fees: Established to create fraud checks and prevent false charges. These typically range from 0.13%–0.15% per transaction.
- Monthly or annual fees: Charged as flat rates for using the service.
- Statement fees: Created to cover the costs of printing and mailing your business statements. These can be avoided by using online statements.
- Retrieval requests: For when customers dispute or cancel orders. If the merchant services team or credit company needs to review a purchase, then you’ll be charged a fee for their investigation.
- Set up and admin fees: One-time or periodic charges for service installation and software/product updates.
- Termination fees: If you decide to break your contract early, you’ll likely be charged early termination fees.
Some of these fees are standard within the industry and can’t be avoided.
However, you may encounter some new fees that seem to lack any purpose or benefit to you. If you think you are being overcharged, it may be time to reconsider your merchant account provider.
How do you get a merchant account?
Applying for a merchant account is similar to opening a bank account or working with a credit card provider.
You’ll need to provide documentation related to your business and work through an approval process.
Merchant service companies take on risks by working with your company and therefore need to carry out an underwriting process, to ensure you’ll cover any lost costs in case of hardship.
To open your merchant account, you will file an application with a provider—in most cases, this can be done online.
What you’ll need for your merchant account application:
- A registered business
- An Employer Identification Number (EIN)
- Business bank account details
- Financial statements (bank statements, tax returns)
- Up-to-date business licenses
- Your contact information and home address
- Your social security number
Like in any underwriting process, the merchant account provider will review your forms and ask for any supplemental information as needed. The greater the perceived risk, the more information the underwriter will need.
Once your application is approved, you can begin your working relationship with your merchant services provider.
The process can be done in a few days if you are a lower-risk business, though it typically takes a bit longer—and can take several weeks for high-risk businesses.
Learning ways to grow your business
In the first few years of your business, you’re typically focused on infrastructure and foundation-building. You’ll set up various processes to make your bookkeeping easier and customer service better.
A merchant account is a great way to save time and process credit card payments more easily and accurately.
To learn more about establishing your business and growing your sales, Lendio has a comprehensive resource center that covers everything from filing business taxes to optimizing your profit margin.
Business credit cards can be an excellent tool to finance your small business.
But should you open a new business credit card? Is now the right time? Would it be better to wait or look for other forms of financing?
In this article, we’ll cover when you should (and shouldn’t) apply for a business credit card, the benefits of doing so, and how you can prepare to apply.
Why get a business credit card?
The short answer: Because it allows you to reap cash rewards, travel, hospitality, and dining benefits, and future credit priorities simply by spending money you were going to spend anyway.
Now, that is assuming you have certain elements in place (which we’ll touch on later).
In most cases, though, a credit card can help you manage day-to-day expenses while boosting your working capital.
Benefits Of Business Credit Cards
Regardless of the size of your business, there are many benefits to having and using a business credit card.
1. Higher spending limits
Many business cards have credit limits of $50,000 or more—typically much more than what you’ll get with a personal credit card.
Large costs can arise unexpectedly—having a high spending limit means you’re ready for those costs when they come.
2. Business perks and rewards
Many creditors offer attractive perks that can help you pay for travel expenses and business supplies, while earning cash back and potentially building airline miles.
Different business cards offer different reward packages, so do your research before applying. Some cards cater rewards more towards travel, while others will cater more towards ongoing business expenses or cash-back rewards.
3. Separate and categorize expenses
Many business credit cards offer detailed monthly and quarterly expense tracking. This saves a significant amount of time during tax season.
Instead of pouring through receipts to organize and categorize expenditures, you’ll be able to rely on credit statements for easier spend tracking, by category.
You can also separate your personal and business expenses, which makes for easier tracking, but also protects your personal assets from creditors.
4. Boost and build your credit score
As with any credit card, when you make payments on time, your credit rating improves quickly.
Building business credit is crucial to qualifying for better rates and terms on business loans. The better the credit score, the better the loan offers you’ll receive.
Whether you have no credit, bad credit, or good credit, using a business credit card can help you continue to build a more positive credit profile and boost your credit score.
5. Monitor employee spending
Most business credit cards allow you to issue employee cards with limits (that you set).
This allows you to delegate spending processes and approvals more easily while monitoring how your team is using their employee cards.
What is a business credit card used for?
You can use a business credit card to finance just about any business-related expense. Typically, business cards are best suited for ongoing, necessary expenses, (hopefully) not too large in size.
For example, you could use your card to:
- Finance inventory or equipment
- Invest in marketing
- Take clients out to lunch
- Pay for flights and event expenses
When NOT to get a business credit card
1. To pay off another credit card
You don’t want to secure a credit card to pay off another credit card—that’s a recipe for disaster.
Only apply for a business credit card if you have the means to pay it off every month.
Extra working capital is excellent for your business, but it can cause a major catastrophe if you begin piling on the credit card interest.
2. To make a large one-time purchase
If you need funds for a big one-time investment, it’s better to use other financing options like a term loan, a line of credit, or equipment financing.
Your credit score will be negatively impacted if you continue to use the majority of your credit limit, demonstrating to lenders that you’re operating to the extent of your means.
Credit cards are great for taking care of small, ongoing expenses. There may be times where you need to use credit to cover unexpected costs, but ideally when you have an established card already. We do not recommend applying for a business credit card if your sole purpose is to cover a large one-time payment.
How to apply for a business credit card
The application process for a business credit card is similar to applying for a personal credit card—you’ll just need a bit of extra information to describe your business.
What do you need to apply?
- A good credit score—while not completely necessary—is certainly beneficial. If you still haven’t formulated how you plan to use your business credit card, you may benefit from using a personal card in the interim to build your credit score before applying.
- Proof of identity. Prepare to present your social security number or Taxpayer Identification Number (TIN).
- Personal information: Name, address, date of birth, income, and other general information will be required.
- Business information: Business type, industry, time in business, contact info, company size, balance sheet data (revenue and expenses), and tax information (if different from personal).
When should you apply?
There’s no one-size-fits-all all answer to this question, but generally, you want to be in one or multiple of the following situations before you consider applying for a new business credit card:
- You have predictable revenue
- You have consistent spending plans
- Expenses are in control
- Your personal credit is better than fair
What to consider when applying for your business credit card
Different cards have varying annual fees, interest rates, credit limits, and eligibility requirements—it’s best to do your homework before choosing one.
Here are a few important elements to consider when evaluating your options:
- Bonuses and Rewards: Many of the best credit cards offer introductory interest-free periods and ongoing rewards. You can earn everything from cash back to free flyer miles. Choose a card with easy-to-use rewards—if you’re not planning on doing any travel soon, look for cards that offer cash-back rewards, software discounts, or expense benefits on food and other necessities.
- Annual Percentage Rate (APR): The card’s APR shows how much you’ll owe if you carry a balance past the payment period.
- Minimum Payment: If you can’t pay off your card’s balance each month, you’ll need to make at least the minimum payment. This minimum could be a fixed amount or a percentage of the remaining balance.
- Foreign Transaction Fee: If you’re using your card abroad, you’ll have to pay foreign transaction fees. These are usually around 2–3%, but some credit card issuers will sneak in higher rates—so do your research if you plan to travel.
So should you open a new business credit card? It depends. If you need additional working capital and can pay off your cards each month responsibly, then by all means—go right ahead. However, if you’re looking for another business credit card to help with your current debt issues, it’s best to look for a fix elsewhere.
If you choose to open a new business card, let us help. Fill out our 15-minute application to access card offers. You’ll get to see which cards you qualify for before choosing the one you need.After choosing your card, you can get approved the same day. Get started now.
Starting and growing a small business is no easy feat, especially for minority entrepreneurs who often face additional barriers. Thankfully, a wealth of grant opportunities are designed specifically to support minority-owned businesses. Here are 29 grants that can provide the funding you need to take your business to the next level.
1. Grants.gov
Grants.gov is the go-to portal for information on federal grants offered by various agencies. With over 1,000 grants from 26 agencies, this platform provides a comprehensive database tailored to small businesses, including those owned by minorities. To apply, you'll need a DUNS number and must register to do business with the federal government. It's a bit of legwork, but the potential rewards make it worthwhile.
2. The National Association for the Self-Employed (NASE) Growth Grants Program
NASE offers $4,000 micro-grants to help entrepreneurs expand their businesses. Membership in NASE is required, and applications must clearly outline how the grant will meet specific business needs, such as hiring help or purchasing equipment. New grantees are selected monthly, so there are multiple opportunities to apply.
3. Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT)
These grants target small businesses in research or technology fields. Though competitive, the substantial rewards offer between $300,000 and $2 million for research and development. Federal agencies with research and development budgets that exceed $100 million are required to allocate a percentage of that budget for these grants.
4. FedEx Small Business Grant Contest
Although highly competitive, the FedEx Small Business Grant Contest awards one $50,000 grand prize and nine $20,000 prizes to small businesses annually. To qualify, businesses must have a valid FedEx shipping account with a FedEx shipping account number and have no more than 99 employees.
5. Community Programs to Improve Minority Health Grant Program
This program focuses on improving minority health through community-based initiatives. Grants are awarded to projects that address health disparities and promote wellness, making it ideal for businesses in the health sector.
6. Asian Women Giving Circle
This grant supports Asian American women-led projects that use arts and culture to bring about social change. The grants typically range from $5,000 to $10,000 and are awarded annually. To be eligible for the Asian Women Giving Circle Grant, applicants must meet the following criteria:
- The project must be led by an Asian American woman.
- The project should utilize arts and culture to bring about social change.
- Applicants must be based in New York City.
7. BeyGOOD x Cécred Salon Business Grant Program
The BeyGOOD x Cécred Salon Business Grant Program is dedicated to empowering Black-owned small businesses, especially those in the beauty and wellness industries. In collaboration with the National Minority Supplier Development Council (NMSDC), this initiative provides $10,000 grants to support business growth or recovery. Each year, 20 grants are awarded to deserving businesses. To qualify, applicants must own a salon or a related business, be majority Black-owned, and demonstrate a genuine need for the funds.
8. SBA 8(a) Business Development Program
The Small Business Administration’s 8(a) program helps minority-owned businesses gain access to federal contracts. It offers a variety of developmental assistance, including management and technical guidance.
9. NuLeaf Project
The NuLeaf Project offers a range of grants and loans designed to assist cannabis business owners from communities disproportionately impacted by cannabis prohibition.
- Grants: NuLeaf provides grants to cannabis businesses within the state of Oregon, focusing on operational costs, licensing fees, and business development.
- Loans: In addition to grants, NuLeaf offers 0%-interest and low-interest loans. No-interest loans are only available to businesses in Portland, OR. Low-interest loans are available to businesses in Oregon, Colorado, and select Northeast states.
10. Glossier Grant Initiative
The Glossier Grant Initiative aims to support Black-owned beauty businesses by providing crucial funding and exposure. Each year, Glossier selects a group of recipients to receive monetary grants ranging from $10,000 to $50,000. Applicants must demonstrate a clear vision for their business and how the grant will be utilized to accelerate growth.
11. National Black MBA Pitch Challenge
This pitch competition encourages members to create scalable startups. Finalists compete for prizes up to $50,000 at the NBMBAA’s annual conference. There’s also a People’s Choice Award with a $1,000 prize. Details for the 2024 pitch challenge have not yet been announced.
12. San Diego Black Chamber of Commerce Grants
The San Diego Black Chamber of Commerce offers grants to businesses completing its free development courses. 2024 course schedules have not yet been announced.
13. Wish Local Empowerment Program
The Wish Local Empowerment Program provides grants to small, minority-owned businesses, offering amounts up to $2,000 to support operational costs and growth initiatives. To be eligible, companies must meet specific criteria, including being registered in the Wish Local app, having 20 or fewer employees, and being Black-owned. The program aims to help local businesses expand their reach and improve their services by providing needed financial assistance.
14. Freed Fellowship Grant
The Freed Fellowship offers grants to small businesses needing financial support to grow. They give one $500 grant every month and one $2500 grant at the end of each year.
15. HerRise Microgrant
HerRise offers $1000 microgrants to women of color entrepreneurs. Grants are intended to support business growth and development, and applications are open on a rolling basis.
To be eligible for the HerRise microgrant, applicants must be women of color entrepreneurs with less than $1 million in gross revenue.
16. CCWC Women of Color Grant Program
The Corporate Counsel Women of Color Grant Program offers $2,500 grants to women of color entrepreneurs. The grant is available to any for-profit business with at least $25,000 in sales.
17. Backing the B.A.R. Grant
An NAACP initiative, this $10,000 grant supports Black-owned businesses in the food and beverage industry. Grants are awarded to businesses with a liquor license or currently seeking a liquor license. Applicants are evaluated based on their demonstrated need for funds, proposed use of funds, and commitment to the community.
18. AAPIStrong Restaurant Fund
This fund supports Asian American and Pacific Islander-owned restaurants. 170 grants are awarded ranging from $5,000 to $25,000. To be eligible the restaurant must be currently operational, operate in a single location, cannot be a franchise, and demonstrate financial need.
19. Galaxy Grants
Galaxy Grant offers a $3750 grant to women and minority entrepreneurs.
20. The Transform Business Grant
This grant supports businesses owned by systemically marginalized groups committed to social change. The grantee receives a $1,000 microgrant and a business strategy and development program. Applications are reviewed regularly, and grants are awarded to businesses demonstrating significant potential for positive impact.
21. National Black Business Pitch
This competition encourages Black entrepreneurs to pitch their business ideas for a chance to win one of three $10,000 cash prizes.
22. Black Ambition Prize
The Black Ambition Prize awards grants to Black and Latinx entrepreneurs. Prizes range from $10,000 to $1 million, depending on the business’s stage and potential impact. Businesses are awarded in exchange for a simple agreement for future equity instruments, giving Black Ambition a small equity stake in the winning firm.
23. The Greenhouse Accelerator Program Juntos Crecemos Edition
This program offers financial and mentorship support to Latinx-owned businesses that create snack or beverage products influenced by Hispanic culture. Each finalist is awarded $20,000 with the winner receiving an additional $100,000.
24. Founders First Regional Grants
Founders First Regional Grants are designed to support small businesses in specific regions across the United States. These grants are typically awarded to underrepresented business owners, including those from minority backgrounds, veterans, and women. The grant amounts range from $5,000 to $25,000, depending on the business’s specific needs and proposed impact within its community. Applications are reviewed based on the business’s potential to drive economic growth and create job opportunities in underserved regions.
Grants are available in several regions, including:
- California
- Texas
- Nevada
- Pennsylvania
- Illinois
To qualify for a Founders First Regional Grant, businesses must meet the following criteria:
- Be located in one of the eligible regions.
- Demonstrate a commitment to creating quality jobs within their community.
- Be a for-profit entity.
- Have annual revenues between $50,000 and $5 million.
- Be majority-owned by veterans, minorities, or women.
25. Black Girl Ventures Pitch Program
This program supports Black and Brown women entrepreneurs through pitch competitions and financial support.
During the Black Girl Ventures Pitch Program, winners can receive prizes to support their entrepreneurial journey. The top prize includes $10,000 and crucial resources like business mentorship, access to professional networks, and media exposure.
Prospective participants must submit an online application detailing their business model, mission, and the impact they hope to achieve. Once the applications are reviewed, selected entrepreneurs move forward to the pitch sessions.
26. Breakthrough Program
The Breakthrough Program offers grants of up to $50,000 to minority-owned businesses that are developing innovative solutions in technology, healthcare, and clean energy sectors. To qualify for this grant, applicants must meet the following criteria:
- Minority Ownership: Businesses must be at least 51% owned by individuals from minority groups.
- Innovative Projects: The project should focus on innovative solutions that have the potential to make a significant impact in their respective industry.
- Location: Companies must be based in the United States.
- Financial Need: Applicants must demonstrate a clear financial need for the grant to further their development efforts.
27. Restaurant Business Development Grant Program
Feed the Soul Foundation offers grants to Black-owned restaurants needing financial support for development. Grants are awarded based on need and potential for growth.
The Restaurant Business Development Grant Program offers grants ranging from $5,000 to $25,000, focusing primarily on Black-owned restaurants. To qualify for this grant, applicants must meet the following criteria:
- Ownership: The restaurant must be at least 51% Black-owned.
- Location: The business must be based in the United States.
- Financial Need: Applicants should demonstrate a clear need for the grant funds to support development and growth.
- Potential for Growth: Businesses must show the potential for significant growth and a positive impact on the community.
28. Coalition to Back Black Businesses
This initiative offers grants to Black-owned businesses across various industries. Grants are awarded based on demonstrated need and potential impact.
Grants awarded through the Coalition to Back Black Businesses range from $5,000 to $25,000, depending on the specific needs and potential impact of the applicant. To qualify for a grant, businesses must meet the following criteria:
- Ownership: The business must be at least 51% Black-owned.
- Location: The business must operate in the United States.
- Need and Impact: Applicants should demonstrate a clear financial need for the grant and outline how the funds will significantly impact their business and community.
29. NAACP Grants
The NAACP offers a variety of grants to support Black-owned businesses. Grants are awarded based on need and potential for community impact.
Here are some of the grants offered by the NAACP:
NAACP and Leslie's Inc. Certification Boost Grant
The NAACP in partnership with Leslie's Inc. offers the Certification Boost Grant to support Black-owned businesses seeking industry certifications. This grant aims to alleviate the financial burdens associated with obtaining the necessary certifications to help businesses expand and thrive.
Keep It Local Business Fund:
This fund, a collaboration between Nextdoor and the NAACP, is designed to support Black-owned small businesses in economically vulnerable communities. Grants of $5,000 are awarded to businesses that demonstrate a commitment to community and local economic impact. Eligible companies must be majority Black-owned and operate within the United States.
Power Forward Small Business Grant:
The Power Forward Small Business Grant program supports Black-owned businesses in New England. Sponsored by Vistaprint and the Boston Celtics, grants of up to $25,000 are available to businesses that exhibit a potential for growth and community development. Applicants must be majority Black-owned and based in the New England area.
For more information and to apply, visit the NAACP Grants page.
Small business funding for minority entrepreneurs.
Lendio works with a marketplace of 75+ lenders to match small business owners with small business financing. Learn more about business loans for minorities.
What’s the difference between cash flow and profit?
As a business owner, these two terms can feel interchangeable. But the truth is, they’re far from it—and knowing when to prioritize one over the other can help you make better strategic decisions in that moment.
What is cash flow?
Whether you’re just starting a business or have an established brand, you’ll feel the effects of cash flow similarly. Cash flow is simply the movement of liquid money (cash) in and out of your business at a specific point in time.
When you execute a business transaction and receive money, that’s an inflow of cash. When you spend money on inventory, bills, or other expenses, that’s an outflow of cash. As you track the movement (flow) of cash in and out of your business, you’ll find that you are either operating:
If you have positive cash flow, you have enough cash to cover your financial obligations. If you’re operating with negative cash flow, you are not bringing in enough cash to cover your current expenses and will likely need additional business financing to continue running at your current pace.
What is profit?
Profit refers to the remaining revenue after all expenses are paid. If you have a positive value after subtracting total expenses from total revenue, then you’re profitable. If you have a negative value, you’re spending more than you’re making over that timeframe and are operating with a loss.
Profit can be used in many ways. You can distribute profit to other owners or shareholders, invest it back into the business, or save it in a reserve fund in case of emergency.
For many small businesses, profitability fluctuates throughout the year. Take toy and hobby retailers, for example, which arguably see the bulk of their sales in the final quarter of each year. This imbalance creates cyclical ebbs and flows of profitability, which can be misleading without the proper context.
What’s the difference between profit and cash flow?
Cash flow and profit are just two of many financial metrics business owners and investors use to assess the health of a company. Both measurements have their own advantages and disadvantages, and it’s up to you to understand how to use each to make better strategic decisions.
However, the difference between profit and cash flow can be tricky to grasp because they both relate to the balance of money within your business. Complicating the matter further, businesses can actually operate with a positive cash flow without being profitable—and may be profitable with a negative cash flow.
Timing is the subtle difference that needs to be considered when comparing cash flow to profit.
Cash flow focuses on the past, looking at the actual money that has come in or left your business at a specific point in time. Profit looks at the past, present, and future of your business and includes liabilities like accounts receivables and long-term debt, which are expected expenses or future cash.
For example, if you sell an item on credit, you don’t actually have the cash on hand—it’s an account receivable, which still needs to be collected. However, it’s considered revenue because the liability of payment has passed on to your customer, and it is used to measure profitability.
On the other hand, cash flow will only measure money that comes in and leaves your business. As a result, it won’t recognize that transaction until the cash is received from the credit purchase.
When to prioritize cash flow vs. profit.
Cash flow and profit both have their purposes as financial metrics, and business owners would be wise to measure and analyze each ongoingly and for different scenarios.
For example, if you want to have an overarching view of your business and its long-term viability, profit can shed more insight than cash flow because it takes a holistic view of your income and financial obligations. However, if you want to see a snapshot of your financial efficiencies at a specific point in time, cash flow may give you more perspective because it’s focused more on your day-to-day operations.
Cash flow or profit: What’s more important?
Cash flow and profit are both important, and business owners and investors may focus on each at different times and for specific reasons. Determining whether profit or cash flow is more important will be based on your unique situation.
Understanding the relationship between cash flow and profit can help you identify when to look at one or the other. This insight alone will put you in a better position to make the right decisions to guide your business forward.
As more American consumers utilize next-generation payment methods like touchless transactions or smartphone payments, there’s a general sense that we’re headed toward a cashless world. However, there are still plenty of small businesses that operate exclusively in cash—and will continue to do so for years to come.
If you’re trying to decide whether you should accept credit card payments, it’s never been easier. While it might not be the clear choice for your business right now, you should at least be aware of the credit card process in case you want to accept these types of payments in the future.The process to accept credit card payments will vary based on what sort of business you own, how you currently accept payments, and what type of credit card processing system you choose. This guide will help you to decide whether you should take advantage of the estimated 441 million open credit card accounts in the United States.
Why accept credit cards?
Banks, credit card companies, and financial media outlets will tell you that you should definitely accept credit cards as a small business. There is a fair amount of data—and probably your own lived experience—to back up the notion that businesses that accept credit cards are poised to make more money.
Think about your own shopping—there have probably been situations where you had no cash on you or not enough cash to buy all the items you wanted. Furthermore, obtaining cash itself can often be inconvenient, costly, or impossible.
Years of studies and polls back up the claim that credit card users make more purchases and spend more per transaction. The average credit card transaction was $95 in 2013, compared to the average $39 value of a cash transaction, according to a study by San Francisco Fed.
Another economic phenomenon surrounding credit card use is so-called “payment coupling.” Payment coupling is the association between purchase decision-making and the actual separation of a customer from their money. A landmark 2008 study found that credit cards ease the “painful” part of shopping, i.e., seeing your wallet or bank account get reduced.
“The conceptual underpinning of our research is that payment modes differ in transparency or the vividness with which individuals can feel the outflow of money, with cash being the most transparent payment mode,” the American Psychological Association study posits. “We argue that the more transparent the payment outflow, the greater the aversion to spending or higher the ‘pain of paying,’ leading to less transparent payment modes such as credit cards and gift cards (vs. cash) being more easily spent or treated as play or ‘monopoly money.’ Further, to the extent that the transparency of paying underlies differences in spending behavior, altering the salience of parting with money should attenuate the difference across payment modes.”
Why you might not be able to accept credit cards.
There can be a few reasons why it could be very difficult—or even impossible—to accept credit cards. Unless you want to use a manual credit card imprinter, you need a reliable internet connection to accept credit cards. Your brick-and-mortar store might also be located where cash is common—retailers in urban or very rural areas might serve customers who are accustomed to carrying around a good amount of cash.
Why you might not want to accept credit cards.
The biggest reason not to accept credit card payments, for many business owners, is the small fee charged to conduct every credit card transaction. These fees add up—which is why some businesses are still cash-only, especially in areas where customers carry a lot of cash. It’s also possible that your business is set in its ways and doesn’t have a culture of adapting to new practices.
How credit card processing works.
When a customer uses a credit card to make a purchase at your business, the transaction initiates a complex process involving several parties. First, the credit card terminal collects the card information and sends it to your merchant bank's processor. The processor then forwards this data to the cardholder's issuing bank via the appropriate credit card network (such as Visa or MasterCard) to request transaction authorization.
The issuing bank checks the cardholder's account for sufficient funds and any potential fraud alerts before approving or declining the transaction. This approval (or denial) is then sent back through the network to your merchant processor and finally to your terminal or point-of-sale system, where the result is displayed. If the transaction is approved, the funds are later transferred from the cardholder's account to your merchant account, minus any processing fees.
This whole process, while intricate, happens almost instantaneously, allowing for a seamless transaction experience for both the business and the customer.
How can I accept credit card payments for my small business?
To start accepting credit card payments for your small business, you'll need to follow a few essential steps:
- Open a merchant account: A merchant account is a type of bank account that allows your business to accept credit and debit card transactions. You can open a merchant account through most banks or through a payment processing company.
- Choose a credit card processing system: There are various types available, ranging from traditional countertop credit card terminals to mobile and online payment processors. The right system for you will depend on the nature of your business, the volume of transactions you process, and your budget.
- Set up the necessary equipment: This may involve installing software, setting up hardware, or both. If you're not tech-savvy, many providers offer support services to help with setup.
- Educate yourself and your staff on how to use the system efficiently and securely: This includes understanding how to process transactions, issue refunds, and handle any potential disputes. Ensuring that your team is knowledgeable about these processes will enhance the customer experience and help your business run smoothly.
If you decide to accept credit card payments, there are a few ways to do so. You’ll want to think about how your business operates and is structured. Shopping with a credit card is common these days because there are so many ways to conduct credit card transactions—in recent years, revenue-minded payment processors have been aggressive in making the process as simple as possible. With a little bit of planning and research, you can find a credit card payment system that works for you.
Types of businesses that can accept credit cards.
Virtually any type of business can accept credit cards, from retail stores and restaurants to service providers and online businesses. Here are a few examples:
- Retail stores: Whether it's a clothing store, a bookstore, or a hardware shop, retail businesses benefit greatly from accepting credit cards due to the ease and security it offers to customers.
- Restaurants and cafés: With the rise of dining out culture, accepting credit cards can streamline the payment process and improve the dining experience for guests.
- Service providers: Professionals like consultants, freelancers, and contractors can accept credit cards, making it easier to receive payments for services rendered, especially for larger projects.
- E-commerce sites: Online businesses are perhaps the most in need of accepting credit card payments, as it allows them to accept transactions from customers worldwide.
- Healthcare practices: Dental, medical, and other healthcare services are increasingly accepting credit card payments for treatments and consultations, providing flexibility and convenience for patients.
- Subscription-based businesses: For businesses that offer products or services on a subscription basis, credit card payments allow for recurring billing, ensuring a steady cash flow.
No matter the industry, accepting credit cards can help businesses increase sales, improve cash flow, and provide a better customer experience.
Different ways businesses accept credit cards.
Depending on how you operate your business, there are probably several options for accepting credit cards. If you run an online-only business, for example, you might find that credit cards are the easiest way to accept payment. You might have some choice here, too—many brick-and-mortar businesses have switched to mobile payment providers instead of the traditional credit card processors.
In-person credit card payments.
If you want to set up traditional in-person credit card transactions like you would find at a typical restaurant or retailer, you need to buy a point-of-sale (POS) system. This set of hardware and software will enable you to accept credit cards. These systems include credit card readers that communicate to your merchant account.
Mobile payments
Mobile payments, also called payment service providers (PSP), require less investment than a standard merchant account. Common examples include Square and Stripe. Many PSPs now combine a merchant account with a POS system, which is why they’ve become very popular among small businesses. As PSPs disrupt the POS field, you should look at your options’ terms and fees to make the best choice. Typically, PSPs are easy to use and inexpensive to set up, but a traditional merchant account system might be more negotiable and cheaper to use as your business ages and expands.
Online credit card payments.
For e-commerce operations, accepting credit cards is fundamental—there’s likely no other easy way to accept payment. Fortunately, however, no hardware is required. The website you use for your store, like Etsy, might also enable easy-to-use credit card payments. Many PSPs and e-commerce gateways, like PayPal or Shopify, offer apps or widgets that you can put onto a website. Many even allow you to sell items through social media.
Over-the-phone payments.
Accepting credit card payments over the phone is a convenient option for businesses that conduct sales remotely or want to provide an additional payment method to their customers. This method typically requires a virtual terminal, which allows you to enter credit card information manually into an online system. Virtual terminals are offered by most merchant service providers and payment gateways, and they can be accessed through a computer or mobile device with an internet connection. This payment option is particularly useful for service providers, such as consultants or businesses that take orders via phone. It's essential to ensure that all over-the-phone transactions comply with PCI DSS (Payment Card Industry Data Security Standard) guidelines to protect your customers' credit card information and reduce the risk of fraud.
Benefits of accepting credit card payments.
Accepting credit card payments can significantly benefit your small business by enhancing the customer experience and expanding your customer base. Here are some key advantages:
- Increased sales: Studies have shown that customers tend to spend more when using credit cards compared to cash. This can lead to higher average transaction values and increased overall sales.
- Improved cash flow: Credit card transactions are processed quickly, often resulting in funds being available faster than with checks. This can improve your business's cash flow, allowing you to reinvest in your operations or settle debts more swiftly.
- Customer convenience: By offering more payment options, you cater to a wider range of customer preferences, making it easier for them to purchase your products or services. This convenience can improve customer satisfaction and loyalty.
- Competitive edge: In today’s digital age, businesses that do not accept credit cards may be at a disadvantage. Accepting credit cards can provide a competitive edge by aligning with consumer habits and expectations.
- Global market reach: Credit card acceptance is crucial for online businesses that aim to reach customers beyond their immediate geographic area. It enables businesses to easily accept payments from customers worldwide.
- Enhanced security: Credit card payments often come with security measures that can reduce the risk of fraud. Payment processors and merchants use encryption and other technologies to protect cardholder data.
- Streamlined accounting processes: Electronic transactions can simplify bookkeeping, making it easier to track sales and manage finances. Many payment processors integrate with accounting software, automating the reconciliation process.
By accepting credit card payments, small businesses can not only keep up with the evolving landscape of consumer preferences but also leverage these benefits to grow and thrive in a competitive market environment.
How much does it cost to accept a credit card?
The cost of accepting credit card payments can vary substantially based on several factors, including your merchant service provider, the type of transactions you process (in-person vs. online), your sales volume, and the nature of your business. Generally, the costs can be broken down into three main categories:
- Processing fees: These are charged each time a customer uses a credit card at your business. They typically consist of a percentage of the sale, usually between 1.5% to 3.5%, plus a fixed fee per transaction, often ranging from $0.10 to $0.30.
- Monthly fees: Some merchant account providers or payment processors charge a monthly fee for using their service. This can range from $10 to $30 per month, although some providers offer plans with no monthly fees.
- Equipment costs: If you need to purchase or lease equipment, such as a POS system or credit card terminals, there will be additional costs. These can range from a one-time fee of a few hundred dollars to ongoing leasing fees.
For businesses operating online, there may be additional fees for using e-commerce platforms or payment gateways, which can include setup fees, monthly subscription fees, and additional transaction fees.
It's essential to carefully research and compare the terms and fees from different providers to find the solution that best fits your business's needs and budget. Remember, the cheapest option upfront may not always be the most cost-effective in the long term, especially as your business grows and your transaction volume increases.
What's the cheapest way to accept credit cards?
Finding the most cost-effective way to accept credit cards requires a careful consideration of your business's specific needs, transaction volumes, and the types of customers you serve. Generally, the cheapest way to accept credit cards will vary based on the scale of your operations and the average transaction size. However, for many small businesses, payment service providers (PSPs) like Square, PayPal, or Stripe offer competitive rates with low upfront costs, making them an attractive option for businesses just starting to accept credit cards. These platforms typically charge a flat percentage plus a small per-transaction fee, with no long-term contracts or monthly fees, which can be ideal for businesses with fluctuating sales volumes.
For businesses with higher sales volumes or larger average transactions, negotiating a merchant account with a bank or dedicated payment processor might be more economical in the long run. These accounts often come with a monthly fee but offer lower transaction rates, which could result in significant savings over time.
Additionally, leveraging technology such as mobile payment solutions can also reduce costs by eliminating the need for expensive point-of-sale hardware. Ultimately, the cheapest way to accept credit cards is the one that aligns with your business model, provides the flexibility your operation requires, and offers the most value for the fees you pay.
The bottom line.
Choosing the right approach to accept credit card payments is critical for the success of your small business. It’s about finding the perfect balance between cost, convenience, and customer experience. Whether you opt for a traditional merchant account, a mobile payment service provider, or an online payment gateway, each has its own set of advantages tailored to different business needs and customer preferences. Remember that the goal is not just to facilitate transactions but to enhance the overall customer experience, thereby fostering loyalty and driving sales. Keep in mind the future scalability of your business as well, choosing a system that can grow with you. Ultimately, investing in the right credit card processing system is an investment in your business’s future.
Quick—when was the last time you calculated your business’s profit margin?
If you answered “Last week,” excellent! And if you don't remember, you’re probably way overdue.
But were your numbers good or bad? Every company is unique, so the yardstick you measure your profit margins against isn’t the same one your neighbor uses. What's considered a “good" range varies across industries—restaurants average a slim 6–8%, whereas the advertising and public relations industry averages a more generous 11–20%.
That means your answer should probably be, “It depends.” Here’s why.
What are profit margins?
Profit margins are key performance indicators that can help you make strategic decisions to keep your business profitable and healthy.
To go deeper, we cover various different profitability ratios here, including how to calculate them and what their purpose is. The 3 most commonly used are:
- Net: essentially shows a company’s bottom line
- Gross: can indicate how well strategies like a price increase are working
- Operating: can show out-of-control expenses
So what’s the difference between a profit number and a profit margin? Profit numbers show a dollar amount—e.g., a $5 profit on an item sold. Profit margins are a percentage that allows your number to be compared against industry averages and competitors or to reveal trends within your own business.
For example, imagine a bakery wants to know if 2 desserts are equally profitable. The calculations for this example are:
- Gross profit = net sales – cost of goods sold (COGS)
- Gross profit margin = (gross profit / net sales) * 100
| Vanilla Cake | Key Lime Pie | |
| Net Sales | $10 | $20 |
| COGS | $5 | $15 |
| Gross Profit | $5 | $5 |
| Gross Profit Margin | 50% | 25% |
Both desserts generate a $5 gross profit per unit. However, vanilla cake has a much higher gross profit margin. That kind of insight might influence whether pie stays on the menu or suggest that social media promotionsshould market the cake.
What should your profit margin be?
Once you've calculated your profit margin, how do you know if it's good or bad? In other words, what should your profit margin be? The answer is—it depends.
According to the Corporate Finance Institute, the average net profit for small businesses is 10%, while 20% is considered good. But your mileage may vary depending on a variety of factors.
For example, a company’s size and life stage can heavily influence profit margins. It wouldn’t be reasonable to expect a mom-and-pop retail store to have the same profit margin as a monster retailer like Walmart. Big companies have more leeway for spreading out or reducing costs through automation than small businesses.
Seasonality can significantly alter your margins, too. No one would expect a ski resort's summertime profitability margins to resemble the values calculated during a snowy winter season.
The economy can also shift what’s normal for an industry—consider the hotel industry's profit margins during the COVID recession. During the shutdown, some hotels improved their gross profit margin by eliminating room service or reducing housekeeping. But their net profit margin, which included mortgage or rent on a commercial building, probably wasn’t even close to normal.
And each industry's typical profit margin range depends on its COGS and operational needs. Think about the difference between a restaurant, a dental practice, and an independent technology consultant—their revenue and expenses are vastly different. Restaurants tend to have high COGS, as meal preparation requires perishable ingredients. The dental practice’s expenses include costly X-ray equipment and malpractice insurance. The technology consultant would most likely have the lowest operating expenses of all 3, as labor would be its main expense. Thus, these businesses' “normal” net profit margins aren’t comparable to each other.
You can find industry averages in various online databases, via your favorite trade association, or even by asking the research librarian at your local library—and you can use those ranges, along with knowledge of your own business’s variables, to judge if your margins need improvement.
Remember, however, that profit margins fluctuate and can be impacted by market conditions. The margins in this chart were calculated in January 2022, during a period of higher-than-normal (8%) inflation.
| Industry | Gross profit margin | Net profit margin |
| Retail (automotive) | 22.20% | 4.81% |
| Retail (grocery) | 25.68% | 1.11% |
| Retail (general) | 24.32% | 2.65% |
| Homebuilding | 24.87% | 12.73% |
| Construction supplies | 22.73% | 7.92% |
| Restaurant | 31.52% | 12.63% |
| Food wholesalers | 14.85% | 0.69% |
| Information services | 5.83% | 16.92% |
| Advertising | 26.20% | 3.10% |
| Recreation | 39.32% | 4.78% |
| Trucking | 25.08 | 1.85% |
How to improve your small business's profit margin.
Now that you’ve completed the calculations for your business, how can you increase your profit margin?
Every business can increase net profit margin (their bottom line) by either increasing revenue or decreasing expenses—or perhaps both. The trick is to understand the business impact of pulling each lever. Will your margins improve more if you raise your prices or negotiate lower pricing with your suppliers?
For example, a restaurant impacted by rising inventory costs could charge more for each item. But their customers are price-sensitive, so they may choose to reduce expenses instead by cutting portion sizes.
On the other hand, a consulting business could reduce expenses by modifying internal workflow processes. Suppose a senior consultant spends 5 non-billable hours a week inputting timecards and expenses. In that case, those tasks probably need to be automated or assigned to a lower-cost data entry clerk to minimize labor costs.
Why should you care about your profit margin?
Numbers are great, but do they really matter? Short answer: yes. Tracking your profit margin can help you to make plans and decisions based on facts, not gut-feel. Scoring a new client can make you feel flush with cash—but only a review of your profit margins will tell you for sure. Remember our dessert example from earlier? Not all profits have the same value.
Monitoring profit margins also helps you work towards your financial plan. It’s similar to a New Year’s resolution to lose weight: after a week-long cruise vacation, a weigh-in might be a reminder to eat healthy again, but your 6 months of historical weight tracking shows that your long-term plan is working, with only a slight hiccup post-vacation. Profit margins do the same thing for your business—they allow you to make course corrections in the short term while providing context in the overall big picture.
Profit margins may also be a factor in certain types of small business financing, and a potential lender may review a business’s profit margin before making a decision, especially for more conventional loan products, like a term loan. While the borrower’s ability to service the requested debt is paramount, current debt service and profit are also important to the equation.
You're in charge of your profit margin.
Take steps to calculate and monitor your profit margins regularly. With some minor tweaks to revenue or expenses, you might find your profit margins soaring from okey to outstanding.
*Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
The Employee Retention Credit (ERC) was launched by the federal government to provide financial relief to small businesses that kept employees on the payroll throughout the pandemic. The credit is available for the 2020 and 2021 tax years, and eligible businesses may retroactively apply using IRS Form 941-X.
Key takeaways
- The deadline for all 2020 filings is April 15, 2024. On average, 2020 quarters make up a total of 20% of the eligible credit dollars available to small businesses and 30% of the ERC credit amount small businesses qualify for.
- Applying and filing for the ERC takes time. If you are applying for ERC and you want to beat the deadline we recommend you apply by February 15, 2024, to allow ample processing time. (While we can often get your credit processed much quicker than this, some accounts require extra due diligence and back and forth).
- To reserve your spot in line with the IRS your business must have all revised payroll tax forms for 2020 quarters postmarked and in the mail to the IRS prior to April 15, 2024.
- The filing deadline for all 2021 filings is April 15, 2025.
Employee Retention Credit deadlines.
The ERC is not available for tax years 2024 and beyond, but you can retroactively apply if you haven't yet taken advantage of this credit. Businesses could receive a credit of up to $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021. So it's definitely worth paying close attention to the deadlines to make sure you don't miss out on this opportunity to significantly lower your tax bill.
Each tax year has its specific deadline. This gives you time to focus on one application at a time since each tax year requires its own form to support the different eligibility requirements.
ERC deadline for the 2020 tax year.
The Employee Retention Credit deadline for the 2020 tax year is April 15, 2024. This applies to all three eligible quarters: Q2, Q3, and Q4. The first quarter doesn't count since COVID-19 mandates didn't begin in the U.S. until the end of the first quarter.
ERC deadline for the 2021 tax year.
The ERC deadline for Q1, Q2 and Q3 for the 2021 tax year is April 15, 2025. This gives you time to gather documentation for a robust application. But it's still smart to apply as soon as possible, especially since the IRS is reporting a backlog in reviewing applications. In other words, the sooner you apply, the sooner you're likely to get approved and receive your credit funds (or have them applied to an outstanding tax bill).
Overview of ERC eligibility.
Before applying for the Employee Retention Credit, make sure your business qualifies for 2020, 2021, or both. The basic eligibility criteria vary from year to year.
For the 2020 tax year:
- No more than 100 employees
- A government mandate prevented operations, either in hours or service capacity, OR revenue was less than 50% of 2019 gross receipts
For the 2021 tax year:
- Fewer than 500 employees
- A government mandate prevented operations, either in hours or service capacity, OR revenue was less than 80% of 2019 gross receipts
Newer businesses may also qualify for the ERC as a recovery startup business. In order to qualify, your business must meet the following requirements:
- Began after February 15, 2020
- Annual gross receipts under $1 million
- One or more W2 employees
How to apply for the ERC.
Lendio is here to assist small businesses with their ERC applications. We can help you quickly streamline your application with a step-by-step guided form that removes all the guesswork from the process. In fact, to date, our tax partners have helped Lendio clients collect over $300 million from the ERC program.
One luxury of being an employee is that you don’t have to worry much about tax planning.
You can sit back as your employer withholds money from your paycheck to cover your liabilities, then use the details from your W-2 to file your tax return come tax time.
As a self-employed individual, you don’t have that privilege, and your tax situation becomes a lot more complex. Fortunately, that complexity has a silver lining. You gain a wide range of tax deductions that can significantly reduce your personal income tax.
In fact, you can deduct all ordinary and necessary business expenses. If you’re not sure what those look like, here are some of the most popular tax write-offs for self-employed people.
Top tax write-offs for the self-employed.
18 Tax Write-Offs
1. Self-employment taxes
Let’s start with a tax break you can take advantage of regardless of your business model: self-employment taxes.
The self-employment tax refers to the Social Security and Medicare taxes you have to pay on 92.35% of your net earnings from your business. These are separate from the federal and state taxes everyone has to pay on their income.
When you’re an employee, you get to split Social Security and Medicare taxes with your employer. For the year 2021, each party pays 7.65%.
Unfortunately, self-employed taxpayers are responsible for both the employer and employee portions. As a result, they owe a combined 15.3% tax, of which 12.4% is for the Social Security tax, and 2.9% goes to Medicare.
To lessen that blow, the Internal Revenue Service (IRS) lets you deduct the employer portion from your income when you calculate your federal and state income tax liabilities.
For example, imagine you generate $100,000 in net earnings as a sole proprietor. 92.35% of your net earnings multiplied by 15.3% equals $14,130 in self-employment taxes.
However, you’d get to deduct half of that expense, $7,065, for income tax purposes. In other words, you’d pay federal and state income taxes on $92,935 of net earnings rather than $100,000.
2. Retirement plan contributions
Whatever your employment status, contributing to retirement plans is one of the best ways to pay less in taxes. Not only does it directly reduce your adjusted gross income in the current tax year, but it also defers taxes on all your earnings within the account.
That said, self-employed people can access some uniquely powerful retirement accounts that employees can’t. For example, if you’re an independent contractor with no employees, you can open up and contribute to a Solo 401(k).
Solo 401(k)s are similar to their employer-sponsored counterparts, but the contribution limits are significantly higher. Here’s how they work:
- Employees: You can contribute up to $19,500 in 2021 and $20,500 in 2022. If you’re over 50, you can also make a catch-up contribution of $6,500. Your employer can put more in the account, but you have no control over that.
- Self-employed: In addition to the standard employee contribution, you can put in 25% of your net self-employment income up to a whopping $38,500 in 2021 and $40,500 in 2022 as your “employer” contribution.
Because retirement contributions are discretionary, you can dial them up and down as necessary to manipulate your taxable income. That’s a huge advantage, especially when your earnings fluctuate from year to year.
3. Qualified business income
The qualified business income (QBI) deduction is one of the newer tax write-offs for self-employed people. If you think you might be eligible, it’s definitely a good idea to consult a CPA for guidance.
In simple terms, the QBI deduction lets you write off 20% of the income you generate from your business operations. To be eligible, you must meet the following requirements:
Legal entity structure: Only people with pass-through income are eligible for QBI. That refers to sole proprietorships, partnerships, limited liability companies, and S-Corporations. C-Corporations can’t claim the deduction.
Income limitations: For single filers, your taxable income must be less than $164,900 in 2021 and $170,050 in 2022.
Business model: If your income is above the threshold, the type of business you run determines how much you can deduct. If you’re a “specified service trade or business”, the deduction phases out the more you earn.
Once again, claiming the QBI deduction is a complex process. There are many nuanced rules and lengthy calculations involved, so don’t try to tackle it without the help of a tax expert.
4. Home office expenses
If you do business out of your personal residence instead of a separate office, you may be eligible to deduct some of the expenses you incur to maintain your home. That includes costs like rent, mortgage interest, utilities, and maintenance.
In general, you can write off the portion of your housing expenses that corresponds with the part of your home that you use regularly and exclusively for your business. You don’t qualify for the deduction if you fail to meet either of those requirements.
In other words, you must have a dedicated home office space where you do most of your business. If you spend more time working at coffee shops than your home office, or if it doubles as a dining room table, you can’t take the write-off.
If you’re eligible, there are two ways to calculate your home office deduction:
Standard: This method involves tracking all of your home expenses and multiplying them by the percentage of your residence dedicated to your home office.
Simplified: If you don’t want to take the time to track all your housing expenses, you can multiply the square footage of your home office (up to 300 square feet) by $5 and deduct that.
Whenever there are two methods to determine the size of a deduction, it’s a good idea to calculate both and take the larger of the two. That said, the standard method often leads to higher tax deductions in this case.
5. Business rent
Renting an office or storefront is one of the most significant business expenses you’re likely to incur. Fortunately, if it’s reasonable that someone in your line of work would need the space, you can write off the cost of the lease.
For example, if you work from a computer, it’s logical that you’d need office space. Likewise, if you own a fitness gym, it makes sense that you’d need a location for people to exercise. In both scenarios, your rent would be deductible.
You can also deduct any rent you pay for equipment that’s necessary for your business operations. For example, if you run a home repair business, you could write off any rent you pay for the tools you use to complete a job.
6. Office supplies
Office supplies are a relatively standard deduction for self-employed people. It includes the minor materials you need to keep your business going. For example, you can write off items like paper, staplers, pens, and printer ink if your company uses them.
7. Depreciation
When you buy property or equipment for your business, the IRS might not let you deduct the expense all at once. Instead, you often need to depreciate these assets over their useful lives, which can be anywhere from a few years to several decades.
Depreciation represents the steady decrease in the value of an asset over time. For example, say you’re a real estate investor. When you buy an apartment complex, you take depreciation as the paint erodes, the floors degrade, and the roof deteriorates.
In general, you’ll need to depreciate assets worth more than $2,500. An IRS safe harbor rule means they won’t call you out if you write off something immediately when you pay less than $2,500, assuming it’s a legitimate business expense.
The rules for deducting depreciation can get surprisingly complicated. There are multiple ways to calculate the amount. If you’re eligible, it’s a good idea to consult a CPA for assistance.
8. Internet and phone bills
You can generally write off the portion of your internet and phone costs that correspond with your business use. If you have a separate business office with its own wifi and telephone, everything you pay for these services is deductible.
However, if you operate out of a home office, calculating the write-off becomes a lot more complicated. The concept is similar to the home office deduction. You’ll need to determine which portion of your usage is for business and personal purposes.
9. Health insurance deduction
The cost of health insurance in the United States is staggering, so health insurance premiums are another hugely beneficial tax write-off for self-employed people. It can help make up for your lack of an employer to subsidize your medical expenses.
As long as you’re not eligible for coverage through a spouse’s employer, you can generally deduct all of the premiums you pay for your and your family’s health, dental, and long-term care insurance.
10. Business insurance premiums
Depending on your business model, you may want or need to purchase some form of business insurance. Fortunately, the premiums you pay for these policies are tax-deductible, as long as there’s a need for them in your line of work.
For example, medical service providers must maintain malpractice insurance, a form of professional liability insurance that protects them against lawsuits over mistakes that harm their patients.
Some other popular forms of business insurance that may be tax-deductible include general liability insurance, commercial property insurance, business income insurance, and workers’ compensation insurance.
11. Business meals
Though you have to tread a fine line, business meals can be tax-deductible in some circumstances. However, the rules are a bit tricky, and you can bet that the IRS watches these deductions closely. It may be worth consulting a CPA for help with this write-off.
In general, you can only deduct 50% of the cost of business-related food and drink from your taxes. For example, that includes:
- Meals while traveling for business
- Catering during meetings with employees
- Meals while discussing business with prospective clients
Unfortunately, lunch at the office by yourself doesn’t qualify. You must actively pursue or discuss business matters with others during the meal. It’s a good idea to keep detailed records of these matters.
There are two ways to calculate a meals deduction. First, you can deduct half the actual cost, in which case a reasonableness test applies. Alternatively, you can take a standard allowance, which the General Services Administration sets.
For tax years 2021 and 2022, the 50% limitation has been temporarily lifted. You can deduct 100% of eligible business meals as long as they come from a restaurant. The change is an attempt to stimulate the restaurant industry after COVID-19.
12. Business travel
If your business requires that you travel, you can deduct the costs you incur to get you to your destination and for lodging while you’re away from home. Maybe you need to tour a potential rental property or meet with a client out of state.
Unfortunately, taking a deduction for business travel can be tricky. As you might expect, there’s a lot of opportunity for abuse with travel write-offs. The IRS won’t be happy if you try to deduct the cost of your family vacation to Orlando.
Even if you go to Orlando for legitimate business reasons, they’re also savvy enough to know that you might stick around for a few extra days for personal reasons.
However, like every other expense, travel is only deductible when it’s ordinary and necessary for your business. That means the extra night you spent in a hotel to see the Magic Kingdom is not tax-deductible.
13. Business vehicle expenses
If a vehicle is necessary for some aspect of your operation, you can write off the expenses associated with your business usage. For example, a real estate agent could deduct the use of their vehicle to meet clients at potential properties.
Unfortunately, you can’t take a deduction for commuting to your primary place of work. For example, you can’t consider the trip from your house to your office space a business expense.
If you’re going to take this deduction, there are two ways to calculate the amount:
Actual expense method: Keep detailed records of all your car expenses, including auto insurance, gas, and maintenance, then multiply that amount by the percentage of your driving that was business-related.
Standard mileage method: Keep track of the total number of miles you drove for business purposes, then multiply it by the IRS standard mileage rate. It’s $0.56 in 2021 and $0.585 per mile in 2022.
Unfortunately, you can’t bounce back and forth between the two. If you start with the standard method, you can decide to switch to the actual expense method, but you won’t be able to go back until you get a new business vehicle.
14. Interest on business debts
The interest you pay for your business debts can be another significant deduction for self-employed people. Whether you take out installment or revolving debt accounts, you can write off any interest that accrues on the balances for business expenses.
For example, if you finance the purchase of business equipment, the interest portion of your monthly payments is tax-deductible. Similarly, if you use a business credit card to buy supplies and carry a balance over, you can deduct the interest when you pay it off.
In theory, it’s possible to split funds from a credit account between business and personal use. In that case, only the interest on the business portion is tax-deductible.
15. Advertising expenses
When you’re self-employed, you have to get your business in front of potential clients. Fortunately, you can take a tax deduction for the various expenses you incur to promote yourself. That means you can write off the cost of things like the following:
- Social media ads on sites like Facebook and Instagram
- Pay-per-click campaigns on search engines
- Local billboards and print media materials
In addition, while not strictly an advertising expense, you can deduct the cost of maintaining a website for your business. For example, that might include the price of the domain and the fees you pay to a copywriter or web designer.
16. Professional services
As a small business owner, you often have to wear many hats. In your early years, you may find yourself handling administrative, bookkeeping, marketing, tax planning, and customer service duties on top of your day-to-day business operations.
However, once you have more traction, you can afford to outsource those functions. Fortunately, you can take a tax write-off for the fees you pay to the various professional service providers who handle them for you.
For example, if you’re tired of doing your own accounting, you can hire an independent specialist to maintain your books, build your financial statements, and file your taxes. Whatever they charge for their services will be a tax write-off.
17. Continuing education costs
Continuing education costs are an often underutilized tax write-off for the self-employed. In general, you can take a deduction whenever you pay to improve the skills necessary for your current business. That might include the cost of:
- A course written by a fellow professional in your field
- Required education to maintain a professional license in your trade
- A series of lectures on modern marketing strategies for small businesses
It’s important to emphasize that you can’t take a tax deduction for educational costs that don’t relate to the business you’re already operating. For instance, a freelance writer couldn’t take a deduction for a seminar on wedding photography.
18. Professional dues
Last but not least, you can take a tax deduction for the dues you pay to maintain a professional license or membership in a professional organization. This is a popular write-off for technical service providers, such as accountants, lawyers, and doctors.
However, you can’t deduct any old organizational or licensing fees. They have to be relevant to your profession. For example, a lawyer could deduct their annual membership dues paid to their State Bar.
Unfortunately, the deduction doesn’t let you claim dues to any club with a social purpose, even if you do business there. For example, you can never write off country club dues, even if you consider it a place to network.
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