Square Deposits in the Books: Sales, Fees, Tips and Sales Tax

What does a Square deposit include after fees, tips and refunds?

A Square deposit, which Square calls a transfer, is the card payments customers made, less refunds, fees and any other amount Square withholds. Those payments already contain sales tax and tips, so a deposit can be smaller or larger than your sales and is never a sales figure. Square defines "net total" as total collected minus fees minus other withholdings, and its Reconciliation report ties payments collected to the amount transferred (Square).

Book each piece on its own line and the deposit as a transfer to the bank. The IRS says business books must show gross income, as well as deductions and credits (IRS). A net deposit hides the fee, the tax and the tips inside it.

Five things make a case not simple:

• Months of deposits were booked as income, so sales are understated by fees and overstated by sales tax and tips. That matters most before a return or a loan application.
• A sales sync (an app that copies Square sales into your accounting software) and the bank feed (the automatic download of bank transactions) both post, so revenue is counted twice.
• Square is one of several ways customers pay, or there is more than one location.
• Personal spending runs through the same bank account as the Square deposits.
• The sales tax returns or Form 1099-K do not match the books, or a return was filed from those books.

Gather before you start: the sales summary, the transfer list exported as a CSV, the fee report, the bank statements and the last sales tax return.

If any of these applies, the books and anything filed from them may need rework. Read Different for you? below before you change entries.

Which Square reports match a deposit to sales?

Start with the transfer list, which shows the card payments inside each transfer, then use the Reconciliation report to explain the gap between payments collected and the amount paid to the bank. Square can rename or move reports, so check your Dashboard against the names below.

• Square's names are not accounting names. Its "gross sales" is net sales plus taxes, and its "total sales" adds tax, tips and gift card sales to net sales. Take sales for the books from the item and service charge lines, and read Square's definition of a metric before copying it.
• The sales summary counts completed orders only. Square says it leaves out partial payments and deposits, and that its numbers can differ from other reports because each is calculated and timed differently. Tie the deposit with the transfer list and the Reconciliation report; use the sales summary for the pieces.

Keep each report as downloaded. Publication 583 lists credit card charge slips and bank deposit slips among the documents behind gross receipts and says to reconcile the checking account each month.

How do I record Square gross sales and fees instead of the net deposit?

Post the payments to their own accounts through one Square clearing account, then match the deposit to that account, not to sales. A clearing account holds what Square owes you until the transfer lands. This is a tracing method, not an IRS-prescribed entry: the IRS lets you use any system that clearly shows income and expenses. Book each sale once: if an invoice or a sync already booked it, the payment clears accounts receivable instead of creating a second sale.

1. Create one clearing account for Square.
2. For each day or period, take the pieces from the sales summary. Debit clearing for the card payments Square will transfer, after refunds. Credit sales for items and service charges, sales tax payable for tax imposed on the buyer, tips payable for staff tips (an owner's own tips are income), and a gift card liability if you sell gift cards. A sale paid in cash, by check or with a gift card you issued is not a card payment: debit cash, or the gift card liability, instead of clearing. For refunds, debit returns and allowances (a line that reduces sales without erasing them), sales tax payable for the tax part and tips payable for any tip refunded.
3. Debit fees and credit clearing for the fees, including the tax Square charges on them. The IRS treats sales tax you pay on a service as part of the service's cost (Publication 334). Post any other amount Square holds back to its own account, not to fees.
4. Post the deposit: debit the bank and credit clearing for the transfer amount. If the bank feed already created the deposit, match it to clearing. Do not code it to sales.
5. Check that clearing equals what is still on its way: payments not yet transferred and transfers not yet in the bank, less their fees and any refunds. It is zero only when everything has landed.

Date each payment by the day of the sale and the deposit by the day the bank shows it. One summary entry per day works; see Recording daily POS sales.

Where do card tips go in the books, and who do they belong to?

Tips a customer chooses to add by card are not the business's income. The IRS says tips are not amounts paid to the employer and are not part of its gross receipts (IRS), so the business holds them as a liability, usually called tips payable, until it pays them to the staff who earned them. A self-employed person who keeps all their own tips is the exception: the IRS says those tips are generally part of gross receipts on Schedule C.

A charge the customer must pay, such as an automatic large-party gratuity, is a service charge, not a tip. It is the business's income even when staff are paid from it, so it gets its own sales line (IRS, Topic 761). A checkout screen that only suggests amounts, where the customer may enter any amount or none, produces a tip. Whether a payment is a tip depends on the facts, and calling it a tip does not decide it.

Paying tips out, withholding and tip pools are in Credit card tips: revenue or liability.

How do I record the sales tax Square collected on in-person sales?

Sales tax imposed on the buyer, which you collect and pay over to the state, is not income. Credit it to sales tax payable, not sales (Publication 334). The payment to the state clears the payable; it is not an expense.

Square's Sales taxes report and the sales summary show the tax collected. Match the payable to that figure for the period, then to the return when you file (Square). Two traps:

• Who the tax is imposed on. If the law imposes the tax on you as the seller, Publication 334 says to include what you collect in gross receipts, so the entries above change. Which case applies is state law; ask your preparer how to book the tax you pay over.
• What is taxable. State rules differ on the tax base, so your state's return, not the Square report, settles it.

Matching the payable to the bank withdrawals and the return is in Restaurant sales tax and POS reconciliation. Filing the return, and who can be personally liable for tax collected and not paid over (it differs by state), is in Filing sales tax returns.

How do refunds and disputes show up in a later deposit?

A refund reduces a transfer in the period the refund happens, whatever the date of the original sale, so a transfer can arrive short with no new sale to explain it. Square's reports subtract refunds from payments collected in the period they are captured, and the Reconciliation report lists refunds among the items between payments collected and the amount transferred (Square).

• Two refund totals. The payment methods report includes tax and discounts in its refund amount. The sales summary's returns line leaves tax out and does not include partial or custom-amount refunds, which Square reports as refunds by amount. Split the tax from the sales before you post.
• Booking the refund. Post it on the day it is issued, as returns and allowances, with a reduction of sales tax payable for the tax returned and of tips payable for any tip returned; Publication 334 says returns and allowances include cash or credit refunds to customers. Netting it against that day's sales hides it from your refund total. See Recording refunds in the books.
• Disputes. Square's articles on transfers and reports do not say how a disputed payment reaches a transfer. If a transfer is short by an amount that no refund, fee or withholding on the Reconciliation report explains, get the dispute record from Square and ask your preparer how to book it. Do not plug the gap to sales.

How do I stop revenue being counted twice when the bank feed and a Square sync both post?

Choose one source for sales, and let the bank feed do one job: bring in the deposit so it can be matched to the Square clearing account. Revenue doubles when a sync, or an entry from the sales summary, posts the sales and the deposit from the bank feed is also coded to income.

A rough monthly test for cash-method books: revenue booked for Square should not exceed Square's total payments collected for the same period, because tax, tips and gift card money sit inside those payments. Revenue near the sum of sales and deposits, or above payments collected, may point to a double count. On accrual books, first take out invoices not yet paid, and gift cards redeemed or work delivered from prepayments taken in earlier months.

1. Pick the sales source: the sync, or an entry from the sales summary. Not both.
2. Point the bank feed at the clearing account. Each deposit matches the clearing entry for its transfer and never creates an income line.
3. Check fees and refunds the same way. If a sync posts them and the feed or a manual entry posts them too, expenses double and profit shrinks.
4. Compare revenue with the sales summary before closing each month.

A month that is already reconciled, closed or filed with doubled income needs the steps in Duplicate income in your books.

How do deposit timing, cut-off and instant transfers change my month-end?

A deposit rarely equals one day's or one month's sales. Payments taken after Square's daily transfer cut-off go out in the next transfer, so at month-end some money sits in the clearing account and the month's sales do not equal the month's deposits (Square).

• Cut-off. When a transfer lacks payments you expected, Square says they were most likely taken after the cut-off and are in the following transfer. Book payments by sale date and the deposit by bank date.
• Month-end balance. The clearing balance should equal the payments taken after the last cut-off and any transfer Square sent that the bank has not yet shown, less their fees and any refunds. List them and tie each to the next transfer or bank deposit.
• Instant and same-day transfers. Square's transfer tags, which label the location behind a transfer, are not available for them, so match them by date and amount. If a deposit is short of its listed payments less fees, ask Square to name the deduction and do not plug the gap.
• Open orders. A partial payment on an order that is still open is not in the sales summary until the order closes, but the Reconciliation report lists partial payments among the items in the amount transferred. Books usually hold that money as a customer deposit until the order closes; when it counts for tax follows the accounting method.

Which tax year a sale falls in follows the accounting method (Publication 538). The gift card and prepayment liabilities above are book entries: for tax, an advance payment generally counts in the year received, and an accrual-method business may elect to defer part of it by one year, a method of accounting that Form 3115 changes (same publication). Whether money Square still holds at year-end counts as received depends on the facts. Ask your preparer before year-end. See Cash or accrual for a small business.

How does Form 1099-K compare with my Square sales?

Box 1a of Form 1099-K is the gross amount of the year's reportable card payments, with no adjustment for refunds, fees, discounts or any other amount (IRS instructions). Compare it with what customers paid through Square before refunds, with tax and tips included, not with deposits or net sales. The regulation's own example has a processor deduct its fee and pay out less than the charge, and the full charge is what gets reported (regulation). A payment card processor sends the form however few or small the payments (IRS).

If a gap remains after these items, do not plug it to sales or other income. It can mean a month, a location or an account is missing from the books, or that charges you ran on your own card through your reader may be in the form; see Personal card charges through Square. The IRS also says Form 1099-K may include items that are not your receipts, such as sales tax, and may not include all your receipts (Publication 334). A form that is wrong or duplicated is a separate problem: see Wrong or corrected platform tax form. The bridge for every platform is in Reconciling sales, payouts and Form 1099-K.

What changes when Square is one of several ways I get paid?

Each way of getting paid needs its own clearing account and its own report, because Square's reports speak only for Square.

• Cash and checks never arrive in a Square transfer. If you ring them up in Square, check whether the sales summary already includes them before adding register sales, and post them to cash, not clearing. Otherwise record them from the register and the drawer count; see Recording daily POS sales.
• Channels and locations. Square's sales summary can be grouped by location, device, source or channel, so in-person, online and invoice sales can be separated before they are posted. With several locations on one bank account, Square's transfer tags tell the transfers apart; keep one clearing account per location, or name the location on every line, so each transfer ties to its own sales.
• Other processors, payment apps and marketplaces each need their own method and send their own form. The IRS says accepting payments on different platforms can mean more than one Form 1099-K (IRS). Methods: payouts from a payment processor, payouts from an online store and business payments through a wallet app.

Example

These examples are illustrative; all amounts are in US dollars.

A cafe's day of card sales

A cafe rings $1,000 of sales, $80 of sales tax and $150 of card tips. Assume the tax is imposed on the buyer and the tips belong to staff. Customers pay $1,230. Square takes $37 in fees, and the deposit is $1,193.

Revenue is $1,000 and clearing is back to zero. Booking the $1,193 deposit as sales would overstate revenue by $193 and hide the $37 fee. The Form 1099-K counts the full $1,230.

A refund that makes a deposit short

A salon refunds a $100 service, with no tax or tip, on Tuesday. Thursday's transfer lists $1,500 of payments but pays $1,400 before fees, and no new sale explains the $100. The salon books the refund on Tuesday: debit returns and allowances $100, credit Square clearing $100. Thursday's deposit then matches clearing once the fees are posted.

A shop that counts revenue twice

A shop books $20,000 of Square sales through a sync. The bank feed also brings in the month's $19,400 of deposits, and they are coded as income. Revenue shows $39,400. If the whole $600 gap is fees, the correct books show $20,000 of sales and $600 of fees, with the deposits matched to clearing. The error overstates revenue by $19,400, and the $600 of fees is missing.

Different for you?

• Months of Square deposits were booked as income, tips and sales tax sit in sales, or personal spending runs through the same account. A return filed from those books may have the wrong gross receipts and fees, and a sales tax return built on the same numbers may be off. How far back to rebuild and whether anything filed needs correcting depends on what each year reported. Bring the sales summaries, transfer lists, fee reports, bank statements and the last sales tax return to bookkeeping; for longer gaps see Catching up on overdue books.
• Your sales tax returns or Form 1099-K still do not match the books after the checks above. See Sales tax payable does not match the return, then take the reports to bookkeeping.
• Square withheld tax from your deposits, or told you the tax ID you gave is incorrect. Backup withholding is not a fee. It is credited on the income tax return as tax withheld, a partnership or S corporation passes it to its owners, and giving the payer the correct name and tax ID usually stops it (Topic 307). Take the notice and the Form 1099-K to bookkeeping, so it is booked that way.
• Revenue was counted twice in a month already filed. See Duplicate income in your books, then take the filed year to bookkeeping.
• The Form 1099-K is wrong, duplicated or under the wrong number. See Wrong or corrected platform tax form.
• You have staff who receive tips. See Credit card tips: revenue or liability and Payroll journal entries.
• You run more than one company. See Books for several companies, then take each company's Square reports to bookkeeping.