Should Donation Processing Fees Be Recorded as Expenses? (October 2026 )

Yes, donation processing fees should be recorded as expenses. When a donor gives $100 online and the payment processor charges a $3 fee, your nonprofit records the full $100 as contribution revenue and the $3 as a separate processing fee expense. You never net the fee against the donation amount.

This approach follows the gross reporting principle that auditors and the IRS expect from nonprofit organizations. I have seen bookkeepers struggle with this exact scenario on Reddit’s r/Bookkeeping and r/nonprofit communities, where the most common question is whether to record the $97 net deposit or split it into $100 revenue and $3 expense. The answer is always the split.

In this guide, we walk through exactly how donation processing fees should be recorded as expenses, including journal entries, tax deductibility rules, donor-covered fee scenarios, QuickBooks workflows, and IRS Form 990 reporting considerations for 2026.

Should Donation Processing Fees Be Recorded as Expenses?

Donation processing fees should always be recorded as expenses, not deducted from contribution revenue. This is the core gross vs. net reporting principle in nonprofit accounting.

Here is the concrete example that makes it click. A donor makes a $100 credit card gift through your website. Stripe charges a 2.9% fee plus $0.30 per transaction, which comes to $3.20. Your organization receives a net deposit of $96.80.

The correct way to record this transaction is to recognize $100 in contribution revenue and $3.20 in a dedicated processing fee expense account. Your books reflect the true generosity of the donor and the true cost of accepting online payments.

Why does this matter? Three reasons stand out. First, netting fees against revenue understates both your total donations and your actual operating costs, which distorts financial statements. Second, donors who gave $100 deserve an acknowledgment letter showing $100, not $96.80. Third, grant reviewers and watchdogs like Charity Navigator use gross revenue figures to calculate fundraising efficiency ratios. If you net the fees, those ratios look artificially better and raise red flags during audits.

What Are Donation Processing Fees?

Donation processing fees are the charges imposed by payment processors when donors make credit card, debit card, or ACH contributions to your nonprofit through an online platform.

These fees typically range from 2.2% to 2.9% of the transaction amount, plus a fixed per-transaction charge of $0.08 to $0.30. Common processors include Stripe, PayPal, Square, Network for Good, and specialized nonprofit platforms like Classy and Bloomerang.

For accounting purposes, donation processing fees fall under the broader category of bank and processing fees, which are classified as operating expenses. Some organizations further categorize them as fundraising expenses because they are directly tied to soliciting and collecting donations. The classification depends on how your chart of accounts is structured and what makes sense for your Form 990 functional expense reporting.

How to Record Donation Processing Fees: Journal Entries

Recording donation processing fees requires two journal entries that work together. I will walk you through each step using the $100 donation with a $3 processing fee example.

Step 1: Record the Gross Donation

First, recognize the full donation amount as contribution revenue. This entry captures what the donor actually authorized.

Debit: Cash or Pledges Receivable — $100
Credit: Contribution Revenue — $100

Step 2: Record the Processing Fee Expense

Next, record the fee charged by the payment processor as a separate expense. This captures the cost of accepting the donation.

Debit: Processing Fee Expense (or Bank and Processing Fees) — $3
Credit: Cash — $3

When you post both entries, your Cash account shows the $97 net deposit that actually hit your bank. Your Contribution Revenue account shows the full $100. Your Processing Fee Expense account shows the $3 cost.

Never Net Fees Against Revenue

The one mistake I see repeatedly in nonprofit bookkeeping forums is recording the net amount only. A bookkeeper sees $97 hit the bank and records $97 as donation revenue, ignoring the $3 fee entirely.

This approach understates your revenue, hides your true cost of fundraising, and creates problems during audits. If the donor gave $100, your records should reflect $100. The fee is a separate cost of doing business.

A related mistake is recording credit card fees as negative contributions. Some churches and small nonprofits do this by crediting Contribution Revenue for negative $3. This distorts your revenue line and violates standard nonprofit accounting principles. Always use a dedicated expense account.

Gross vs. Net Reporting: Why It Matters

The choice between gross and net reporting has real consequences for your nonprofit’s financial health and credibility. Gross reporting is the correct approach, and here is why.

Gross reporting means you show the full amount donors intended to give as revenue, then list processing fees as a separate line item in your expenses. This paints an accurate picture of both how much you raised and how much it cost to raise it.

Net reporting means you only record what hit the bank account after fees. A $100 donation with a $3 fee shows up as $97 in revenue with no expense recorded. This hides costs and makes your organization appear more efficient than it actually is.

The fundraising efficiency ratio is where this matters most. This ratio divides total fundraising expenses by total contributions raised. If your organization raises $500,000 in gross donations and pays $15,000 in processing fees, your fundraising efficiency ratio is 3%. Donors and watchdogs use this number to evaluate whether your organization spends responsibly. Net reporting makes this ratio look like 0%, which is a red flag, not an achievement.

What Happens When Donors Cover the Processing Fee?

Many donation platforms offer a checkbox that lets donors cover the processing fee on top of their gift. This is increasingly common on platforms like Classy, Givebutter, and Network for Good, and it creates a specific accounting scenario that most guides skip.

Here is how it works. A donor enters a $100 gift and checks the box to cover the 3% fee. The platform calculates the surcharge so that after fees are deducted, your organization still receives the full $100. At a 3% fee, the surcharge is approximately $3.09. The donor’s credit card is charged $103.09.

In this scenario, you record $103.09 as contribution revenue because that is the total amount the donor authorized. You then record $3.09 as processing fee expense. The net cash to your organization is $100, which matches what the donor intended you to receive.

The donor can deduct the full $103.09 on their tax return because that is the total amount they gave. Your donor acknowledgment letter should show $103.09 as the contribution amount, not $100.

Some organizations wonder whether the covered fee portion should be treated as a temporarily restricted gift. The short answer is no. The covered fee is part of the donor’s overall unrestricted gift to your organization. You are simply using a portion of that gift to pay the processing cost.

Are Donation Processing Fees Tax Deductible?

The tax deductibility of donation processing fees depends on whose perspective you are asking about. Let me break it down for both donors and nonprofits.

For donors, the deductible amount is whatever they authorized and paid. If a donor gives $100 and does not cover the fee, they deduct $100. If they check the box to cover the fee and are charged $103.09, they deduct $103.09. The processing fee does not reduce their deduction because they gave the full amount to the charity.

For nonprofits, processing fees are fully deductible as business operating expenses. The IRS treats these costs the same way it treats any legitimate cost of doing business for a tax-exempt organization. Since your nonprofit pays no income tax, the deductibility is less about tax savings and more about proper expense classification for Form 990 reporting.

IRS Publication 535 covers business expenses for organizations, and while it is written primarily for for-profit entities, the principle applies: ordinary and necessary costs of operating your organization are legitimate expenses. Payment processing fees qualify because they are a standard cost of accepting online donations.

IRS Form 990 and Reporting Considerations

Donation processing fees appear on your IRS Form 990 in the functional expense section. Where you classify them depends on how your organization allocates costs between program services, management and general, and fundraising.

Most nonprofits classify processing fees as fundraising expenses because they are directly tied to collecting donations. If your online donations are part of a specific fundraising campaign, the associated fees belong in that campaign’s fundraising cost allocation.

If the fees are tied to general online giving that is not campaign-specific, some organizations classify them as management and general expenses. Either classification is acceptable as long as you are consistent and can justify your methodology.

The classification matters because Form 990 Part IX shows your functional expense breakdown, and reviewers use the program service ratio (program expenses divided by total expenses) to evaluate your efficiency. Processing fees classified as fundraising do not hurt your program ratio as long as your overall fundraising costs remain reasonable relative to the funds raised.

Tracking Processing Fees in QuickBooks and Other Software

Setting up your accounting software to handle processing fees correctly saves hours of reconciliation work each month. Here is how to configure QuickBooks Online and similar platforms.

First, create a dedicated expense account called Processing Fees or Bank and Processing Fees under your chart of accounts. This gives you a single line item to track all payment processing costs throughout the year. Having a separate account makes it easy to pull totals for Form 990 reporting and annual budget reviews.

When recording online donations in QuickBooks, create the donation as a sales receipt or invoice for the gross amount, coded to your Contribution Revenue account. Then record the processing fee as a separate expense transaction, coded to your Processing Fees account. Many nonprofits download a monthly summary from their processor and enter the total fees as a single journal entry at month-end.

For Stripe and PayPal, you can reconcile the processor’s monthly statement against your bank deposits. The difference between what the processor reports as collected and what hit your bank should equal the total fees charged. If the numbers do not match, investigate before closing the month.

If you use a donor management platform like Bloomerang, Little Green Light, or DonorPerfect that integrates with QuickBooks, the sync can automate this process. Make sure the integration is configured to pass gross donation amounts and separate fee transactions rather than netting them.

Records to Keep for Audits

Proper documentation protects your nonprofit during audits and ensures compliance with IRS recordkeeping requirements. Here is what you need to retain.

Keep monthly processing statements from each payment processor. These statements show every transaction, the gross donation amount, the fee charged, and the net deposit. They serve as your primary evidence that fees were recorded correctly.

Retain all donor acknowledgment letters sent to contributors. These letters must show the gross donation amount, not the net after fees. If a donor gave $100, the letter says $100, regardless of the processing fee.

Keep bank deposit records that show the net amounts transferred from each processor. These should reconcile with your processor statements and your accounting records. Matching all three sources is the foundation of a clean audit trail.

The general IRS retention guideline for financial records is at least seven years. Check with your accountant or state regulators for any longer retention requirements that apply to charitable organizations in your jurisdiction.

FAQs

The Bottom Line

Donation processing fees should be recorded as expenses, period. Record the full gross donation as contribution revenue, then capture the processing fee in a dedicated expense account. This approach gives you accurate financials, clean audits, correct donor acknowledgments, and meaningful fundraising efficiency ratios.

If you are setting up your nonprofit’s accounting for the first time or cleaning up an existing system, start by creating a Processing Fee expense account in your software today. Then review your recent online donations to make sure each one was recorded at the gross amount. Getting this right from day one saves significant headaches when audit season arrives.