The Power of Cash

Day 478: I was pleasantly surprised when one of my wedding vendors offered to give me a discount if I paid in cash. At first an offer like that sounds sketchy, but if you take a step back and look at it from the merchant’s point of view, you start to understand why paying in cash is encouraged.

Paying with cash helps vendors avoid complicated credit card fees and perhaps decide not to claim the transaction in their taxes. If you do decide to pay your vendor in cash, always get a receipt.

Below are just a couple of big examples of the complicated processes vendors go through when you pay with a credit card.

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Credit Card Processing Fees

There are several parties involved when you pay with plastic: credit card associations, credit card issuing banks, credit card processors and merchant account providers. All of these parties come with a variety of fees that take bites away from your down payment to your vendor. There are three main types of credit card fees.

  1. Transactional fees
  2. Flat fees
  3. Incidental Fees

Transactional fees are assessed each time you run a transaction. They are the biggest cost of the operating merchant account. Flat fees vary by name and value, and are charged to the merchant to cover merchant account provider costs. Incidental Fees are charged per incidence. 

Popular credit cards like Visa, MasterCard and Discover use interchangeable reimbursement fees, which are fees the card-issuing banks and credit card associations charge for every transaction. These fees take out a percentage of what you paid, plus a flat rate per transaction. For example, Visa credit card interchange rates can range from 1.510% – 2.400% + 10 cents.

Some examples of flat fees are terminal fees,  annual fees, monthly fees, statement fees and network fees. These fees can cover the costs of basic use of the merchant account provider’s services, call center costs, and printing and mailing costs for credit card statements.

Examples of incidental fees are retrieval request fees, which are fees for each time a customer initiates a dispute on a charge from the business. Batch fees are another example; each time a merchant submits a batch of transactions, they get charged.

See? All very confusing. And we haven’t even gotten to the big stuff yet. Taxes.

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Business Taxes

Small business owners like your local vendors essentially have to pay taxes on anything and everything having to do with their businesses: selling products or services, owning business property, being self-employed, having employees, and making a profit.

Here is a list of taxes your vendor will have to pay come tax season:

  1. Income tax
  2. Sales tax on products or services sold
  3. Property tax
  4. Excise Taxes on use or consumption
  5. Self-Employment tax
  6. Employment taxes paid on employee earnings
  7. Gross receipts tax
  8. Franchise taxes

In general, self-employment taxes are 15% of a business owners’ income. If a vendor is in the 25% tax bracket ($50,000 – $75,000/year) they will need to set aside 40% of their profits for taxes. That means if you pay a photographer $2,500, he or she knows they won’t be seeing $1,000 of that money.

So God forbid your vendor offers a discount for paying in cash. Realizing the substantial amount of my money that is not even going to my vendors is alarming and unsettling. So if I am able, I will be paying all my vendors and future small business transactions in cash.

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