Merchant Category Codes

A merchant’s business is classified by the credit card industry using a four-digit number known as a merchant category code, or MCC.  Both credit card companies and the government utilize merchant category codes to track purchases, as well as occasionally prohibit purchases.

The merchant category code has three primary functions.  The MCC is used to detail the primary line of business the merchant is involved in  as well as what type of product the merchant sells.  The Internal Revenue Service utilizes the merchant category codes to determine if a purchase is taxable.  MCCs are also important in classifying high risk purchases of restricted goods by government regulators.

From local mom and pop convenience stores to large national sport store chains there are over 600 categories of merchant category code classifications.  As soon as you begin accepting credit card payments you will receive your number from the card issuer.  The card carrier for your small business will report this number to both your issuing bank as well as the IRS so that it is included in all of your business’ financial statements and reports.

The IRS typically makes a distinction between merchant products and professional services and your  company’s MCC will likely reflect the bulk of your company’s business.  Where merchant products are not taxable at the federal level, professional services are and so MCCs can be very important in regards to how your business is taxed.

Understanding your own merchant category code is important, but it is also imperative that you know the MCCs of other companies that your business deals with.  While you don’t have to report payments for supplies, if your business pays for services provided by another company, those payments must be reported.  To determine whether a payment requires you to report it requires that you know that company’s MCC.

In order that you stay in line with current government regulations and ensure that you keep the IRS from meddling with your small business you should ensure that you know not only your own merchant category codes but those of all the businesses you interact with financially.

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