As tax season looms—and with many practices still filing under extensions—credit card processing fees are top of mind. Passing these fees to patients through surcharging might seem like an easy solution, but in reality, it’s anything but simple. Between evolving state laws, card network rules, IRS reporting requirements, and even insurance contract stipulations, the risks for noncompliance are growing.
For medical offices of all types and other service-based businesses, the stakes are high. A small oversight in how a surcharge is taxed, recorded, or disclosed can snowball into penalties, audits, and administrative headaches. And with regulators and card networks paying closer attention, enforcement is becoming both more aggressive and more inconsistent.
Why Surcharging is a Compliance Minefield
Surcharges—additional fees added to a credit card transaction—are subject to a web of rules. In New York, for example, businesses can only pass along the actual cost of processing, and they must disclose that cost clearly before the transaction. Colorado caps surcharges at 2%, regardless of what the business actually pays. Massachusetts and Connecticut ban surcharging altogether.
Card networks add another layer of restrictions, including prohibiting surcharges on debit cards and requiring conspicuous signage to inform customers before payment. And in Illinois, pending legislation may delay—but not remove—the coming Interchange Fee Prohibition Act, which will ban interchange fees on the tax and gratuity portions of transactions and could introduce even stricter controls on how fees are applied.
The compliance challenges don’t stop there. Surcharges are included in the gross amount shown on your 1099-K form, even though the money often goes straight to the processor. If you don’t record the surcharge as both income and an expense, you create a reporting mismatch. For example, a $200 procedure with a 3% surcharge totals $206. That extra $6 shows up in the processor’s totals, but if it’s not accounted for in your books, it could look like underreporting to the IRS—a potential audit trigger.
Sales tax treatment varies by state as well. Some states tax the surcharge, others don’t. Getting it wrong—whether by taxing the base service but not the surcharge, or vice versa—can create compliance gaps. And insurance provider contracts can further complicate things, as some explicitly limit or prohibit passing on additional fees.
The Hidden Cost of “Easy” Surcharge Programs
Flat-rate surcharge programs may seem attractive, but if they’re not customized to your transaction patterns, the savings might not be as big as promised. Worse, if they apply the wrong surcharge amount or fail to exclude debit transactions, they can put you out of compliance without you even realizing it.
The bottom line: surcharging demands a detailed understanding of your state’s laws, your card network’s requirements, your tax obligations, and your insurance contracts—and it requires constant monitoring to stay compliant.
Why Dual Pricing is a Simpler, Safer Alternative
This is where dual pricing can shine. Instead of adding a separate fee at checkout, dual pricing offers two clearly posted prices: one for cash or ACH payments, and a slightly higher one for credit card payments. Customers see the difference upfront and choose how they want to pay.
The advantages are significant:
Compliance clarity:Dual pricing is generally treated as a pricing strategy, not a fee, which means it avoids most surcharge restrictions, including state bans and caps.
Simplified tax reporting: There’s no need to record a separate surcharge as income and expense—the card price is simply the card price.
Customer transparency: Prices are posted clearly, reducing surprises and building trust.
No debit card issues: Since it’s a price difference rather than a surcharge, dual pricing can apply uniformly to all card transactions without running afoul of card network rules.
Fewer operational risks: Staff don’t have to remember when surcharges can and can’t apply, or worry about terminal programming errors.
State-by-State Snapshot: Where Dual Pricing Beats Surcharging
| State | Surcharge Rules | Dual Pricing Advantage |
|---|---|---|
| New York | Allowed only up to actual cost of processing; must be disclosed before transaction | Dual pricing avoids cost-calculation requirements and disclosure complexities |
| New Jersey | Limited to actual processing cost; clear patient communication required | No cap calculations—simply two posted prices |
| Colorado | Capped at 2% regardless of actual cost | No arbitrary cap limits |
| Massachusetts | Surcharging prohibited | Dual pricing permitted |
| Connecticut | Surcharging prohibited | Dual pricing permitted |
| Florida | Allowed with full disclosure | Avoids added-fee perception and compliance documentation |
| Illinois (pending change) | Potential limits on charging interchange fees on tax/gratuity portions starting 2026 | No need to segment tax/gratuity for compliance |
| California | Allowed with restrictions and disclosure | Pricing difference is simpler and avoids disclosure disputes |
| Texas | Allowed with disclosure; no cap | No fee line item—reduces pushback from customers |
| Oregon | Allowed but monitored closely | No need to defend cost-justification to regulators |
Making the Shift Before It Becomes a Problem
With tax season already challenging for many businesses, now is the time to reassess your payment strategy. If you’re surcharging, review your setup carefully:
Are you fully aligned with state and card brand rules?
Are surcharges reported properly in your books and to the IRS?
Is your signage clear and compliant?
For many practices, moving to dual pricing eliminates most of these concerns and offers a more customer-friendly way to recover processing costs.
PayLow Pro helps merchants implement fully compliant dual pricing programs that keep you in control of your margins while reducing compliance risks. In a regulatory environment that’s only getting more complex, the simplicity and transparency of dual pricing could be your smartest move this tax season. For more information on how dual pricing is the better option come tax season, contact us today.
Get the Guide
- The hidden fees your practice incurs for card payments
- The differences between traditional processing, cash discounts, surcharging, and dual pricing
- The legalities for federal government, state legislation and card brand regulations
- The correct setup process and implementation of a legal dual price processing program.
