Understanding Credit Card Costs

Square Pricing Structure

Since I'm familiar with Square Email Invoice Pricing, I will use that service in my following calculation examples.

Square charges a fee of 2.9% on the invoice total plus 30 cents per invoice (as of October 2019). This is the cost for either email invoice or taking payments through Houfy using Square integration.

The cost to you can vary by the number of invoices you accept payment on:

• One invoice for all = 2.9% of invoice + 30 cents
• Two invoices for all = 2.9% of both invoices + 60 cents
• Three invoices for all = 2.9% of all invoices + 90 cents

Net: The more invoices issued and then paid through Square, means a slightly higher cost by fractions of a dollar to you.

Note: If you issue an invoice through Square, but payment is received outside of Square, you can mark the invoice paid with a notation of how that payment was made. Square will not charge you a fee on the invoice if they did not actually collect the payment.

What's on Your Invoice?

The invoice to your guest includes not only your rental fee, which could vary by the rental period, but also additional static or variable fees you charge (cleaning fee, additional guest fees, security/damage deposit etc), plus the taxes you collect for all taxing authorities on all the taxable items on your invoice (local, state, tourist, etc.).

Consider that not all these charges are for money going into your pocket. The cleaning fee may be the exact charge your cleaner charges. Many of the items on the invoice are taxable in most jurisdictions.

Net: You're paying the 2.9% Credit Card Fee on everything on your invoice including charges that aren't yours.

Let's Calculate the True Cost

This is where Algebra education will come in handy! Let me define some values and variables and develop formulas to calculate the true credit card cost.

Let's set the variable X to be the rental fee you plan to charge. This could include variable fees that you charge such as extra guest fee. The thing to understand about X is that this is money coming to you. This variable X is taxable.

Let's say that you require a $250 deposit for every reservation. It's a static cost that you will be charging. Per your tax jurisdiction, this is NOT a taxable item. This is also money going to you with the intention of refunding to the guest after their stay.

You also collect an $80 cleaning fee per reservation. This fee is taxable and you are required to collect the tax on this fee.

In this example, I will keep the taxing requirement easy. Let's say the tax rate is 9%. This rate will be written as .09 in our mathematical formulas.

The Square credit card fee is 2.9% and will be expressed as .029 in our formulas.

These are the items that will be included on the invoice to the guest:
Rental fee + tax rate on Rental fee + deposit + Cleaning Fee + tax on Cleaning Fee

When calculating your specific formula, it might be easiest to start as I've shown above, using words to list all items that will be included in the invoice.

Using Algebra, the formula looks like this (remember X is the variable associated with your rental fee from this guest.)

Invoice to guest = (X + .09X) + 250 + (80 + .09(80) )

Invoice to guest = 1.09X + 337.20

For a rental rate of $1000, this invoice to guest would be $1,427.20

The total is then charged 2.9% by Square, shown in the next formula, where I've also grouped values from our invoice values above and also added the 30 cents that Square collects per invoice payment received.

Square Fee = .029 * ( 1.09X + 337.20) + .30

Using Algebra, let's adjust this formula so it's easier to work with:

Square Fee = .03161X + 9.78 + .30

Square Fee = .03161X + 10.08

This Square Fee formula takes into account the 9% tax on the rental fee as well. ex. As X, the rental fee increases, X is still multiplied by 1.09 (rent + tax) and the .029 Square fee.

Let's Plug in Some Numbers

Let's say the rental fee to our guests is $1000. Using our established formulas that include deposit and cleaning fee:

Square Fee = (.03161 * 1000) + 10.08

Square Fee = 31.61 + 10.08

Square Fee = $41.69

Summary on $1000 rental rate:

Invoice to guest - $1,427.20

Tax on rental rate paid by guest: $90.00

Square Fee - $41.69

Your true take rate on the rental is actually $1000 - $41.69 = $958.31

Adjusting Your Rental Fee for Credit Card Fee Recovery

If you'd like to adjust your rental rate to cover this credit card fee, increasing the fee by $41.69 will not do that! This is because all prices on your invoice will be charged the same 2.9% fee. This would mean you would pay 2.9% fee on the $41.69 too, thereby collecting less than $41.69 from Square!

On top of that, when you charge a higher rental fee to recover this Square processing fee, you'll also have to collect more tax on the rental fee increasing the Square processing fee further than just the rental fee increase.

Let's figure out Rental Fee that Covers the Square Charge

If we didn't have fees, we've already determined that our invoice to guest including deposit, cleaning and taxes would be $1,427.20. So let's work towards receiving that amount....or really an amount close to this number. Keep reading to understand this....

We've already determined that our fixed costs including tax on cleaning fee totals $337.20. We also know that the Square fee is .029 times the total of rent + tax and these fixed costs.

Our formula that takes into account the Square Fee should result in a total received by us as $1,427.20. This total assumes we're collecting $90 in rental tax. But we know that with a higher rent, our tax will also be higher. We'll have to receive not only the $90 on the first $1,000 of rent collected, we need to receive 9% tax on the new rent amount over this first $1,000. Therefore, our new invoice must not only total $1427.20, but also include the 9% tax on the new rent over $1,000.

Here's our new formula and the steps to solve for New Rent:

Taxable New Rent + Fixed Costs - Square Fee = $1,427.20 + .09 (New Rent - $1,000)

1.09(New Rent) + $337.20 - [ .029 ( 1.09(New Rent) + 337.20) + .30 ] = $1,427.20 + .09 (New Rent) - $90

1.09(New Rent) + $337.20 - .03161(New Rent) - .029(337.20) - .30 = $1,427.20 + .09 (New Rent) - $90

1.05839(New Rent) + $327.42 - .30 = $1,427.20 - $90 + .09 (New Rent)

1.05839(New Rent) + 327.12 = $1,337.20 + .09 (New Rent)

1.05839(New Rent) - .09 (New Rent) = $1,010.08

.09639 (New Rent) = $1,010.08

New Rent = $1,010.08 / 0.96839

New Rent = $1,043.05

We would have to charge $1,043.05 to our guest to recover $1,000 after Square fees.

Let's Verify

Rent is $1043.05. Tax on rent is $93.87. Our fixed cost including taxes remains at $337.20 for a total invoice to out guest in the amount of $1,474.12. The Square fee is .029 * $1,474.12 + .30 = $43.05.

Subtracting the new Square fee of $43.05 from the new rent of $1,043.05, we get $1,000.00, our intended take-rate for rent.

This fee is 4.1% of your new rental rate ($43.05/$1,043.05) and 4.3% of your desired rental take ($43.05/$1,000).

Let's Calculate Rent When You Want $1,500 Income

Using the same fixed fees as in our earlier example, the total including related 9% tax is still $337.20. If our goal is to take in $1,500, then our the desired amount from the guest is:

1.09 * $1,500 + 337.20 = $1,972.20

Let's figure out New Rent to charge in order to recover $1,972.20 + the additional new tax over the first $1,500 in rent.

New taxable rent + fixed costs - Square Fee = Value Invoiced Before Square Fee + New Additional Tax on Rent

1.09(New Rent) + 337.20 - [ .029 ( 1.09(New Rent) + 337.20 ) + .30 ] = $1,972.20 + .09 (New Rent - $1,500)

1.09(New Rent) - .03161(New Rent) + 327.12 = $1,972.20 - $135 + .09 (New Rent)

.96839(New Rent) = $1,510.08

New Rent = $1,559.37

Let's Verify

New Rent plus 9% tax is $1,699.71. Fixed costs are still $337.20 for a total invoice of $2,036.91. The Square Fee on this amount is $59.37. Subtracting the Square Fee from the new rent, we receive $1,500.

In this example, the Square Fee as a fraction of the new rent is 3.8% ($59.37/$1,559.37). As a fraction of our intended rental income of $1,500, the Square Fee is 4.0% ($59.37/$1,500).

How Can You Calculate The Upcharge?

1. Determine the amount you would collect if there was no credit card fee. This invoice would include your desired rental income, all taxes and any fees you charge. This is the base amount you need to still receive. This base amount includes the tax on your intended rent.
2. Build your mathematical formula to solve for new rent. The formula needs to subtract the Square fee from the proceeds and acknowledge the additional tax created by the higher rent. The formula would look like this:

New Rent + Tax on New Rent + Other Fixed costs including tax - Square Fee on these 3 items = Value from Step 1 + Additional Tax Required on this New Rent which isn't included in the value in Step 1.

Plug 'n Play Formula

Assuming that there is a single tax rate that applies to all taxable items, just plug in your desired rental take into this formula along with the total non-taxable items, the total taxable items and the tax rate (ex. 9% is written as .09 in the formula) to determine the rate you need to charge to recover your Square fees. This formula assumes just one invoice.

Suggestions on Recovering Credit Card Fees

Rather than accept the Square fee as an expense and reduce your overall income, you might want to charge the guest to recover fees associated with credit card processing. Know that it is illegal in some places to charge a fee explicitly for recovery of this cost. You can increase your rental rate to ensure your income covers this cost. After making these rental fee adjustments, you could offer cash discounts (if allowed in your jurisdiction) ensuring that your net take is the same regardless of payment method.

Personally, I get a little disgruntled when I get an invoice that includes a fee designated as related to my payment by credit card. I would rather that cost be buried in the price of whatever it is I'm purchasing. For that reason and based on these examples where we assume that most reservations are for the $1000 rental fee and a single invoice, I would suggest increasing the rental fee by at least 4.3%. So instead of $1000 rental fee or the $1,043.05 calculated to return $1,000 income, charge the guest $1,050. If most reservations are in the $1,500 range, I would increase the rental fee by 4.0%. Please remember that my examples incorporated a specific tax rate and specific fees that influenced this percentage increase required.

For check payments, you can offer your guest a discount on your new rental rate and still make the rent you intended. However, I would save that offer for repeat guests who are more likely to pay by check since they are familiar with you and your business.

A Note about Refundable Security Deposit and Square

If you issue a refund of the security deposit within 1 year (for invoiced payments and those made using Square integration), Square will also reimburse you the 2.9% credit card fee along with the 30 cents if that invoice was solely for the credit card fee. In my calculations above, I included the security deposit fee as a cost I want to recover. I would suggest keeping the security deposit in the calculation rather than assume the deposit fee will be reimbursed in the future. Square could change its policy or you may be miss the reimbursement window and have to refund the deposit by personal check instead of through Square.