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A Merchant Category Code (MCC) is string of four numbers assigned to a business by the credit card companies of Visa® or Mastercard® in order to accept one of these cards as payment in the business. It is an established code recognized by sections 6041 or 6041A of the Internal Revenue Code (IRC) of the Internal Revenue Service (IRS) in the United States for the purposes of taxation. The list of codes is broken down into two broad categories for revenue processing. This includes services, for which payments must be reported, and products, where payments are not required to be reported.
The merchant category code comes into application in the US only after $600 US Dollars (USD) in business has been transacted within a calendar year by a business. The credit card holder that assigns the merchant category code is also allowed to use an industry equivalent code in its place. The primary requirement is that the code that is assigned be matched to the business’ Tax Identification Number (TIN) or a business owner’s Social Security Number (SSN), which can be substituted for a TIN by sole proprietor businesses.
It is the responsibility of the credit card organization to assign the correct MCC classification to the business. The merchant category code is based on the predominant activity being conducted by the business, even if they are engaged in multiple types of commerce. A merchant category code list is maintained by both of the credit card companies and the IRS, itself. For example, IRS code number 0742 is an early code on the list for Veterinarian Services and a later one is 9950 for Intra-Company Purchases. The code list is not necessarily sequential, and sub-codes exist for industries that service other industries directly.
Use of a merchant category code is officially optional, but it is encouraged by the IRS, as it is a method of streamlining the process of determining what has to be reported for tax purposes. Prior to the creation of the merchant category code listing, determining what business transactions were payments for services versus for products could be difficult and time-consuming, and could require individual transaction review. IRS bulletin 2004-43, produced on 2 August 2004, is the industry standard Revenue Procedure code list in use. It is accessible on the IRS website, with a breakdown of the appropriate merchant category code per industry and its subsequent tax bracket.
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