Merchant Category Code: Reporting & Rates

Originally created in 2004 to streamline 1099 reporting, merchant category codes are now used for a number of different purposes. Of particular importance to businesses is a merchant category code's impact on interchange fees charged by issuing banks.

We will discuss the finer points of MCCs below, and we have also created a merchant category code lookup tool.

What is a merchant category code?

A merchant category code (MCC) is a four-digit number assigned to a business by an acquiring bank or institution when the business begins accepting Visa or MasterCard as a form of payment.

Merchant category codes have been used to classify businesses by specific market segments since the Internal Revenue Service published IRS Revenue Procedure 2004-43 in Internal Revenue Bulletin 2004-31.

For example, a veterinary clinic would be assigned a merchant category code of 0742 for "Veterinary Services."

How are merchant category codes used?

Merchant category codes were originally created to simplify 1099 reporting for commercial cardholders. The IRS requires businesses to report payments made for services on a year-end 1099 form, but it does not require the purchase of goods to be reported.

Prior to MCC classification, cardholders had to sort through transaction-level detail to determine whether a payment card purchase needed to be reported.

With MCC classification in place, cardholders can now reference the MCC of the business where a purchase was made to determine whether the purchase must be reported to the IRS.

For example, a payment made to a business classified as MCC 4816 "Computer Network Services" would be reportable because the business provides a service, whereas a payment made to a business classified as MCC 5734 "Computer Software Stores" would not be reportable because the business sells a product.

Since 2004, merchant category codes have come to be utilized for more than simplifying 1099 reporting. For example, acquirers use MCC classification as a measure of risk and to identify prohibited business types, and Visa and MasterCard use merchant category codes to influence interchange fee qualification.

Why are merchant category codes important?

Aside from cardholder reporting, merchant category codes are used by the major card brands (Visa, MasterCard, Discover and American Express) to influence the interchange fees that a business pays.

If you're not sure what interchange fees are, take a moment to read up interchange fees here. Interchange fees are important because they are collected by banks that issue credit and debit cards, and they account for the vast majority of a business' credit card processing expense.

Businesses with certain merchant category codes qualify for special interchange rates that often lead to lower than typical credit card processing charges.

For example, a business classified as 5411 "Grocery Stores, Supermarkets," 8211 "Elementary and Secondary Schools," or 6300 "Insurance Sales and Underwriting" will qualify for lower than typical interchange categories.

It's important to note that most merchant category codes will not qualify a business for lower interchange rates, and some MCCs qualify a business for industry-specific interchange rates that are different than typical rates, but not necessarily lower.

However, it's important to ensure that your business is correctly classified both for reporting purposes and to ensure it does not lose out on potentially lower rates.

MasterCard merchant category codes

MasterCard uses the same merchant category codes referenced by the IRS and other payment brands such as Visa, Discover and American Express. However, MasterCard uses an additional transaction category code (TCC) to further identify general business categories.

MasterCard's TCC codes are as follows:

A Automobile/Vehicle Rentals
C or Z Cash Disbursement
F Restaurant
H Hotel/Motel
O College/School Expense
O Hospital
P Payment Service Provider
R All Other Merchants/U.S. Post Exchange
T Pre-Authorized Mail/Telephone Order
U Unique Transaction Quasi-Cash Disbursement
U or R Cardholder-Activated Terminal
X Airline, Railroad, Travel Agency/Transportation

Merchant category code list

Several resources are available online that provide a merchant category code list. We have listed a few of these resources below:

Merchant category code lookup

We have created a handy merchant category code lookup tool that allows you to search by MCC to find the name, general category and reporting requirements for any merchant category code.

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