How to enter collections by another company and classify them

When you use a third-party company to collect payments, how you record the transactions depends on whether you want to track the full gross amount or just your net income. The most common method is to use a Clearing account to track the full sale and the collection fee separately.

Here is how to set this up in QuickBooks Online:

1. Create a Clearing Account

We recommend creating a bank account to act as a temporary holding place for the money.

1. Go to the Settings (gear icon) and select Chart of Accounts.
2. Select New.
3. From the Account Type dropdown, select Bank.
4. From the Detail Type dropdown, select Checking.
5. Name the account something like “Clearing Account” or “Payment Processor Clearing.”
6. Select Save and close.

2. Record the Sale

When you make a sale, record the full gross amount (before fees) and deposit it into the Clearing account.

• If using an Invoice: Receive the payment and deposit it to the Clearing account.
• If using a Sales Receipt: Deposit the payment directly to the Clearing account in the Deposit to field.

3. Record the Collection Fee

Record the fee charged by the collection company as an expense.

1. Go to the + New button and select Expense (or Check).
2. In the Payee field, enter the name of the collection company (add them as a Vendor if you haven’t already).
3. From the Bank Account dropdown, select the Clearing Account.
4. Enter the amount of the fee.
5. In the Category field, select the appropriate expense account (e.g., “Professional Fees” or “Merchant Service Fees”).
6. Select Save and close.

4. Record the Actual Deposit

When the money arrives in your real bank account, record the transfer from the Clearing account.

1. Go to the + New button and select Transfer.
2. Set the Transfer Funds From account to your Clearing Account.
3. Set the Transfer Funds To account to your actual Bank Account.
4. Enter the Transfer Amount (this should be the net amount: Gross Sale minus Fee).
5. Select Save and close.

Important Notes

• 1099 Reporting: If you pay the collection company more than $600 in a calendar year and they are a sole proprietor or partnership, you may need to file a 1099-NEC. Ensure their Vendor profile includes their Tax ID and address.
• Net Method: If you prefer not to track the gross amount, you can simply record the deposit directly to your bank account for the net amount, and record the fee as an expense at the same time. However, the Clearing method above provides a more accurate audit trail of your total sales.