What is a merchant category code?

It's a four-digit number that identifies what kind of business someone is in. On credit card transactions, the merchant category code (or MCC) is used to identify the type of goods or services being sold. The more specific you can be about exactly what product or service your business provides, the more accurate you'll be at classifying your business.
The three types of merchant category codes are:
Major group – This is the broad category, so if you run an office supply store it would be 591210. If you sell furniture, the number could be one of several different categories depending on what specific type of furniture you're selling. You can find a full list of code numbers and what they represent here .
– This is the broad category, so if you run an office supply store it would be 591210. If you sell furniture, the number could be one of several different categories depending on what specific type of furniture you're selling. You can find a full list of code numbers and what they represent . Sub group – This is the more specific designation for your business. If you sell office supplies, your sub-group code might be 591211 for stationery goods or 591219 for other goods.
– This is the more specific designation for your business. If you sell office supplies, your sub-group code might be 591211 for stationery goods or 591219 for other goods.
Classification – This is the type of service you provide, so if your business is an accounting firm, your classification code could be something like 713210 (management consultants).
While it doesn't matter so much at the processing stage when swiping credit cards, using the most accurate MCC for your business is important when filing income taxes. If you're using the wrong code, it can lead to all sorts of problems.
For example, if your primary customer base isn't in the wholesale/retail category, but you use that code anyway, certain expenses may not be deductible because they will not be classified as "ordinary and necessary." Deductions on an income tax return depend on business type, so it's important to get this one right.
There are different MCC codes for wholesale/retail, services and government entities. You can find a full list of them here . You'll want to use the code that best describes your business as a whole, so if your accounting firm provides services to both individuals and businesses, you might have two MCC codes on your tax return.
The most common mistake with merchant category codes is using the wrong one for a specific transaction or business line. This can lead to penalties from the Internal Revenue Service (IRS). If they think your business is in one category when it should be in another, they'll reclassify your expenses and potentially make you pay more taxes.
So how can you avoid making mistakes with merchant Category Codes (MCC)?
First, do some homework before filing your taxes to make sure your MCC codes are correct. The IRS maintains a list of these codes for all types of businesses.
Otherwise, it's a good idea to contact your credit card processor and ask them what the correct code should be. In most cases, they'll already have this information on file since you filled out an application when you signed up for your account. If not, they can help you fill out the IRS Form 4702 , which asks for the correct merchant category code.
You'll also want to use the MCC that your credit card processor recommends if you're filing a Schedule C with your taxes. This is especially important if you have more than one business or are planning to make money in categories other than retail or wholesale.