How Square Payment App Works and What It Costs
What Square Does and Who Uses It
Square is a payment processor that lets you accept credit cards, debit cards, and digital wallets (like Apple Pay or Google Pay) on a mobile device or computer. You swipe, tap, or insert a card, and the money moves into your bank account. Square makes money by taking a percentage of each transaction—you pay the fee, not your customer.
Square is built for small businesses, freelancers, and sole proprietors who don't have a traditional merchant account through a bank. A plumber, a yoga instructor, a handmade goods seller, or a food truck can start accepting cards within days instead of weeks. You don't need a storefront or employees. You need a smartphone or tablet, an internet connection, and a bank account.
Square also sells hardware—card readers that plug into your phone, stands for a register, receipt printers—and software to track inventory, appointments, or payroll. This guide focuses on the payment processing part: how the money moves and what you pay for it.
Key Takeaways
- Square charges a percentage of each transaction (the rate depends on how you accept the card) plus a per-transaction fee, and these rates are the same for all businesses of the same size.
- Money from card sales deposits into your linked bank account, usually within one to two business days, though some deposits take longer.
- You need a Square account, a compatible device (phone, tablet, or computer), and a linked bank account to start processing payments.
- Square keeps records of every transaction, which you can download as a report for your own bookkeeping or tax filing.
- If a customer disputes a charge or claims fraud, Square holds the money while they investigate, which can take weeks.
How Much Square Charges
Square's fees depend on how the card is processed. If the customer physically swipes or inserts their card into a reader, or taps their phone, the rate is one percentage plus a flat fee per transaction. If you manually type in the card number (called a "keyed" transaction), the rate is higher. If the customer is not present—you're billing them later or over the phone—the rate is also higher.
The exact percentages and per-transaction fees change over time and may vary by location. Square publishes its current rates on its website. The key point: you pay the same rate as every other small business using Square's standard plan. There is no negotiation, no volume discount, no special deal. You either accept Square's published rate or you use a different processor.
Square also charges monthly fees for certain add-ons: invoicing software, payroll processing, or a point-of-sale system. The basic payment processing has no monthly fee—you only pay when you process a transaction.
How Money Gets Into Your Bank Account
When a customer's card is processed, Square doesn't send the money to your bank immediately. Instead, Square holds it in a holding account for one to two business days. This delay is called the settlement period. After the settlement period ends, Square transfers the money to the bank account you linked when you created your Square account.
The transfer itself usually arrives within one business day, though some banks take longer to post it. So from the moment a card is swiped to the moment you see the money in your account, plan for two to three business days. If you process a card on a Friday, the money may not land until Tuesday or Wednesday.
Square sends you a receipt and a record of every transaction. You can see your balance, pending deposits, and transaction history in the Square app or on the Square website. This record is useful for your own accounting and for matching against your bank statement.
What Happens If a Customer Disputes a Charge
If a customer tells their bank that they didn't authorize a charge or that they never received what they paid for, the bank opens a dispute. Square is notified and freezes the money—you can't access it while the dispute is being investigated. This is called a chargeback.
Square gives you a window (usually 7 to 10 days) to respond with evidence: a receipt, a photo of the product, a delivery confirmation, an email from the customer, or any other proof that the transaction was legitimate. If you respond with strong evidence, Square usually rules in your favor and releases the money. If you don't respond or your evidence is weak, the money goes back to the customer's bank, and you lose it.
Chargebacks are common in online sales and phone orders. They're less common in face-to-face transactions where the customer is present and sees what they're buying. If you have a high chargeback rate, Square may freeze your account or close it.
Setting Up Square and Linking Your Bank Account
To start, you download the Square app or go to Square's website and create an account. You'll need your name, email, phone number, and the bank account where you want deposits to land. Square will ask for your Social Security Number or Employer Identification Number to verify your identity.
Once your account is created, you order a card reader (if you want one) or you can start processing payments immediately using your phone's camera to read a card or by manually entering the card number. Square sends the reader to you by mail, usually within a week.
Before your first deposit lands, Square may hold your account for review. This is a fraud-prevention step. They may ask for documents like a business license, a photo of your ID, or a bank statement. This review usually takes a few days. Once approved, deposits start flowing on schedule.
When Square Is Not the Right Choice
Square works well for small, low-volume businesses. If you process thousands of dollars per day or run a high-risk business (like a casino, a cryptocurrency exchange, or a business with a history of chargebacks), Square may not accept you, or they may charge higher rates through a different plan.
Square also doesn't work well if you need instant access to your money. The one- to two-day settlement period is standard across the payment processing industry, but some processors offer faster deposits for a higher fee. If you need money the same day, you'd have to pay extra.
If you process very few transactions—maybe one or two per month—Square's per-transaction fee might feel high. Some processors have monthly minimums or flat fees that could be cheaper if your volume is tiny. Compare Square's rates against Stripe, PayPal, or your bank's merchant services before you commit.
Keeping Records and Taxes
Square automatically records every transaction and stores it in your account. You can download a report by date range, payment method, or customer. This report shows the gross amount, the fee Square took, and the net amount you received. You can export it as a CSV file and import it into accounting software or a spreadsheet.
At the end of the year, you'll need these records for your tax return. If you're a sole proprietor or run an LLC, you report your business income on your personal tax return. The Square records show exactly how much you brought in. Your accountant or tax software will ask for this number.
Square does not file tax forms on your behalf. You are responsible for reporting your income to the IRS. If you have questions about what to report, talk to a tax professional or contact the IRS directly.
Frequently Asked Questions
Can I use Square if I don't have a business license?
Yes. Square doesn't require a business license to open an account. You can use it as a sole proprietor or freelancer. However, you are still required to report the income to the IRS, whether or not you have a formal business license.
What if my bank account is closed or I change banks?
Log into your Square account and update your bank account information. Future deposits will go to the new account. Deposits that were already scheduled will still go to the old account, so contact your old bank to see if they'll forward it or if you need to retrieve it another way.
Does Square report my income to the IRS?
Square reports your transaction volume to the IRS if you process more than a certain threshold in a year (the threshold varies by state and changes annually). You will receive a form called a 1099-K. This does not mean you don't have to file taxes—it means the IRS already knows roughly how much you processed, so your tax return should match.
Can I process payments without a card reader?
Yes. You can manually type in a card number, or the customer can tap their phone on your device to pay with a digital wallet. Both methods work, but manually entered cards are charged at a higher rate because they're riskier for fraud.
What if I want to refund a customer?
Open the transaction in your Square app or dashboard, click refund, and choose the amount. The refund is processed immediately, and the money goes back to the customer's card. It usually appears in their account within one to three business days, depending on their bank.