What is an NSF fee on a returned check or ACH payment?

NSF fees, sometimes called bounced check fees or insufficient funds fees, get applied when a payment instrument — typically a check or ACH transfer — is rejected by the payer's bank because the account balance is below the payment amount. Both the payer's bank and the payee's bank may charge fees, and many service businesses also pass a separate NSF fee back to the customer to cover the cost of the failed transaction.

Most states allow merchants to charge NSF fees on returned checks, with caps that vary widely. California limits the fee to $25 for the first instance and $35 for subsequent ones. Texas allows up to $30. New York allows up to $20. Some states require advance disclosure (a sign at the register or a clause in your terms) before the fee can be enforced. ACH NSF fees follow similar but separate rules under NACHA's regulations.

Operationally, an NSF event means the original invoice is still unpaid. The accounting entry reverses the deposit, the fee is added as a separate line item, and the customer needs to remit a fresh payment. Repeat NSF events on the same customer are a strong signal of cash-flow distress on their side and usually lead to either a payment plan or a switch to cash-only terms.