Are PayPal fees tax deductible? If you are a freelancer or small business that uses PayPal to collect payments for services, this is an important question for you during tax time. Simply put, PayPal fees add up. Every time you receive money through PayPal, the fees are deducted from your payments.
Yes, PayPal fees related to collecting money from customers or clients and operating your business are, in fact, deductible and will reduce taxable income. Let's explore which processing fees you can deduct when you do your PayPal taxes.
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Tax Deductions For PayPal Fees
Fees are calculated based on the transaction's TOTAL AMOUNT. PayPal deducts their charge from the Total Amount and puts the leftover balance into your PayPal Account when someone pays you. After you've received the cash, you can use them however you wish, such as withdrawing them to a bank account, requesting a paper check, or making an online transaction.
For instance, if you sold an item for $100 and the total amount of the sale was $100, you'll receive the payment minus the fees. PayPal processing fees given to your business can be reported on Schedule C as Business Income, usually as "Other Income."
Similarly, the PayPal fees you pay are shown as "Other Expenses" under "Business Expenses."
Here are all the transaction rates/processing fees you can write off as a loss if you use PayPal to receive business-related payments.
The standard rate for receiving domestic transactions
These PayPal payment fee types are all tax deductible.
PayPal Guest Checkout – American Express Payments (3.50%)
QR code Transactions – 10.01 USD and above (1.90% + fixed fee)
QR code Transactions – 10.00 USD and below (2.40% + fixed fee)
Pay with Venmo (3.49% + fixed fee)
Send/Receive Money for Goods and Services (2.89% + fixed fee)
Standard Credit and Debit Card Payments (2.99% + fixed fee)
All Other Commercial Transactions (3.49% + fixed fee)
All Other Commercial Transactions – American Express Payments (3.49%)
Other Deductions You Can Claim On Your Taxes
It's important to keep receipts (digital or physical) of expenses or deductions to limit how much you pay Uncle Sam. On top of processing fees from PayPal, you can claim many more deductions as a self-employed business.
Let's review some of the other expenses you can deduct.
Home office deduction - if you are a freelancer or small business owner who works from a home office, you can opt to take this deduction. There are two methods to claim a home office reimbursement from the Internal Revenue Service. The regular method or the simplified method aka tracking business expense or taking the IRS's square feet rate for a deduction.
Professional software tax deduction - If you buy an accounting software subscription, you can deduct the cost of the software.
Internet - practically every business needs wifi to perform their services. If your small business uses wifi, you can deduct the cost of the internet from your tax bill.
Social media management tools - just like accounting tools, if you use any social management platforms to help you market your small business, you can claim these costs from your taxes.
Cell phone - you can deduct a percentage of your cell phone from your tax liability. Chances are, unless you have a phone specifically for business, you'll be using your phone for personal reasons too. You can deduct the percentage of business use, compared to personal. For example, if you use your cell 75% for personal reasons and 25% of the time related to business, you can write-off 25% of the cost is tax-deductible.
Credit card fees - Individual credit card expenses are not deductible, but business credit card fees are. These fees, as well as finance charges/PayPal fees, can be deducted by businesses. Individuals are not permitted to write off credit or debit card processing fees incurred in the course of paying taxes. Keep in mind, annual credit card fees are NOT deductible. Interest expenses are tax-deductible.
Business property rent - if you rent out any storage or property to run your business, then this is deductible.
Business meals - if you buy dinner or coffee at a meeting with a client, partner or someone in your business and you discuss business-related topics, you can write off a portion of the costs.
Health insurance - you can claim the cost of your health insurance premiums off what you owe to the government.
Remember, in order to write off expenses, you have to claim the income to the IRS. They also have to be a reasonable expense related to your business. You cannot claim a course you took, that is not related to your profession.
Hobby Vs. Business
If you sell products on eBay as a hobby, you do not need to file self-employment taxes. Hobby income is considered to be personal income, and not business income. The Internal Revenue Service has specific guidelines to when income is considered business versus hobby. Although you do not have to file self-employment tax, you'll still need to claim income tax on the money you earn as a hobby.
Try Bonsai Tax To Help You Record Tax Deductions
Listen, handling taxes for your business doesn't have to stress you out. With Bonsai Tax, we'll track all your tax deductions automatically. You won't have to worry about what counts as a tax deduction or how to properly track receipts. Our app will do all of that for you. Try a 7-day free trial today.
We always recommend you seek the advice of a tax professional if you have any questions related to filing your tax return.
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