If you’ve freelanced for any length of time, you’ve probably considered several options for accepting payment for the invoice templates you submit. Since cash flow is especially important for your small business, it’s likely that you are looking for an option that is both easy for your client to use and for you to collect. Many businesses are moving away from paying with paper checks or even electronic deposit. They are instead requiring many of their independent contractors to take freelance invoice payment online.
There is quite a bit of conversation around this choice, including whether it’s a good deal for freelancers, after all. Fast money should always be a preferred method, right? Things aren’t always so simple. Here are the pros and cons for receiving money online using PayPal that every freelancer should be aware of.
PayPal is one of the oldest, largest, and most popular third-party payment processors used today. The payment processor of choice for retail sites such as eBay and Etsy, it allows any person or business to send money in real-time to any other registered user. It also makes it easy to process payments using major credit cards or transfers from a checking account. Freelancers can receive money on PayPal for a fee.
PayPal is an all-in-one payment provider that also offers options to return all or just a portion of the purchase price of any service or product via their uncomplicated refunds process. Purchasers are also fond of the ability to dispute payments for lack of service, a product not being delivered, or conditions of a buying contract being met. These protections are in addition to any provided by a credit card company, and so many clients prefer to protect their purchases through PayPal’s built-in resolution policy.
PayPal has made it very simple for freelancers to bill clients and receive payments, almost instantaneously. If you are looking for a solution that increases cash flow and will make things simple for your client, PayPal can’t be beat. They accept many common payment options, and you don’t have to set up more than one account to get access. Freelancers used to get away with paying taxes by staying under the IRS's 1099-K threshold. President Joe Biden lowered the requirement in order to catch folks who try to avoid paying PayPal taxes.
One amazing perk of PayPal is that it is also a good cashflow solution for your clients. A cash-strapped customer who may be reluctant to use your services may be persuaded with the option to pay with credit. PayPal’s generous credit card acceptance policy – along with their own Pay Later program – ensures that lack of funds need not stop a potential client from using your services.
A negative to using them, however, is their customer-focused refund policies. Since they make it very easy to dispute charges for a number of reasons (including an item not being in good condition or not representative of what was sold), sellers can be on the hook for money earned if the buyer changes their mind. This suggests that it could be a great idea to know a few PayPal alternatives to have as options. While there is a resolution process that allows freelancers to provide documentation supporting their side, PayPal almost always refunds the money to the customer while the dispute is taking place (not unlike a credit card dispute.)
In addition, PayPal’s refund policy makes it likely that an unscrupulous buyer could make a false complaint against you, collect their money back, and retain the work you provided them. While not common, it has happened.
Freelancers who have concerns about this practice may want to reserve PayPal payments only for qualified clients or long-time buyers who have earned their trust and aren’t likely to flake out.
This refund practice (also known as a “chargeback”) isn’t specific to PayPal, however. Major credit card companies all have procedures in place to protect buyers, and they will often side on the customer when a dispute arises. One way to ensure you are in the clear is to carefully lay out payment terms in the original contract, along with remedies for an unhappy buyer. (You may, for example, require that they come to you with problems and allow you to resolve them before requesting a refund through PayPal.)
Another drawback for some are the PayPal fees for receiving money through it.
Paypal isn’t free, even if it is convenient. In fact, when most freelancers do their PayPal 1099 taxes at the end of a year, they should include PayPal fees as a deductible expense against earnings. While the exact amount you’ll pay per transaction will vary based on the amount you received, here is the current formula:
On a $500 job, for example, you’d pay $22.30 in PayPal fees for receiving the money. Then, it would cost an additional $1.50 to have a check issued.
For a freelancer who does $35,000 in sales each year, with 60% of those sales coming through PayPal payments, you can expect to pay fees on $21,000. This would be a minimum of $924.30 in fees, but likely more (since the $.30 charge is per transaction, it would really depend on the transaction numbers.)
Considering that you are paying up to 5% of your annual earnings in fees to PayPal, it is understandable why some freelancers are looking for an alternative.
One way that freelancers are getting around the PayPal fees when receiving money is by bundling them into their service costs. If you normally charge $250 for a blog post, you can choose to charge $265 and more than cover your PayPal fees. The client doesn’t necessarily know what all goes into your pricing formula, so this is a safe way to feel good about the value you provide while also keeping your expenses in check.
(Note that PayPal prohibits passing on the cost of fees as a fee “surcharge”. Just as a restaurant can’t charge you more for using a credit card vs. cash, you can’t charge an additional fee for accepting PayPal. You can, however, charge a bit more across the board to account for your PayPal expenses. Be sure that you aren’t adding this extra charge as a line item on your invoices. Simply bundle it into your service cost.)
In the end, it’s hard to avoid using PayPal entirely. Some clients insist on using it, and it’s really one of the most convenient ways to get paid – and in a hurry. When tied to a PayPal Mastercard, it can simultaneously serve as a tool for both tracking expenses and payments. (Many freelancers use their PayPal payments to then pay off their card, making it easy to keep debt paid off each month).
For the freelancer on a strict budget, losing a bit of each paycheck to Paypal may not be an appealing thought. Many have successfully ditched the processing giant altogether. For these freelancers, however, it mostly works because they have just a few large retainer clients who have no problem paying via electronic bank transfer. The vast majority of freelancers, however, have over a dozen clients a month, and even more in the course of a year. It’s a very tedious process to set up a new or one-off client for a check or direct deposit situation – not to mention a bit scary.
In truth, PayPal may be the best option for those looking for quick payments from any source, and without the need to expose your personal information or bank account numbers. There are also few things more satisfying then getting a notification that payment has been received for a job well done. Perhaps the best part of freelancing, getting paid is an amazing feeling, indeed. Ensure it happens fast by signing up for a free Bonsai trial.