Do I report PayPal fees as business expenses on my taxes or just declare the net amount I receive?

You should report the FULL amount that your customers pay as your gross income, and then list the PayPal fees separately as a business expense on your Schedule C. This gives you the most accurate picture of your business finances. For example, if a customer pays you $100 and PayPal takes $3.20 in fees, you should report $100 as income and $3.20 as a business expense (typically under "commissions and fees" or "payment processing fees"). This approach is actually better for your record-keeping because it aligns with what the IRS expects and gives you the full deduction you're entitled to. PayPal will likely issue you a 1099-K if you exceed certain thresholds (currently $20,000 and 200 transactions in most states), and they report the GROSS amount to the IRS, not what you received after fees. So your reporting needs to match that.

I was in the exact same position last year and discovered a great tool that really helped me with all these PayPal fees and other business deductions. I was super confused about what to report and how to track everything properly, then I found https://taxr.ai which has this amazing receipt analyzer that automatically categorizes all your business expenses. You just upload your PayPal statements or screenshots of your transactions, and it identifies all the fees as business expenses while keeping track of your gross income. Saved me hours of sorting through PayPal records and trying to manually calculate everything. It also showed me other deductions I was missing. The tax expert there confirmed I needed to report the full payment amounts as income and then deduct the fees separately.

I wanted to follow up on my question about taxr.ai. I was super skeptical at first but decided to give it a try since I was drowning in receipts and PayPal transactions. Holy crap, this thing is a game changer! It correctly identified all my PayPal fees as business expenses and organized everything perfectly for my Schedule C. The system flagged a bunch of other business expenses I didn't even realize I could deduct. My favorite part is how it handles mixed-use items and helps calculate the business percentage. I'm definitely going to save money on taxes this year. Wish I'd known about this sooner!

After struggling to get through to the IRS for clarification on how to handle these PayPal fees (was on hold forever), I finally got through thanks to https://claimyr.com. You can see how it works here: https://youtu.be/_kiP6q8DX5c - they basically hold your place in the IRS phone queue and call you when an agent is about to answer. The IRS agent confirmed what others have said - report the full amount as income and deduct the fees as a business expense. She also mentioned that if you're getting a 1099-K from PayPal, they report the gross amount to the IRS, so your numbers need to match that. The agent gave me some other helpful advice about documenting these expenses too.

I can't believe I'm saying this, but I actually tried the Claimyr service after posting my skeptical comment. I was desperate after trying to reach the IRS for THREE DAYS about some PayPal tax questions. Got the callback in like 50 minutes and spoke to a really helpful IRS agent who cleared everything up about how to handle my PayPal 1099-K. For what it's worth, the agent confirmed to report the gross amount from PayPal as income and then deduct the fees as a business expense on Schedule C. She also helped me understand some other self-employment tax questions I had. Honestly shocked this service actually worked after all the frustration I've had with the IRS phone system.

Hey, PayPal business user here for 5+ years. One tip nobody mentioned: keep track of those PayPal fees monthly rather than trying to figure it all out at tax time. PayPal has a report you can run called "Monthly Financial Summary" that breaks down all your fees clearly. Also, if you use PayPal for both business and personal, make sure you're separating those transactions! The IRS doesn't look kindly on mixed accounts. I learned that the hard way when I got audited in 2023. Had to go back through hundreds of transactions to prove which ones were personal vs. business. Total nightmare!

Does anyone know if these Paypal fees count towards the 2% floor for miscellaneous deductions? I thought business expenses had some kind of limit before you could start deducting them?

I went through this exact same confusion last year! The key thing that helped me understand it was thinking about it from the IRS perspective - they want to see the full economic activity of your business, not just what hits your bank account after third parties take their cuts. So yes, report the gross amount customers pay as income, then deduct PayPal fees as a business expense. This is actually beneficial for you because it gives you a larger deduction and more accurately reflects your business activity. One practical tip: PayPal's monthly statements make this pretty easy to track. They show both your gross sales and total fees for each month, so you don't have to calculate transaction by transaction. I just download the monthly summaries and use those numbers for my tax prep. Also worth noting - if you're using PayPal Goods & Services, those fees are definitely deductible business expenses. But if you ever use Friends & Family for business (which you shouldn't), those transactions get murkier from a tax perspective since that's technically not a business payment method.

Great question! I had the same confusion when I started my business. You definitely want to report the FULL amount customers pay as income and deduct the PayPal fees separately as business expenses on Schedule C. Here's why this matters: If you only report the net amount, you're essentially letting PayPal reduce your income without getting the tax benefit of those fees as deductions. By reporting gross income and deducting fees, you get the full business expense deduction you're entitled to. Also, keep in mind that if you receive a 1099-K from PayPal (which reports the gross amounts to the IRS), your tax return needs to match what they've already told the IRS you received. If you only report the net amounts, there will be a discrepancy that could trigger questions. The fees typically go under "Commissions and fees" or "Payment processing fees" on your Schedule C. Make sure to keep good records - I save my PayPal monthly statements which clearly show both gross receipts and total fees charged. This makes tax prep much easier and gives you solid documentation if the IRS ever has questions. One last tip: set up a separate PayPal account just for business if you haven't already. Mixing personal and business transactions makes everything more complicated come tax time!