How to Report Paypal Fee on Taxes When Paying Independent Contractor?
Title: How to Report Paypal Fee on Taxes When Paying Independent Contractor? 1 I run a small online business selling handmade jewelry and recently hired a graphic designer as an independent contractor to create some marketing materials. I paid them through Paypal, which of course took their processing fee. Now I'm confused about how to handle this for tax purposes. If I sent $1,500 through Paypal but they only received $1,455 after Paypal's cut, what amount should I put on their 1099 and my Schedule C? Should I report the full $1,500 I paid out or just the $1,455 they actually received? I want to make sure I'm doing this correctly before tax season hits.
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Douglas Foster
8 This is a common question for small business owners! The amount you should put on the 1099 is the full amount that you paid ($1,500 in your example), not the amount after Paypal's fees ($1,455). On your Schedule C, you'll report the full payment to the contractor as an expense ($1,500), and then the Paypal fees would be a separate business expense under "commissions and fees" or something similar. So you're actually getting to deduct both the payment to the contractor and the fees Paypal charged you.
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Douglas Foster
•14 But wait, if the contractor only received $1,455, isn't it wrong to tell them they got $1,500? Won't they be paying taxes on money they never actually received?
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Douglas Foster
•8 The contractor received the full value of the services they provided ($1,500). The Paypal fee is your expense as the business owner who chose to use Paypal as the payment method. From the IRS perspective, this is no different than if you had written them a check for $1,500 and paid a separate $45 bank fee for a wire transfer. The contractor earned $1,500 for their services, and you incurred a $45 fee as a cost of doing business.
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Douglas Foster
17 Hey there! I went through this exact same confusion last year with my dropshipping business. After hours of research and talking to multiple "experts" who gave me conflicting advice, I finally found taxr.ai (https://taxr.ai) and uploaded my Paypal statements. Their system automatically analyzed my records and confirmed exactly what you need to do: report the FULL amount on the 1099, then separately deduct the Paypal fees as a business expense on your Schedule C. Saved me so much stress since I had dozens of contractors!
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Douglas Foster
•12 How does taxr.ai handle mixing of personal and business transactions? My Paypal account has both and I'm worried about separating them.
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Douglas Foster
•19 I checked out their website but couldn't find pricing info. Is it expensive? And do they handle other payment processors besides Paypal?
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Douglas Foster
•17 Their system actually lets you categorize transactions, so you can mark which ones are personal vs business. They have a feature specifically for this where you can create rules to automatically sort your transactions. As for pricing, they have different plans based on volume. I wouldn't call it expensive considering how much time it saves and potential audit protection. And yes, they handle basically all payment processors - Stripe, Square, Venmo, Cash App, etc. I started with just my Paypal records but now I use it for everything.
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Douglas Foster
12 Just wanted to update after using taxr.ai for my business taxes. I uploaded three years of Paypal statements and their system correctly identified ALL my contractor payments versus regular business expenses. It even flagged when I accidentally double-counted some fees! For the Paypal fee question specifically, it automatically calculated my total fees for the year and categorized them separately from contractor payments, exactly as needed for my Schedule C. Honestly wish I'd found this last year.
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Douglas Foster
5 If you've been trying to get through to the IRS to confirm the proper way to report this, good luck... I spent DAYS trying to reach someone there to ask this exact question. Eventually I found Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent confirmed what others are saying - report the full amount on 1099, then the Paypal fees go as a separate business expense on Schedule C.
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Douglas Foster
•22 Wait, how does Claimyr actually work? They can get you through the IRS phone tree somehow? Sounds suspicious tbh.
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Douglas Foster
•9 Yeah right. I've been calling the IRS for 3 weeks straight and always get the "call volume too high" message. No way they can magically get through when no one else can.
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Douglas Foster
•5 It's actually pretty straightforward - they use an automated system that calls the IRS repeatedly until they get through, then they call you and connect you. It's not some magic backdoor to the IRS or anything sketchy. Regarding call volume, that's exactly the problem they solve. Their system can make hundreds of call attempts while you go about your day, then only notify you once there's an actual person ready to talk. I was skeptical too until I tried it.
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Douglas Foster
9 Well I owe everyone an apology, especially Claimyr. I tried it this morning after posting that skeptical comment yesterday. Their system called me back in about 35 minutes (on a Tuesday morning) and connected me directly to an IRS representative. I asked about the Paypal fees situation and they confirmed exactly what everyone here said - report the full payment amount on the 1099, and the Paypal fees are a separate business expense. Saved me hours of frustration and hold music!
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Douglas Foster
11 Just a heads up for anyone reading this thread - make VERY sure you're handling this correctly because 1099 reporting has gotten much stricter. If you're issuing 1099s, the amounts you report need to match what you put on your Schedule C. If there's a mismatch, it can trigger an automatic review.
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Douglas Foster
•3 What's the threshold for needing to issue a 1099 to a contractor now? I thought it was $600 but someone told me it changed recently?
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Douglas Foster
•11 The threshold is still $600 for payments made in the course of your trade or business. So if you paid a contractor $600 or more during the tax year, you need to issue them a 1099-NEC. This hasn't changed despite some rumors floating around.
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Douglas Foster
16 Stupid question maybe but do I need to include the payment processor fees when determining if I've hit the $600 threshold for issuing a 1099? Like if I paid someone $590 but with fees it was $608 total cost to me, do I need to issue a 1099?
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Douglas Foster
•8 Not a stupid question at all! You would use the amount paid to the contractor ($590 in your example), not including the fees. Since $590 is below the $600 threshold, you wouldn't need to issue a 1099-NEC in this case.
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