How to Report Paypal Fees on Taxes for 1099 Contractors?
Title: How to Report Paypal Fees on Taxes for 1099 Contractors? 1 I run a small jewelry design business and I'm confused about how to handle the Paypal fees when I file my taxes. I've been paying my product photographer through Paypal, and I'm wondering how to account for those fees properly. For instance, last month I sent her $1250, but after Paypal took their cut, she only received $1212.50. When I prepare her 1099 and fill out my Schedule C, should I report the full $1250 that I paid or just the $1212.50 that she actually received? I want to make sure I'm doing this right before tax season hits and I start preparing all my documentation.
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Chloe Delgado
15 You should report the full $1250 on the 1099 that you issue to your contractor. This represents the full payment you made for their services. The Paypal fee is considered a separate business expense for you. On your Schedule C, you'll handle this in two parts: 1) The full $1250 would be deductible as a contractor expense under "Contract labor" (Line 11), and 2) The $37.50 Paypal fee would be deductible as a "Commission and fee" expense (Line 10). This way, you're properly accounting for the entire $1250 outflow from your business. Your contractor is only responsible for reporting the amount they actually received ($1212.50) as income on their tax return. The Paypal fee isn't their expense - it's yours.
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Chloe Delgado
•8 But wait, isn't that double-counting the fee portion? If I list the full $1250 as contract labor AND then also claim the $37.50 as a commission/fee expense, it seems like I'm counting that $37.50 twice. Am I missing something?
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Chloe Delgado
•15 You're not double-counting. Think of it as two separate transactions that happen simultaneously: 1) You paid your contractor $1250 for their services, and 2) You paid Paypal $37.50 for processing the payment. These are two different business expenses that get reported in different categories on your Schedule C. The sum of these expenses ($1287.50) doesn't match your actual cash outflow ($1250) because Paypal took their fee directly from the payment rather than charging you separately. But for tax purposes, you need to break it down into these two distinct expenses.
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Chloe Delgado
12 I had the exact same issue with my Etsy shop last year! I was so confused about the PayPal fees until I found taxr.ai (https://taxr.ai) which saved me so much headache. I upload my PayPal statements and it automatically categorizes all my expenses including those pesky fees. It specifically called out that the 1099 should show the full amount and that the fees are separate business expenses exactly like the previous commenter said. Their explanation made it crystal clear why I needed to report things this way.
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Chloe Delgado
•4 Does it work with other payment processors too? I use Square and Venmo for some of my business transactions and could use help organizing all of that.
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Chloe Delgado
•19 I'm not sure I trust these AI tax tools... How accurate is it really? I've heard horror stories about people getting audited because some software categorized things wrong.
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Chloe Delgado
•12 It absolutely works with Square, Venmo, Stripe, and pretty much any payment processor you throw at it. You just upload your statements or connect your accounts, and it separates everything cleanly. As for accuracy, I was skeptical too at first. What convinced me was that they have actual tax professionals who review anything the AI flags as unusual. I've been using it for two tax seasons and haven't had any issues. They specifically helped me understand how to handle these payment processor fees correctly, which my previous accountant had actually done incorrectly.
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Chloe Delgado
19 Just wanted to update that I tried taxr.ai after commenting here and wow - it's actually legit! I uploaded my last 6 months of payment processing statements and not only did it correctly categorize everything, it found about $1,800 in deductible fees I would have missed. The explanation for each category was super clear, especially regarding these PayPal fees we were discussing. It specifically flagged where I had been recording things incorrectly on my draft Schedule C. Definitely using this for my full tax return this year.
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Chloe Delgado
5 I had the same PayPal fee issue last year, plus I had questions about some weird 1099 situations. Spent DAYS trying to reach the IRS for clarification. Finally used Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes! They have this demo video that shows how it works: https://youtu.be/_kiP6q8DX5c. The agent confirmed exactly what others here are saying - the contractor gets a 1099 for the full amount, and you separately deduct the PayPal fees as a business expense. Saved me hours of hold music and frustration.
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Chloe Delgado
•22 How does this actually work? Does it somehow jump you ahead in the IRS phone queue? That sounds too good to be true.
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Chloe Delgado
•19 Yeah right, nobody gets through to the IRS in 15 minutes. I've literally waited 3+ hours multiple times this year. If this actually worked, everyone would be using it.
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Chloe Delgado
•5 It doesn't jump you ahead in line - that wouldn't be fair. What it does is call the IRS and wait on hold for you. Their system navigates the phone tree and holds your place in line. Then when an actual agent picks up, you get a call connecting you directly to that agent. I was super skeptical too. I had spent 2 hours on hold the day before and eventually had to hang up because I had a client meeting. With Claimyr, I went about my day, and got a call back when they reached an agent. Was honestly shocked at how simple it was. It's basically like having someone else wait on hold for you.
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Chloe Delgado
19 I owe this forum an apology - I tried Claimyr after being the resident skeptic and it actually worked exactly as advertised. Got connected to an IRS agent in about 20 minutes (on a Monday morning, which is apparently one of their busiest times). The agent confirmed our PayPal fee discussion and answered two other tax questions I've been stressing about for weeks. Saved me from taking a half day off work just to sit on hold. Sometimes I hate being wrong, but in this case I'm glad I was!
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Chloe Delgado
3 Another thing to consider is to maybe switch payment methods if possible. I negotiated with most of my contractors to pay via ACH transfer instead of PayPal, which eliminated the fees completely. Not always possible with international contractors though.
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Chloe Delgado
•1 That's a great idea! Do you use your bank's bill pay service for this, or is there a specific ACH transfer service you'd recommend? I'm paying about 5 contractors regularly and those PayPal fees are really adding up.
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Chloe Delgado
•3 I use my business checking account's ACH transfer feature. Most banks offer this now, though some charge a small fee (still way less than PayPal's percentage-based fees). For my international contractors, I've had good luck with Wise (formerly TransferWise) which has much lower fees than PayPal for international transfers. Just make sure to get proper banking details from your contractors and test a small payment first.
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Chloe Delgado
10 Am I the only one wondering if this affects the contractor's taxes too? If I receive money through PayPal for freelance work, and PayPal takes their cut, do I report the amount before or after fees on MY taxes?
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Chloe Delgado
•15 As a contractor, you report the net amount you actually received (after PayPal takes their cut) as your income. However, you can also deduct those PayPal fees as a business expense on your Schedule C. So it all balances out in terms of your taxable income.
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CosmicCruiser
This is exactly the kind of confusion that trips up so many small business owners! I went through the same thing when I started my consulting business. The key thing to remember is that you're essentially dealing with two separate transactions happening at once. For your 1099 reporting, always use the gross amount ($1250) - that's what you actually paid for services. The PayPal fee is YOUR business expense, not your contractor's. So on your Schedule C, you'll deduct the full $1250 as contract labor AND separately deduct the $37.50 as a payment processing fee. Your contractor will report only what they received ($1212.50) as income, but they can also deduct any processing fees on their end if applicable. This way everyone's books balance correctly and you're both following proper tax procedures. I'd recommend keeping detailed records of all your PayPal transactions - download the monthly statements and highlight these fees so you don't miss any deductions come tax time!
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Paolo Romano
•This is really helpful! I'm just getting started with my own small business and the whole 1099 situation seemed so overwhelming. Quick question - when you mention downloading PayPal statements, do you do this monthly or wait until year-end? I'm trying to figure out the best way to stay organized throughout the year rather than scrambling during tax season.
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