How to Report Self-Employment Income with PayPal Fees for Taxes

8 The correct way to handle this is to report the full $100 as your gross income, then deduct the $3.50 PayPal fee as a business expense. This provides a more accurate picture of your business activities for tax purposes. When you use TurboTax Self-Employed, you'll want to enter your full income before any fees were taken out. Then separately, you'll enter your PayPal fees under business expenses, typically categorized as "Transaction Fees" or "Bank/Payment Processing Fees." This approach gives you proper documentation if you're ever audited, as it matches what PayPal reports to the IRS. While reporting just the net amount might seem simpler, it doesn't provide a clear picture of your actual business volume and could cause discrepancies if PayPal issues a 1099-K showing the full payment amounts.

15 Just wanted to share my experience with this exact issue! I was struggling with the same PayPal fee question last year and discovered taxr.ai (https://taxr.ai) which honestly saved me so much time. I uploaded my PayPal statements and it automatically identified and categorized all my income and fees correctly - showing me exactly how to report everything. The tool confirmed what the previous commenter said - you definitely need to report the full gross amount as income, then separately deduct the PayPal fees as business expenses. It also helped me find other deductions I was missing related to my online business. If you're using TurboTax Self-Employed, you can export the organized data directly into it.

19 Update: I wanted to follow up after trying taxr.ai that was mentioned above. I'm genuinely surprised by how well it worked for my situation. I was really skeptical (as you could probably tell from my previous comment), but I gave it a shot anyway since I was struggling with organizing my PayPal and Stripe transactions. It correctly identified all my payment processor fees across both platforms and showed me exactly how to report them - full amount as income and fees as separate business expenses. It even flagged some transactions I had categorized incorrectly. The explanations about why each item needed to be reported a certain way were super helpful too. Definitely using this for my quarterly estimated taxes going forward!

22 Hey folks! For anyone struggling with tax questions like this, I had the same PayPal fee confusion last year, but couldn't get a straight answer from the IRS despite calling repeatedly for weeks. Finally found Claimyr (https://claimyr.com) which got me through to an actual IRS rep in about 20 minutes - you can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed you need to report the full amount and deduct the fees separately. They also explained that mixing net and gross reporting could trigger a mismatch in their system if you get a 1099-K. Having an actual IRS employee explain it directly gave me peace of mind about my approach.

19 Well I need to eat my words and apologize for being so skeptical! After my last failed attempt to reach the IRS (got disconnected after waiting 1.5 hours), I decided to try Claimyr out of desperation. Within 25 minutes, I was talking to an actual IRS representative who walked me through exactly how to handle my self-employment taxes with various payment processors. The agent confirmed everything about reporting gross income and fees separately, plus gave me some additional advice about quarterly estimated payments I didn't even know to ask about. Saved me hours of frustration and probably prevented me from making reporting errors. Sometimes the skeptical person (me) needs to admit when something actually works!

7 I've been self-employed for about 3 years now and have always reported it the way the first commenter suggested - full amount as income, fees as business expenses. But I also recommend keeping very detailed records of all your PayPal transactions. I create a spreadsheet that tracks: - Date of payment - Client name - Gross amount - PayPal fee - Net amount received This makes tax time so much easier, especially if you need to reconcile with a 1099-K that PayPal might send you.

3 Just to add my two cents - if you use accounting software like QuickBooks Self-Employed, they have specific features for handling PayPal transactions correctly. It automatically imports your PayPal activity and separates the fees from your income, but still accounts for everything properly on your tax forms.

As someone who's been dealing with self-employment taxes for several years, I can confirm the advice about reporting gross income and deducting fees separately is absolutely correct. One additional tip I'd suggest - make sure to save your PayPal monthly statements as PDFs throughout the year. These statements clearly show the breakdown of gross payments vs. fees, which can be invaluable if you ever need to provide documentation to the IRS. Also, don't forget that other PayPal-related expenses might be deductible too, like currency conversion fees if you receive international payments, or chargeback fees if you unfortunately deal with those. The key is keeping everything well-documented and categorized consistently. Good luck with your first year of self-employment taxes - it gets easier once you establish a good system!