How to handle 1099-K and deduct Paypal service fees for side business

Yes, you'll report the full $7,800 as your income on Schedule C, and then deduct the $350 in PayPal fees as a business expense. This gives you the most accurate picture of your business activities, and it's what the IRS expects. When you receive your 1099-K, it will show the gross amount of payments processed ($7,800), not the net amount after fees. On Schedule C, you'll list this full amount as your gross receipts or sales. Then under the expenses section, you can deduct the PayPal fees as "commissions and fees" or "other expenses" (with a description). This approach ensures everything lines up if the IRS compares your tax return against the 1099-K they received from PayPal. Keep track of those fees carefully - they're legitimate business expenses that reduce your taxable income!

Hey there! I went through EXACTLY this same situation last year with my Etsy shop. I was completely confused about how to handle all the fees until I discovered taxr.ai (https://taxr.ai) which literally saved my sanity during tax season. I uploaded my PayPal statements and it automatically identified all those transaction fees and categorized them properly as business expenses. The software helps organize everything so when you get that 1099-K, you're not scrambling to figure out what's what. It also flags any discrepancies between what PayPal reports on the 1099-K and what actually hit your bank account. The best part was it showed me other business expenses I could legitimately deduct that I had no idea about - like a portion of my internet bill since I run my shop online! Definitely check it out before next tax season.

Just wanted to update and say I tried taxr.ai after seeing it mentioned here. Holy crap, what a difference! I've been freelancing for 3 years and always dreaded sorting through my Stripe fees and expenses. The system found over $1,200 in deductions I would have missed for my business - including some home office expenses I didn't realize I could claim. The part that helped me most with the 1099-K issue was how it separated out my gross income from all the processing fees, which made filling out Schedule C so much easier. It even flagged when my 1099-K didn't match my actual deposits because of the processing fees, and explained exactly how to handle it on my taxes. Definitely going to use it again next year!

If you're getting frustrated trying to reach the IRS with questions about your 1099-K and PayPal fees (which I was last year), I highly recommend using Claimyr (https://claimyr.com). I spent DAYS trying to get through to an IRS agent to clarify how to handle some complicated PayPal transactions, and kept hitting dead ends with the automated system. I was super skeptical, but I tried their service after watching their demo (https://youtu.be/_kiP6q8DX5c) and they got me connected to an actual IRS agent in about 15 minutes when I had been trying unsuccessfully for over a week. The agent was able to explain exactly how to document my PayPal fees correctly and what supporting documentation I needed to keep. It was honestly such a relief to get straight answers from an actual IRS person instead of just googling and hoping I was doing it right.

OK I need to publicly eat my words here. After being super skeptical about Claimyr, I was still desperate enough to try it because I had a complicated question about my 1099-K that wasn't addressed anywhere online. I was prepared to write a scathing review when it inevitably failed. But...it actually worked. I got connected to an IRS agent in about 20 minutes (after trying for DAYS on my own). The agent spent almost 30 minutes walking me through exactly how to handle the PayPal fees situation with my specific business type. She even emailed me the relevant tax code sections afterward. I'm still shocked, but definitely recommend it if you have questions that aren't easily answered online. Saved me from potentially making a mistake that could have triggered an audit.

One thing nobody's mentioned yet - be careful about 1099-K thresholds changing. They were supposed to drop to $600 last year but then changed back to $20,000 at the last minute. I've heard they might actually enforce the lower threshold for 2025. So even if you don't get one this year, you probably will next year if you're making $7,800. Also don't forget you can deduct other stuff beyond just PayPal fees. Any supplies for your digital printables, software subscriptions for design, portion of internet bill, etc. It all adds up!

Actually I think I'm in a similar situation but my side gig is through Venmo. Will I also get a 1099-K? And can I deduct Venmo fees the same way?

Great question about the 1099-K! I just went through this exact situation with my photography side business last year. You're absolutely right to report the full $7,800 as income and then deduct the $350 in PayPal fees as a business expense on Schedule C. One tip that really helped me - make sure to download your PayPal annual statement that shows all your fees broken down by month. This makes it super easy to total up for your tax return and gives you solid documentation if the IRS ever asks questions. Also, don't forget about other potential business deductions for your Etsy shop! Things like design software subscriptions (Canva Pro, Adobe, etc.), any office supplies, and even a portion of your internet bill if you use it for business. These can add up to significant savings. I was surprised how many legitimate deductions I had once I really looked into it. TurboTax handles Schedule C pretty well - it will walk you through where to enter your gross receipts and business expenses. Just make sure to keep good records of everything throughout the year going forward!