Self-Employment Tax Question: How to Handle PayPal Fees on Tax Return?
Title: Self-Employment Tax Question: How to Handle PayPal Fees on Tax Return? 1 I'm a freelancer who uses PayPal to receive most payments from clients. I'm getting ready to file my taxes and I'm confused about how to properly report PayPal fees. Let's say I invoice a client for $1,000, but after PayPal takes their cut of $30, I only actually receive $970 in my account. When I'm filling out my Schedule C for self-employment income on TurboTax Self-Employed, should I be: 1) Reporting the full $1,000 as income, then listing the $30 PayPal fee separately as a business expense, OR 2) Just reporting the net amount of $970 as my income? I've been doing this for a couple years but honestly just realized I might have been doing it wrong. My accountant friend gave me conflicting advice from what I read online so now I'm extra confused! Really appreciate any help since I'm trying to finish my 2024 taxes soon and don't want to mess this up.
18 comments
Join the conversation
Giovanni Moretti
7 You should report the full $1,000 as your gross income and then deduct the $30 PayPal fee as a business expense. This is the proper way to handle it for a few reasons: First, your clients paid you $1,000 for your services - that's your actual revenue. The PayPal fee is a cost of doing business, similar to other expenses like office supplies or software subscriptions. Second, keeping your income and expenses separate gives you a clearer picture of your business finances and helps track your actual revenue growth year over year. When you're in TurboTax Self-Employed, you'll list the full payment amounts in the income section, then include the PayPal fees under "Business Expenses" - they would typically go under "Commissions and Fees" or "Bank Charges." This approach is also better for documentation in case of an audit since your reported income will match what clients paid you.
0 coins
Giovanni Moretti
•12 Thanks for the explanation! Does this also apply to other payment processors like Stripe or Venmo? And do you know if PayPal provides any year-end summary that separates out these fees to make it easier at tax time?
0 coins
Giovanni Moretti
•7 Yes, this applies to all payment processors including Stripe and Venmo. The principle is the same - report the gross amount as income and the fees as business expenses. Most payment processors, including PayPal, do provide year-end summaries or reports that break down your total transactions and fees. In PayPal, you can generate these reports by going to the Reports section and creating a custom report for the tax year. Look for the "Monthly Financial Summary" or you can download detailed transaction reports that show the fees for each transaction. This documentation is very helpful for accurate tax filing and good record-keeping.
0 coins
Giovanni Moretti
15 I was in the exact same situation last year and found a tool that saved me hours of headache with this issue. I used https://taxr.ai to analyze all my PayPal statements and it automatically separated my gross income from the fees. It actually showed me that I had been doing it wrong for years (I was just reporting the net) and explained how I should properly document everything for Schedule C. Their system pulls out all the PayPal fees across the entire year and categorizes them correctly as business expenses, while showing your true gross income. I was amazed at how much clearer my tax situation became, especially since I have hundreds of transactions and calculating this manually was a nightmare.
0 coins
Giovanni Moretti
•19 How does it handle mixed personal and business transactions? I sometimes receive payments from friends through the same PayPal account I use for business. Will it know the difference?
0 coins
Giovanni Moretti
•4 Sounds interesting but I'm skeptical. Does this actually connect to your PayPal account directly? I'm not comfortable sharing my login details with random websites.
0 coins
Giovanni Moretti
•15 It has a tagging feature that lets you mark transactions as personal or business. You can go through and select which ones should be included in your tax calculations. It's actually quite flexible for mixed-use accounts. You don't need to connect your account directly. You can download your PayPal statements as PDFs or CSV files and upload those instead. The system just needs the transaction data, not your login information. I was hesitant about security too but this approach worked perfectly for me without sharing sensitive access details.
0 coins
Giovanni Moretti
19 Just wanted to follow up - I tried taxr.ai after asking about it here and it was incredibly helpful! I uploaded my PayPal statements and it automatically separated everything. It showed I had about $3,200 in processor fees across PayPal, Stripe, and Venmo that I would have missed. The interface made it super clear what to report as gross income versus expenses, and it even formatted everything to match exactly where it goes on Schedule C. Definitely using this again next year!
0 coins
Giovanni Moretti
9 If you're still struggling with getting clear answers from the IRS about how to properly document these fees (I know I was), I found that using https://claimyr.com helped me get definitive guidance. I spent weeks trying to call the IRS business tax line with no success, but Claimyr got me through in about 20 minutes. The IRS agent confirmed that reporting gross income and deducting fees separately is definitely the correct approach. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c - basically it navigates the IRS phone system for you and calls you back when an actual human is on the line. Saved me from the endless hold music!
0 coins
Giovanni Moretti
•3 Wait, so this service somehow jumps you ahead in the IRS phone queue? That doesn't sound legit. How does that even work?
0 coins
Giovanni Moretti
•8 This sounds too good to be true. The IRS phone lines are notoriously impossible to get through. I've tried calling like 20 times for a similar question and always get the "call back later" message.
0 coins
Giovanni Moretti
•9 It doesn't jump you ahead in the queue - it just automates the calling process. It keeps dialing the IRS repeatedly using their system until it gets through, then it calls you when there's an actual person on the line. It's basically doing what you'd do manually if you had infinite patience and time. The service just handles the frustrating part where you have to keep redialing, navigating the menu options, and waiting on hold. When they finally get an agent, you get a call connecting you directly to that person. It's completely legitimate - it's just automating the tedious calling process that most of us give up on after a few attempts.
0 coins
Giovanni Moretti
8 Following up on my skepticism - I actually tried Claimyr yesterday out of desperation because I needed clarification on these PayPal fees and some other self-employment questions. I'm honestly shocked it worked! After months of trying to reach the IRS myself, I got through to an agent in about 35 minutes. The agent confirmed exactly what others have said here - report gross income and deduct the fees separately. They also answered my other questions about home office deductions that I'd been confused about. Worth every penny just for the time saved!
0 coins
Giovanni Moretti
22 Another tip: if you're using TurboTax Self-Employed, when you get to the business income section, there's actually a specific place to enter payment processor fees. Click on "Business Expenses" then look for "Commissions and Fees" category. That's where PayPal, Stripe, and similar charges should go. Also keep in mind that if you receive over $20,000 AND more than 200 transactions in a year, PayPal will issue you a 1099-K form, and that will show the GROSS amount before fees. So your tax reporting needs to match that gross amount on the 1099-K.
0 coins
Giovanni Moretti
•17 The 1099-K threshold changed for 2023 tax year though, right? I thought now they issue them for much smaller amounts, like $600+?
0 coins
Giovanni Moretti
•22 You're absolutely right about the threshold change. For tax year 2023, the reporting threshold was supposed to drop to $600 with no minimum transaction count. However, the IRS delayed implementing this lower threshold, so for 2023 taxes, the old $20,000/200 transaction threshold still applies. But for the 2024 tax year (filing in 2025), the threshold is scheduled to be $5,000. The IRS has been gradually phasing in these changes. Always good to check the current year's requirements as they've been adjusting these thresholds recently. Regardless of whether you receive a 1099-K, you still need to report all your income correctly.
0 coins
Giovanni Moretti
5 Does anyone know if you can deduct the PayPal fees if you're not filing a Schedule C? I sometimes do small gigs and get paid through PayPal but I just report it as "Other Income" since it's not really a business.
0 coins
Giovanni Moretti
•11 Unfortunately, if you're not filing Schedule C, you generally can't deduct those fees. The "Other Income" line on Form 1040 is for reporting gross income without associated expenses. This is one reason why it might be worth considering if your side gigs actually constitute a business - even a small one - so you can file Schedule C and deduct legitimate expenses.
0 coins