PayPal invoice fee: Here's what you need to know

The PayPal invoice fee is probably one of the most familiar charges for SMEs, freelancers, bloggers, eBay sellers or pretty much anyone who makes money selling their services or products online. It is arguably the biggest name in online payment solutions to date, literally operating 24/7 and facilitating millions of transactions between freelancers, business owners and their clients all over the world.

However, the single biggest issue for those who use PayPal regularly is the fact that for every transaction that is made through this payment method, PayPal takes a cut. This is called the PayPal transaction fee, which is a 2.9% + $0.30 charge out of every transaction that is invoiced.

To be fair, a business this huge requires at least some kind of income to fund its worldwide services, but for most freelancers who run a super lean operation, the PayPal invoice fee represents a serious business expense - one that can add up and eat into the revenue earned from their hard work and hustle after a profitable year.

PayPal invoice fee: Who pays for it?

Simply put, PayPal fees automatically get deducted from the receiver of the payment - not the sender. This means that if you are a freelancer requesting a payment via an invoice sent to your client, the fee is deducted from the money that your client sends to you the moment it reaches your PayPal account.

For businesses, the same principle applies - the customer does not pay any fees on PayPal. The fees are taken out from your account right before your customer’s money hits your PayPal bankroll - a business expense in every sense of the word.

How do I send an invoice on PayPal without fees?

PayPal fees aren’t unique in any sense. This is not unlike brick and mortar shops, whereby a processing fee - a percentage of every sale is taken from the payment providers (Mastercard, Visa, Amex etc) - is taken after every transaction that uses credit card payments.

SMEs and freelancers are unlike such businesses; for most - there isn’t a lot of headroom in cashflow for business expenses like these. After deducting the annual taxes, these fees can certainly feel like a big portion of your hard-earned money coming out from the year’s work and may feel unnecessary or even unfair. Here’s how you can reduce or avoid their fees when using PayPal to receive payments from clients.

Reduce the frequency of payments

Requesting to receive fewer payments from clients helps you to avoid paying the fixed-rate PayPal fees every single time ($0.30).

However, you’ll have to pay the percentage-based fee (2.9%) per transaction, so while you’ll save some money in the long run, it probably wouldn’t be enough for a holiday in the Caribbean! Still - for the frugal ones who believe that every bit of change saved is money that counts, this is a great idea to start implementing in your SME business.

Ask clients to pay you as a friend

Another common method that freelancers (and small businesses) tend to use to avoid fees with PayPal during transactions is to label the payment as a personal transaction as opposed to a business-related one. This is because personal PayPal transactions are not subjected to any additional fees unlike business transactions (with the fees above). 

However - be fully aware that this little grey area might constitute a breach in PayPal’s user agreements and since you signed off on the terms of use, you will be liable for a complete account termination once PayPal catches wind of you using this method to regularly avoid paying PayPal business-related fees.

We don’t fully condone this method - but with that said, this is just one of the notable ways that businesses have used to save on PayPal fees.

List PayPal fees as a business expense (clients and taxes)

Whether you are a freelancer or a small business, you can offset these PayPal fees as a business expense, and you can get reimbursed for them in one of two ways. Here’s how you can do either:

• Pass on your PayPal fees as a billable expense to your clients. This means that you’ll include in your contract that these costs will be passed on to the client (by including them in your final invoice). Your client will be the one paying the PayPal fees, and your final amount will be the price that you are originally expecting to be paid for the work you’ve done. This involves a little bit of calculation on your part, so you’ll have to do your accounting here. Also, be wary that these billable expenses must be contractually stated between you and your client beforehand - never spring on such expenses during payment time, as this may result in unnecessary delays and worst cases, a legal intervention that may cost more than it is worth.
• Label PayPal fees as a business expense when paying taxes. Tax time is a dreaded time of the year - but for business owners and freelancers, knowing your business expense allowances will allow you to deduct certain costs from your yearly revenue. This may significantly reduce the amount of taxes you owe to the government, potentially saving you a big chunk of cash in the long run. Always track your PayPal fees as your business expenses throughout the fiscal year, and ensure that you keep all records of your PayPal transactions (including a breakdown of fees etc). It makes it easier for the tax authorities to audit your figures if necessary.

Are invoices free on PayPal?

Yes. PayPal Invoicing is an online service that allows you to make invoices that look and feel professional, to help you get paid faster. Simply create your professional invoice using the free invoicing software, and send it off to your clients - your clients can then pay you via any method (bank transfer, cash and cheque, credit cards), and they don’t even need to have a PayPal account of their own. For clients who already have accounts, they can choose to pay via their accounts as well.

Can you charge for PayPal fees?

Legally speaking, the short answer is: No. In section 4.6 of the PayPal user policy, there is a statement which reads “You agree that you will not impose a surcharge or any other fee for accepting PayPal as a payment method”. What does this mean for you as a small business owner or a freelancer?

Here’s the good news - instead of charging “PayPal transaction fees” in your invoice (which is not allowed), you can either raise your fees across the board (to account for PayPal fees incurred) or issue a handling fee per transaction (it must be a reasonable figure).

Also, remember that PayPal fees are legally tax-deductible as a business expense so it’s worth keeping that in mind as you crunch the numbers for your business balance sheet at the end of the year.