Growing an online business requires a reliable method of accepting customer payments. PayPal, a global online payments provider, is processing an ever-growing number of transactions.
According to market research firm Statista, PayPal amassed a net payments volume of $339 billion in Q2, 2022. This figure represents nine percent year-over-year growth.
PayPal is also making its mark in the mobile payments arena. Here, the company currently ranks just behind credit card and debit card payments.
However, eCommerce merchants often complain about PayPal fees that take profits out of each sale. Naturally, many of them find themselves wondering, “How do you avoid PayPal fees?”
Fortunately, online retailers can implement strategies to avoid these costly fees.
PayPal Business Accounts
One of the biggest payment processors, PayPal is convenient and easy to use. Besides online and mobile payments, PayPal serves the professional services and freelancer markets too. And in addition to US-based businesses, PayPal processes international payments.
Mastercard and Visa are also easy-to-use payment options. However, each payment method can be compromised by a well-placed card skimmer or other creative hacking mechanisms. Credit card processing companies are very concerned about these card fraud incidents. Thankfully, highly secure virtual PayPal payments are not subject to these payment service risks.
PayPal Business Account Fees
In return for secure payment processing, PayPal charges transaction fees to every business owner. If a business owner offers PayPal as a payment option, the company must open a PayPal Business Account. These accounts will be charged processing fees plus monthly fees and/or additional fees. Does PayPal charge overly high fees? For many business owners, the answer is yes.
Paypal’s Basic Fee Structure
When businesses accept PayPal payments, they must work within the online platform’s fee structure. Although PayPal’s website does not feature a fee calculator, the company clearly posts its pricing structure and different fees. The business owner is responsible for determining the exact fees the company pays.
For starters, the company is charged a percentage of the sale plus a fixed fee. Currently, US-based businesses pay 3.49% of the transaction amount along with a $0.49 fixed fee to PayPal.
International transactions also require a currency conversion. PayPal charges the customer a currency conversion fee based on the current retail exchange rate. The company assesses a 4.5% conversion service charge.
Freelancer Services Payments
Many freelancers, such as writers and graphic designers, use PayPal’s invoicing software to easily send/track client invoices and receive payments. All PayPal-generated invoices are subject to the platform’s invoicing fees.
Freelancers can receive paid invoices’ proceeds via the standard transfer or instant transfer options. The standard transfer method (1 business day to 3 business days) carries no additional charges. However, the instant transfer method (30 minutes for transfer to a bank account or debit card) carries a fee. Many freelancer merchant service providers use the PayPal bank transfer option.
Other PayPal Services and Fees
PayPal allows individuals to send or receive money through a personal account. However, users will pay transfer fees for this money transfer service. If they take money out of their PayPal account, they will reduce their PayPal balance. They must also pay transaction fees.
PayPal Credit
Many customers are eligible for PayPal Credit. Shoppers can use this digital credit line during transactions with any merchant who accepts PayPal.
PayPal Cash
The prepaid PayPal Cash Card must be linked to a bank account such as a checking account. Next, the user must place funds into their linked bank account. Then, they can use the PayPal Cash Card like a normal credit card or debit card.
5 Ways for Small Businesses to Avoid PayPal Fees
Many small business owners (and freelancers) are seeking ways to save money on business expenses. These five tactics may reduce (and could eliminate) hefty PayPal fees.
1. Choose Less-Frequent Payments
Instead of requesting payments after each sale or service, providers can ask clients to pay them weekly, biweekly, or monthly. Fewer PayPal transactions will reduce PayPal fees accordingly. However, the provider should first examine their cash flow needs.
2. Accept Alternative Forms of Payment
PayPal fees never apply to other types of client payments. For example, paper checks, direct deposits, and ACH or eCheck payments are exempt from PayPal fees.
Providers should, therefore, consider other options for sending and receiving funds. The Stripe payment processing app’s APIs can send money and handle global payments.
Venmo is a PayPal-owned mobile payment service that’s ideal for friends and family. This handy app makes it easy to split bills for personal expenses.
3. Ask Clients to Cover the PayPal Fees
Some business owners (and freelancers) may ask their clients to pay applicable PayPal transaction fees. The provider can include the fee in the invoiced amount or ask the client to pay the entire PayPal fee on their end. This option may work for providers with established client relationships.
4. Request “friends and family” Payments
When business owners (and freelancers) are paid for providing goods or services, PayPal fees apply to those payments. PayPal fees will always apply to invoice-based payments. However, if clients send funds via the “friends and family” method, the recipient won’t pay to receive the money.
Clients who send the money via their bank account and/or PayPal balance won’t pay any fees. However, fees apply to credit and debit card payments. Clients should understand that PayPal’s payment protection does not apply to friends and family-based payments.
However, providers risk having their accounts shut down if PayPal decides a “friends and family” payment is meant for business-related services. Providers should decide if the benefit is worth this substantial risk.
5. Deduct PayPal Fees as a Business Expense
Invoice-based providers must pay those pesky PayPal fees. However, the fees may be deductible on the year’s tax return. This means providers can realize a lower adjusted gross income, the basis for tax payments.
Consider a Budget-friendly Payments Processor
As you can see, PayPal’s fees don’t make it a great choice for small businesses. Instead, partnering with a small business-focused payments processor can result in lower overall processing costs.
Payment Depot’s membership-based pricing results in low rates and merchants are never nickel-and-dimed with unnecessary fees. Plus, the company’s customer service is tops in the payment processing industry. To learn how you can save more on credit card processing, contact us today.
Quick FAQs about PayPal Fees
Q: How can small business owners and freelancers reduce or eliminate PayPal fees?
Small business owners and freelancers can reduce or eliminate PayPal fees by requesting payments less frequently, consolidating payments, using alternative payment methods like paper checks or direct deposits, and asking clients to cover the transaction fees in the invoiced amount.
Q: What are some alternative payment methods to PayPal?
Alternative payment methods to PayPal include Stripe, Venmo, Apple Pay, Google Pay, Square, Skrill, and Payoneer. Each of these platforms offers different features and fees, making them suitable for various business needs.
Q: How does requesting payments less frequently help in avoiding PayPal fees?
By requesting payments less frequently or consolidating multiple payments into one, businesses can reduce the number of transactions processed through PayPal. This can significantly lower the overall transaction fees incurred.
Q: Can clients pay the PayPal fees on behalf of the provider?
Yes, providers can request clients to cover the PayPal transaction fees. This can be done by including the fee in the invoiced amount or asking the client to pay the entire fee separately. However, this approach works best with established client relationships.
Q: What are the fees associated with using PayPal for international transactions?
For international transactions, PayPal charges a currency conversion fee based on the current retail exchange rate. The conversion service charge is 4.5%, in addition to the standard transaction fees.
Q: Are PayPal fees tax-deductible for small businesses and freelancers?
Yes, PayPal fees incurred during business transactions may be tax-deductible. This can lower the adjusted gross income (AGI) for a business owner or freelancer, potentially reducing their overall tax payments for the year. It’s advisable to consult with a tax professional for detailed guidance.
Q: What is the difference between a PayPal personal account and a business account?
A PayPal personal account is used for sending and receiving money for personal purposes, while a PayPal Business Account allows companies to manage and accept payments for professional services, e-commerce, freelancing, and international transactions. Business accounts are subject to a different fee structure.
Q: How can freelancers use PayPal’s invoicing software to manage payments?
Freelancers can use PayPal’s invoicing software to easily send and track client invoices. The proceeds from paid invoices can be received via the standard transfer method, which takes 1 to 3 business days and carries no additional charges, or the instant transfer method, which takes 30 minutes but comes with a fee.
Q: Is it risky to use the “friends and family” payment method for business transactions?
While using the “friends and family” payment method can help avoid PayPal fees, it comes with significant risks. PayPal may shut down accounts if they suspect that this method is being used for business-related services. Additionally, payment protection does not apply to these transactions.
Q: What are some tips for negotiating lower PayPal fees for your business?
Small businesses can try negotiating lower merchant fees with PayPal by demonstrating high transaction volumes or long-term usage. Additionally, exploring other payment processors and presenting competitive offers to PayPal may help in securing better rates.
