How Do You Avoid PayPal Fees? 5 Useful Tips for Small Businesses
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.
Many customers are eligible for PayPal Credit. Shoppers can use this digital credit line during transactions with any merchant who accepts PayPal.
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 avoiding PayPal Fees
Q: What are the transaction fees for small businesses using PayPal?
For each transaction, US-based businesses are charged 3.49% of the transaction amount plus a fixed fee of $0.49. International transactions also require a currency conversion, for which PayPal charges a 4.5% conversion service charge based on the current retail exchange rate.
Q: How can small business owners and freelancers reduce or eliminate PayPal fees?
To avoid PayPal fees, small business owners and freelancers can:
- Request payments less frequently or consolidate payments to limit the number of transactions, thus reducing fees.
- Use alternative payment options such as paper checks, direct deposits, or eCheck payments to avoid PayPal fees altogether.
- Switch to payment processing apps like Stripe or mobile payment service Venmo for alternative payment processing solutions.
- Request clients to cover applicable PayPal transaction fees in the invoiced amount or pay the fees separately.
Q: What is the difference between a PayPal personal account and a PayPal Business Account?
A PayPal personal account is used for individuals to send and receive money for personal purposes. On the other hand, a PayPal Business Account allows a company to manage and accept payments for professional services, e-commerce, freelancing, and international transactions while complying with the associated fee structure.
Q: How do PayPal-generated invoices work for freelancers, and what are the associated fees?
Freelancers can use PayPal’s invoicing software to send and track client invoices and receive payments easily. All PayPal-generated invoices are subject to invoicing fees. Freelancers can receive the proceeds through the standard transfer (1 to 3 business days) with no additional charges, or the instant transfer method (30 minutes) with an associated fee.
Q: What are the PayPal Credit and PayPal Cash Card, and how do they work?
PayPal Credit is a digital credit line that allows customers to use it during transactions with merchants who accept PayPal. The PayPal Cash Card is a prepaid card linked to a bank account, such as a checking account. Users add funds to their linked bank account to use the PayPal Cash Card like a regular credit or debit card.
Q: Can PayPal fees be deducted from tax returns?
Yes, PayPal fees incurred during business transactions may be tax-deductible, thus lowering the adjusted gross income (AGI) for a business owner or freelancer. Deducting fees may result in reduced tax payments for the year. Discuss this with your tax professional for details.