Running your own company or freelancing has a lot of advantages. You don’t have to report to your boss, you have no annual performance reviews, you can work from home, and you set your own hours.
But you have to face a lot of challenges, too. You are responsible for handling finances – paying your vendors and receiving money from customers for products or services delivered.
The most popular way small businesses and freelancers to get paid is via PayPal because PayPal is easy to use and almost everyone has a PayPal account. But PayPal charges a fee every time you receive money. Remember that the sender typically does not incur any fees if they transfer money out of their PayPal balance.
How much does PayPal charge in fees?
If you receive money from US-based clients, you will be charged $0.30 per transaction + 2.9% of the funds received.
If you receive money from outside the US, you will be charged a fixed fee that varies by country + 4.4% of the funds received
How can you save money on PayPal fees?
1. Use the Standard Transfer option to transfer money to your bank account
Any funds transferred to PayPal stays in the Paypal account. Most of us need to transfer it to our bank accounts.
If you use the Instant Transfer option to transfer money to your bank account, Paypal charges a 1% fee on the amount transferred. But the fee is capped at $10. In this case, you will receive the money in your bank account immediately.
But if you use the Standard Transfer option to transfer money to your bank, the transfer is free of charge. The downside is that it could take up to two days. I have been able to receive money in one day using this option. But it is slower than the Instant Transfer.
If you can wait a few days to get your money by using the standard transfer option, you could save money.
2. Use PayPal debit card
Paypal offers a debit card that allows you to spend money directly from your PayPal account. It’s is just like every other debit card. You can also withdraw cash from the debit card, up to a limit of $400 per day.
3. Opt to be paid as a friend or family
You need to use this option very carefully because it could be risky for some people. It is a violation of Paypal terms to receive money as a friend if you are not really friends, and you are engaged in a business transaction. In addition, you will lose the payment protection that Paypal provides for business transactions.
If a client pays you using the friends or family option, you will not pay any fees. This helps you avoid paying all the Paypal fees mentioned above. But you need to work out an agreement with your client for how to send an invoice because you cannot invoice them using Paypal. The client must also agree to pay as a friend.
This option only works if you receive money from clients occasionally. If you receive money too often as a friend or family, and Paypal will figure out that you are actually doing business transactions, your account will be shut down. So use this option cautiously and only rarely.
4. Pass on the fees to customers
It is not uncommon to add a 2-4% surcharge on your invoices to cover your Paypal fees. Discuss this with your clients before you do this. Most of them run a business themselves and will understand that there is a cost to doing business and will be willing to pay to cover those costs.
5. Expense on your tax return
When filing taxes, you can expense PayPal fees. Deduct them in Schedule C of your tax return.
Keep track of all the PayPal fees you have paid over the year. This prevents problems when it’s time to file taxes
6. Look at Paypal alternatives
While PayPal is ubiquitous, there are other options such as Stripe, Amazon Pay, Google Pay, TransferWise, etc. Each payment service has its own set of fees and rules.
It might take you some time to get familiar with these new providers. But it is not a good idea to be bound to a single payment option. In certain cases, other options can also save you money.
Bottom Line
PayPal is convenient to send and receive money. When you run a business and receive money through Paypal, you will incur fees. You have a few options to reduce your fees. Consider getting a Paypal debit card and transferring money from PayPal to your bank account using the standard transfer option. You can even pass on your PayPal fees to your customers and deduct them from your taxes
Paypal is not the only game in town. There are other providers who offer similar services. You don’t want to tie yourself to just one payment option. In certain cases, other providers may have cheaper options than Paypal.
