When I first started making money for myself, one of my greatest concerns was how I was going to accept payment. PayPal was the most obvious answer, but the fees and restrictions were daunting. Even if you are fortunate enough to live in the USA or the UK you can end up paying some rather hefty fees. This was why I, like many others, began trying to work out how to avoid PayPal fees.
If I’m completely honest, my first attempt at avoiding fees was to actually avoid PayPal altogether. In the long run, however, this decision cost me even more.
The Dominance of PayPal
PayPal is a major player and millions consider it a safe and easy payment option. We also have to face the fact that for some activities, it’s only option for getting paid.
I’m not saying that there are not other and even possibly better options. But how can you compare those options if you don’t take the time to get properly understand the way PayPal works?
It isn’t the easiest of things to do though. The PayPal fee structure is not very clear or straightforward. While you can find suggestions on the internet about how to save money on those fees, you do need to be careful. PayPal can freeze your account if you do something wrong.
I plan to cut through a little of this for you. In this article, I want to help you understand what PayPal is, the fees it charges, and how you can avoid PayPal fees – or at least minimize them.
What is PayPal?
PayPal is an online payments system. This means that it allows online money transfers and acts as a payment processor.
PayPal provides Buyer Protection when you make a purchase. This means you can dispute transactions and even receive a full reimbursement. PayPal also allows you to accept payments on your website.
PayPal offers a lot, but has to cover costs in making so many services available to the public. As such, it is not reasonable to expect PayPal to charge the same as a virtual bank. PayPal is providing more services. Nor can you expect PayPal to accept you trying to get around fees in any way you please.
PayPal has and will no doubt continue to take measures to protect its business interests.
What Fees does PayPal Charge?
This is the hardest part of the whole equation. PayPal does not make it easy to understand at all. The first thing to know is what types of fees you might face.
1. Fixed Fees
These are set by currency, and are roughly equal to $0.30. You can expect to pay a fixed fee, in addition to a variable fee, if you are selling. When it is an international transaction, your fixed fee is based on the currency in which you are paid.
2. Variable Fees
This variable fee is applied to domestic transactions when the funds do not come from an existing balance on PayPal, or a linked bank account – in other words, if a credit card is used. Within the USA, buying is free and selling has a variable fee of 2.9% in addition to the fixed fee.
3. Cross Border Fees
These fees are applied to international personal and business payments. They can vary depending on the countries involved in the transaction.
The USA website lists international variable fees at 4.4% of the transaction. However, this varies by country and can end up being around 7%. This is because cross-border personal transaction fees get added to personal transaction payment fees.
4. Currency Conversion Fees
The currency conversion fee will either be 3.00% or 4.00% above the transaction exchange rate. Which of the two applies depends on whether the seller has agreed to bear the fee, or not.
Personally, I don’t see why it should increase by 1.00% just because you didn’t agree to it beforehand, since PayPal deducts fees automatically.
These PayPal fees might be the easiest to figure out. Even so, they are usually the most criticised, as it is hard to find anyone who will charge you more than PayPal for currency conversion.
5. Withdrawal Fees
In the USA and the UK, you only pay withdrawal fees if you request an instant transfer or withdraw to a card rather than to a bank account. In other countries, PayPal charges a fee and the banks will sometimes charge another fee on top of that.
In the case of all these fees, you will need to check the information for your country and for the country from where you will be receiving payment. Unfortunately, there is no way around that, but you can find fee calculators online to help you get a rough idea.
There are some other fees, such as chargeback fees, records request fees, and bank return fees, but these are unlikely to affect many everyday PayPal users.
How Can I Avoid PayPal Fees?
The following are 15 tips to help you make decisions that will reduce fees and increase the money in your pocket:
1. Fill Out All of your PayPal Information Correctly
This will help you avoid problems and may help you become eligible for certain fee discounts.
If you do not do this and PayPal refuses your payment order, then you could end up stuck without your hard-earned cash. You might also have to pay that records request fee I mentioned in order to get everything sorted out.
Providing all of the required identifying information is also important if you want to be able to use your business account balance to make purchases or send payments.
PayPal will also place limits on your withdrawals if you do not provide all the information they request.
2. Never use Credit to Make a Payment
Although you are probably more concerned about receiving money than paying it out, this is a really easy way to avoid a fee of at least 2.9% of the transaction. If you pay with PayPal credit or a credit card rather than from your PayPal balance or associated bank account, you could be hit with this fee.
A little bit of planning could, therefore, help you to avoid PayPal fees whenever you make purchases or pay others for services.
3. Use the “Friends and Family” Option
This is a somewhat risky tactic. If you have not sent an invoice through PayPal, when the person goes to pay you, they are asked if they are paying or “Goods and Services” or “Friends and Family.”
If they choose “Friends and Family,” then you, as the recipient, will not be charged any fees. However, there will be no payment protection on the payment and if PayPal suspects you are doing this they can shut down your account.
If you know your client well, you are both comfortable with the risks, and the “Friends and Family” option is available, then this could save you quite a bit. Just be careful!
4. Bill Less Often
This is a great option whether you are using PayPal or any other service which charges a fee: Whenever possible, try to group payments.
This won’t help with fees based on the transaction amount, but will eliminate some fixed fees. Although the fixed fees on PayPal are small, it is worth setting this kind of system up with trusted clients.
5. Apply for Micropayments
This probably won’t apply unless you are selling goods on your website. But if you do receive lots and lots of payments under $10 then applying to PayPal for Micropayments could be the answer for you.
With lots of small payments, those fixed fees suddenly become a huge deal. PayPal has created the Micropayments system so that those who qualify can pay significantly less in fees. For payments in USD, the fixed fee drops from $0.30 to $0.05. That’s a $25 saving for every 100 items sold.
6. Apply for Merchant Rates
Another option offered by PayPal to help save you money is Merchant Rates.
To qualify you must have at least $3000 in sales every month. This is not easy, I know, but if you can manage it and PayPal agrees to give you Merchant Rates, then your variable fee drops significantly. In the USA it drops from 2.9% to 1.9%.
7. Include Fees in your Price
You could increase your prices so that PayPal fees are included, or add a percentage charge at the bottom of your invoices for billable expenses. If you decide to take this route then it would be a good idea to make this clear to the client!
You don’t want to alienate clients by surprising them with a fee they were not expecting! After all, you are reading this because you want to avoid PayPal fees…
That being said, most clients are aware of how transactions fees can hurt freelancers. Believe it or not, many may be happy enough to accept these costs being passed on to them. I have even had the good fortune to have a client pay me more than I had invoiced “because I know you have transaction fees.”
8. Claim PayPal Fees as Business Expenses on your Tax Returns
Obviously, you can’t ethically combine this tip with the previous one!
In many countries, you will be able to add up all your PayPal fees and claim them as a business expense when you pay your taxes. This does take a bit more effort, and won’t prevent you from paying the fees, but you will end up will a lower tax bill.
9. Use Your Balance
If you are likely to pay for goods or services with PayPal, then you should perhaps consider keeping a balance in your account.
Part of the appeal of PayPal is that using it to make purchases is almost always free of fees. Leaving some money in the account could help you avoid withdrawal fees and ensure you don’t lapse into using credit to make a payment.
10. Plan your Withdrawals
While it can be a good idea to keep some money in your account, at some point you will want to withdraw your money. Even for those in the USA or UK, it is worth planning your withdrawals. If you request an instant transfer then you will pay a fee.
Since the options vary from country to country, you should check your PayPal agreement to see what is available to you. Then check on all the PayPal and bank fees that may apply.
In my case, I can only withdraw to one particular bank and I get charged a percentage fee by PayPal based on the size of the transaction.
It might seem that there is, therefore, nothing to plan, but it just so happens that that bank also charges me. They also charge a percentage fee, but there is a minimum fee per transaction. This means that if I withdraw less than $1000 at a time I will pay more in fees.
Whether you have multiple withdrawal options or only one, it is well worth learning if and how you will be charged.
11. Request to be Paid in a Specific Currency
Since currency conversion generates really big fees in PayPal you want to do everything you can to avoid it.
You may not be able to use your local currency as the primary currency you request but you can pick one of the major currencies and insist on that. If you receive payments from all over the world, then the US Dollar is probably the best choice.
Aside from telling your clients they must pay in Dollars, you can also designate a primary currency in your PayPal profile.
Doing this will at least limit the currency conversion to changing Dollars to your local currency for withdrawal.
You might even be able to avoid it altogether by having your local bank account in Dollars, as this option is available in many countries. However, these accounts usually have fees and conditions. You will also still need to change the Dollars into local currency. So, check if it actually ends up being cheaper before doing this.
12. Make use of Invoicing Software
PayPal used to have a Business Payments program that allowed invoicing software, such as Freshbooks and Harvest, to integrate with PayPal. This reduced the fees for US-only transactions to a flat $0.50.
However, PayPal is no longer supporting the program. If you happen to have or chance upon an invoicing program which still lets you do this…Congratulations! Enjoy it while it lasts.
Even if you cannot find invoicing software which lets you get the Business Payments program flat fee, it is well worth using invoicing software. It will keep you organized and help you see more clearly how much you are paying in fees. At the very least, it will make filing your taxes easier.
13. Use Virtual Banks
Virtual banks, such as TransferWise (reviewed here), offer accounts in multiple currencies. Having an account in the same currency as your primary PayPal currency allows you to avoid currency conversion fees. It might also have a positive effect on withdrawal fees.
You will, of course still have to convert the currency before having the virtual bank deposit it to your local bank or designated card. The good news is that these providers generally have much better currency conversion rates than PayPal.
The savings are so significant that I immediately tried to do this. In fact, they are so good that PayPal has already started closing this loophole.
PayPal will usually help you if you have problems connecting their system with your local bank. They make it very clear, however, that they will not manually add a virtual bank or card.
If the PayPal system does allow you to register a virtual bank or card then you are free to use it. The odds of that happening nowadays are, to be honest, slim….
14. Open Another Bank Account
Withdrawing your funds can be expensive if your bank account is in a different currency. While it is not easy, if you are able to open a bank account with the same currency as your primary PayPal currency then this could save you a lot of money.
UK citizens that now reside in other countries have sometimes been able to retain their UK accounts. Foreign students and workers can also frequently manage to have accounts in more than one country. Apparently, it is also rather easy for Canadians to get a US bank account.
Despite what you might have heard, offshore banking is not in itself illegal. However, please make sure you check the bank contracts and local laws to ensure you don’t end up with bigger headaches than some PayPal fees.
15. Use Alternatives
If all else fails, you can simply avoid using PayPal. There are many alternatives out there, but each of them will have their own weakness, strengths, and fees.
Stripe is probably the alternative that most closely matches the functionality provided by PayPal. If you need to be able to accept payments on your website, then you should definitely check to see if it might be a better option for you.
When all you need is a money transfer so that you can get paid, you absolutely must take a look at the virtual banks and cards which are now available. The main players here are TransferWise, Revolut and Payoneer.
Their fees are usually very easy to figure out and are generally much lower than PayPal’s. If you want to get an idea of just how much, you can check out an article Ben wrote comparing TransferWise and PayPal.
PayPal can be a very useful tool for all kinds of people, but it can be expensive to use it to receive payments.
Since it is free to create a PayPal account and there are no maintenance fees, I would definitely recommend having a PayPal account. It will mean that you can work with agencies or clients that insist on PayPal. However, it’s still wise to look into how to avoid PayPal fees and do whatever you can.
After all, there is nothing to stop you from using PayPal when it is the best option, and an alternative when it is not.
More Money Stuff
- Struggling with late payments? Read our guide to chasing them up.
- Take a look at this free solution for producing professional invoices.
- Take a look at Amazon Business and see if it could save you money.