At our office we get a lot of similar questions, and when we see a pattern of something people commonly struggle with, we like to offer extra help. We have been getting a lot of questions regarding how to handle business PayPal accounts, so don’t worry, you are far from alone in your confusion. Read this blog to get some of your questions cleared up.
Claiming PayPal Income
This question comes up regularly: Do I claim the amount my customer paid or the amount after fees? Do I claim the income when it comes into PayPal or when I transfer it into the bank?
It often helps if you think of PayPal as just another bank account. The thing that gets a little bit confusing with PayPal can be the fees. You need to claim the amount your customer paid as income. If you have an invoice with a client for $75.00 and they paid you $75.00, you do not want to accept the payment for less than that $75.00 because in your system it will look like your client still owes you money. Your customer paid you how much they paid you, the PayPal fees are a separate business expense. See below about how to handle the fees.
But, What About the PayPal Fees?
There are two different ways that we handle the PayPal fees. Both are accurate and it is up to you what works for you process and what information you need to have in your records.
One way that the fees can be addressed is by removing them from the deposit. (Check out episode 7 of our QuickBooks Tutorial Series to see this in action.) The way that this works is that you create a payment or sales receipt for the full amount your client paid you. Then you split the deposit and enter the PayPal fees, pointing to the expense account that you use, as a negative number. Now the deposit shows the actual amount that came into PayPal, but you claimed both the correct income and the correct expense.
For people who have a large number of transactions coming in through PayPal (we have some clients with hundreds of PayPal transactions a month), the method above is not always practical. In those cases we enter all of the deposits to PayPal for the full amount received. Then, at the end of the month, when we reconcile the account, we enter a single expense for all of the fees charged that month. This allows you to claim the full expense without all of the data entry time it would take to edit every deposit.
Banking Link and PayPal Fees
The final consideration when choosing the method for entering fees is your banking link. PayPal has been in the process of making updates to their website that affects how PayPal communicates with QuickBooks Online. Depending what version of PayPal you currently have, it will either download your deposits with the fees removed or for the full amount received. If your download shows the amount less the fees, you will want to use the first method, if your download shows the full amount then it will be easiest to use the second method.
Final thought, if your download shows the payments less the fees, but you have a large number of transactions and it would not be a good use of time to edit each deposit, there is one more option: Just accept all of the deposits into your income account. (Note that this will only work if you do not use payments or sales receipts to track your individual customer transactions.) Make a single month-end expense transaction for the full amount of fees for the month. Then, make an adjusting deposit into PayPal using your usual income account for the same amount. This will allow your PayPal account to reconcile correctly and make it so you are claiming the correct income and the correct expenses.
Transferring from PayPal to the Bank
How much money do I need to transfer? When should I transfer it?
The easy answers to these two questions are, as much as you like, and whenever you want. If we go back to thinking about PayPal as just another bank account, it is your money and you can move it however you like. When transferring between a checking and savings you don’t worry about the amount or the timing, and PayPal transfers are exactly the same. You have already claimed the income, now you are just moving your money around.
Have more questions?
Leave a comment below and we are always happy to help.