Tag Archives: paypal

What is a Square Credit Card reader and why should I avoid them?

The Square card reader is the brainchild of Jack Dorsey, the founder of Twitter. The technology is a departure from the traditional mode of credit card processing, opening the acceptance of cards to individuals. Anyone who owns an iPhone, iPad or Android device can fill out a form and download an app from Square. A card reader is then mailed to them which plugs into the headphone jack of their smartphone or mobile device, thus turning the device into a mobile credit card terminal. Thanks to successful online marketing and a straightforward pricing model with no “hidden fees,” Square has enjoyed a high level of success, but this method of payment definitely falls in the high risk merchant account category.

On first examination, the Square reader seems highly attractive. There are no fees for activation, monthly use, gateway, downgrade, or early termination. Merchants pay a flat 2.75 percent for swiped transaction and 3.5 percent plus %0.15 for transaction that are typed. Where does this fall in the merchant account pricing model? It’s more expensive than the qualified rate, and comparable to the mid- and non-qualified downgrade surcharge. Next to the interchange pass-through model, however, the Square rate schedule is definitely more expensive, but most merchants don’t have interchange pass-through. So, what’s the problem with Square?

Although there is no limit on the amount of money that can be accepted in transactions per month, if the sales are card-not-present (typed into the phone) transactions of more than $1000 in any rolling seven-day period, Square holds the sales for 30 days. Transactions under this $1000 “limit” and those that are swiped are deposited into the merchant’s checking account within 24 business hours. (In all fairness, Square does have some venues to get around these limitations, but the process is cumbersome and protracted, and Square has not gotten high marks for its customer service.)

A more serious concern, however, and one that makes the Square method a very high risk merchant account is that the reader does not encrypt the information from the credit card before it is sent to the attached device. That means that the person swiping the card could use the device to skim the credit card data for their own use. The Square application can store the customers credit card information. In the hands of an unscrupulous employee, this raises the very real potential for identity theft. Taken as a whole, the apparent convenience of the Square reader does not outweigh its limitations and liabilities for taking card payments.

Paypal Income Reporting Requirements for Bloggers

For tax year 2011 (and this still applies today), the IRS did something very interesting: they required payment settlement entities to file Form 1099-K for payment transactions. This includes PayPal accounts that received at least 200 transactions and $20,000 total during the calendar year.

Paypal Income Reporting Requirements for Bloggers

If you’re a blogger, the majority of payments are made via Paypal, so this adds a completely new hassle to the income reporting equation. The two biggest problems are:

  • Not everyone uses their PayPal account solely as a business account. For sole proprietorships, some payments from businesses should be marked as income. However, payments made from friends shouldn’t be. The IRS requirement doesn’t differentiate the different payments (unless they are made as personal payments). Therefore, in some cases, the 1099-K issued by PayPal may over-report income.
  • This also raises the issue of being taxed twice on the same income. If someone pays me over $600, they are required to file a 1099-MISC. If they pay via PayPal, PayPal then records that payment on the 1099-K. We shouldn’t be required to pay taxes twice on the same income!

The 1099-K changes are designed to prevent tax evasion, which amounts to over $300 billion a year in the U.S. I like the idea of holding people responsible for their taxes, and this holds people accountable for their online business ventures which in the past may have gone under the radar. For example, eBay re-sellers are required to report their online income, but it’s been easy to avoid it in the past.

However, this puts a large burden on taxpayers. eBay sales of used goods will still show up on the 1099-K, even though they shouldn’t be considered taxable income (if you sell something for less than it’s worth, it’s generally not taxable).

Because this is so confusing, the IRS did something smart. Really smart. On December 6th, the IRS released the 2011 Instructions for Schedule C, the form to mark profit or loss from business, and in it they gave all business owners a little reprieve and helped us prepare for our future taxes as well.

First, while the 1099-K requirement still stands for 2011, the IRS has deferred the requirement to report the amounts on the 1099-K:

“However, for 2011, the IRS has deferred the requirement to report these amounts.”

What this means is that while you may get a 1099-K from PayPal, but in 2011, you did not have to record that number on your taxes. You are, of course, still responsible to pay taxes on your income that you received through PayPal, but you can do it the same way it’s been done in the past, by recording only the actual business income on line 1b. You can simply enter ‘0’ on line 1a.

Additionally, the 1099-K reporting requirement eliminates the need for some 1099-MISC filings, according to Don Frank, partner-in-charge of outsourcing with CliftonLaronAllen. The 1099-MISC indicates (in a not-so-straightforward way) that businesses should not complete Form 1099-MISC if the payment will already be reported on a 1099-K. So if someone pays you via PayPal and you will be issues a 1099-K, you won’t need to be issued a 1099-MISC as well. This avoids the double taxation issue.

Kudos to the IRS for realizing what a hassle this would be for 2011. I prepared for the future by separating my personal and business PayPal accounts and by tracking PayPal transactions separately so I won’t have to go through at the end of the year and figure out which transactions were included on the 1099-K and which need to be recorded on the schedule C separately.

Pay Heavily For Convenience With Paypal

If you’ve ever bought or sold anything on Ebay, you know that Paypal is the most convenient and most widely used form of payment for transactions.

Paypal is really convenient. You get paid immediately and can transfer the funds immediately after getting paid (there are some restrictions) to your bank account. It’s one thing you don’t have to worry about and you definitely save a lot of time not having to be concerned about accepting certain credit cards and processing payments. It’s automatic and you don’t have to deal with it.

PayPal is Expensive!

Of course, with any service, there are fees. Paypal takes part of every deposit that comes to your account, for business accounts. For a $250 transfer into your account (from your own bank account), you would pay over $6.50. That’s almost 3% just to fund your account. And of course there are fees for accepting payments too. Another 3%. So if you’re doing business regularly and there is money coming in and out of your account, you can end up paying a lot for this convenience.

There are no other tools out there that do what Paypal does and is used and accepted by so many people and online stores. When using Ebay, you actually pay two sets of fees: Ebay fees and Paypal fees. This can really cut into your profits and you should calculate this when deciding on the price you want to set for your items.

I just received $40 for selling an item, and of that, actually received $38.54 after the fees, which is over 3% in fees. Not horrendous, but if you’re doing a decent amount of business, it definitely adds up. Paypal is a great service and there’s no replacement. But know that you’re paying for that quality. With all the free services out there, I’m surprised they are able to be THE go to payment service with little competition from others who would accept smaller fees.

Changing The Rules

This summer, Paypal sneakily rolled out new fees of 2.9%, plus 30 cents for payments classified as “Goods” or “Services.” Previously these types of payments were free (typically they were used for transferring money between friends, or having money transferred from outside of Ebay), but without alerting anyone, Paypal added these fees to all types of accounts. They sent an e-mail regarding the positives changes that were happening, but that email didn’t say anything about changes to the fee structure.

Enjoy this service, but be aware that with Paypal, you are paying a high premium for the convenience of using their service. For awhile, Google Checkout provided comparable service for free, but started charging similar fees earlier in the year. At least they were up-front about it. I’m interested to see when the next service will roll out with lower fees and higher transparency.