Sole proprietor can expense transaction fees Tax Talk by George Saenz • Bankrate.com

Dear Tax Talk,
I have a question that I cannot seem to get an answer on from anyone. If I have an employer who pays me 1099-MISC income for independent contractor work via PayPal, are the transaction fees that are automatically assessed by PayPal deductible? It's not much, but after a year, it adds up to almost $2,000 of "income" that I did not ever receive. Thanks for any help you can offer.
-- Dan

Dear Dan,
The most common small business is the unincorporated sole proprietor, which is basically anyone that works and is not an employee. Sole proprietors file Schedules C and SE of Form 1040.

Schedule C is used to report gross income and ordinary and necessary business expenses. Gross income will generally come from Form 1099-MISC that will be issued in your individual name from businesses that pay you more than $600 during the year. The Internal Revenue Service requires that a business report payments for services performed by independent contractors when the contractor receives $600 or more in a calendar year.

Form 1099-MISC, Miscellaneous Income, is used to report payments you make in your business. Since the businesses that pay you are probably not aware of the PayPal charges, they will probably report the gross amount paid to you through PayPal on Form 1099-MISC. However, the amount you pay to collect through PayPal would be considered a business expense.

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Accordingly, in the deductions section of Schedule C, you should include an expense for PayPal. You should combine this with other credit and collection costs that you incur for the year and disclose it as such on Schedule C.

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