I use PayPal to send my payroll out every week. I know that PayPal first tries to take money out of your bank account, but then uses a credit card if there are no funds available.

Does that mean I can accumulate miles by leaving the account empty, and paying my credit card at the end of each month?

In advance, I know there are better ways to do payroll then PayPal (ala 3.5% charge). Circumstances dictate that I use this system.

Thanks!

I think so...as long as the charge hits your CC as a purchase and not a cash advance, it should be no different from any other purchase.

Actually, you can fund it with the credit card directly. This way, you won't have the NSF fee on your bank account.

If your employees already have the 'premiere' level account (the one that charges 2.9% for all funds received) then you should indeed fund the payment with your credit card each time. If they have a basic account, they will be charged something like 4.9% for transactions funded with a credit card. More power to you if they don't complain.

Back to OP, I recall Paypal places a limit on the amount of transactions processed via credit cards. (Maybe lifted recently? I am not sure). Depending on how much payroll you have to handle, you better make sure you won't exceed the limit (if there's any).

Both personal and business/premier Paypal accounts can be funded via credit cards. Like others had pointed out, you don't have to use the bank account. The difference is on the recipients' end. If it's the creditcard funded payment, the recipients have to pay a fee. I haven't use my Paypal accounts for a while so I am not sure what's the current fee structure. However, if your employees' Paypal accounts are the personal type, I am sure they won't be happy to see the fee deducted by Paypal from their accounts. It wasn't an issue since you used to send bank-account-funded payment and there's no extra fee involved. If you are going to switch to the credit card-funded Paypal payment, well you have to factor in the fees now.

You better research more and see what fees you and your employees will have to pay to go this Paypal credit card route.

If the employees are indeed being charged a % fee, the employer should be increasing the payments so that the employees get the gross pay they were promised (or specify from the very beginning that the employee is responsible for the Paypal % fee). If you offer your employees a certain wage, but actually pay them 2-5% less, that could be illegal.

I am no accoutant, but wouldn't this complicate a lot of things? For example, when the tax season comes, what to put on the 1040 (both employer and employees)? Would it mean more taxability on employers?

Secondly, does Paypal really treat this payroll payment as purchases? I know how Paypal works in terms of being a buyer/seller on eBay. I don't know the payroll processing part.

Thanks LawSchoolFlyer =)

I don't have employees-they're technically subcontractors, and they're aware of the fees associated with this method of payroll. Don't worry, they're well compensated. =)
Based on the info you guys kindly provided and some research on Paypal, I'll advise them to sign up for premier accounts. The charge for receiving credit card payments is only 2.9% plus .30 per transaction.

Thanks!

Hi Olwagner,

Thanks for your input. I searched through Paypal, and saw no option for this. A search on google brought me to various forums that suggested I leave my bank account empty, so the backup would automatically be charged. Any thoughts?

When sending money, your options are (IIRC):
auction; non-auction goods; services ; cash

The first 3 are all treated as purchases if funded by a credit card. Only the last option posts as a cash advance.

If using this to pay contractors, "services" is accurate, and will avoid cash advance fees.

Oh, okay, then everything's fine. I thought that you were using a "payroll" product by PayPal (which I didn't know they had, but I thought they might have recently introduced) which charged the employer (sender) for the payments instead of the recipient, who is usually the one charged. And I thought that the bank account thing was part of the "payroll" product. If you're just using ordinary PayPal, see below.

Don't leave your bank account empty, because as another poster indicated, even though PayPal probably won't care, your bank (depending on its policies) might charge you fee for the rejected debit (like a bounced check).

When you send a payment, PayPal will automatically select your bank account as the payment source (that's how they make money--they don't want to pay Visa or MC a cut, and a bank account debit is "free" to them), but on the Send Money screen you can change the payment source to your credit card (assuming you have a credit card stored in your PayPal profile).
PayPal will ask you "Are you sure you want to change to credit card? Paying with a bank account is great!!!! etc" (again how they make money), and if you hit yes then you can choose to pay with your credit card.

Here's the thing:

• If you pay with credit card, your subcontractors will need a merchant account to receive the payment, and they will be charged the ~3% fee on the incoming payment. So you pay nothing and they pay 3%
• If you send payment with a bank transfer, your subcontractors can receive the payment with a personal account, which has no charge for an incoming bank transfer payment (but costs even more than a merchant account to receive a credit card payment). So you pay nothing and they pay nothing.

If you compare the scenarios, you see that PayPal is taking a 3% cut from your transfer to your employees. If the money amount you pay them is high, maybe you could work out a deal like this:
You send payment by bank transfer (so you don't get the credit card miles), but you pay them 1.5% less money (but they can use a free personal account, with no 3% PayPal charge).

So then you would paying 1.5% less money, but your employees would be earning 1.5% more, because you split the 3% that PayPal would have eaten.

It's extra hassle, but if you're talking large dollar amounts, the 3% might be worth it.

(Oh and the "secret" to how PayPal makes money is this: if you send money to a merchant account, PayPal charges the recipient 3%. But if you funded the payment with a bank transfer and not a credit card, PayPal doesn't have to pay a cut to VISA/MC, so they just get to eat the 3% they charge to the recipient. And the recipient who has a merchant account doesn't even know whether the payment was funded by bank transfer or credit card, since they get charged 3% either way.

That was an extremely concise, accurate summation of everything that just took me about four hours to research. I wish I had just waited for your post. Thanks again, you're going to make a great lawyer someday!

Personal accounts also have lower limits on the amount that can be received/withdrawn each month. Depending on the amounts that DNPierson1 is sending, the presonal account type may not be an option.

You might want to look at www.paypalsucks.com

Sure, and anyone planning to fly united might want to look at www.untied.com, and anyone planning to ship by UPS might want to look at www.unitedpackagesmashers.com ...

just because it's online doesn't mean it's balanced, or even true.