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The most important part of online freelancing is the part where you get paid. There’s no point to doing honest work if you aren’t certain you’ll receive your honest pay. These days you’re expected to accept payment through certain gateways that make for a hassle free transaction. With each passing client, you’ll notice general trends towards the lowest common denominators. However, payment gateways differ between countries, in both availability and conditions of use. We’re going to try to explain how some of these work to help you find your place in the online financial playing field.

taxation of online income

Paypal

The original payment gateway that took the world by storm, PayPal is still an uncontested monopoly. In providing a hassle-free purchasing experience, PayPal is the most used gateway for online shopping, rivaled only by direct card payments. Unfortunately, direct card payments require a payment gateway regardless, so if you’re a merchant looking to set up an online store, you’ll undoubtedly opt into using PayPal, even if you intend for your customers to pay with their debit/credit cards.

The main reason for this is that PayPal adds a layer of middle-man protection, and comes with built-in escrow functionality. Further, their conflict resolution methodology is quite impartial and dependable. The real question then is why anyone would use anything other than PayPal to transfer money online, and there are many valid answers.

International Regulations

There are several degrees of misfortune in using PayPal if you’re not a first-world citizen. First of all, there are still countless countries where PayPal is simply not available in any capacity. There’s also a number of countries that can use PayPal as a payment gateway but can’t receive any funds. And further, down the list, there are countries that have full access to PayPal, with governments that don’t really know what to make of the relationship between PayPal and their domestic banks.

The problem arises from various nations’ banking regulations having been developed slowly, over a long period of time, specifically for regulation of domestic banking operations. The second that PayPal introduced the online market and the idea of digital currency, countless nations were essentially forced to adapt faster than they’d been used to. There was never really any time to flesh out a proper international concept on how to perceive online transactions, so governments have been solving the issue with hesitance and apprehension.

Specifically, the problem is that governments aren’t sure how to access their citizens’ PayPal accounts, in that there’s no clear legal definition that can define, internationally, whether PayPal accounts are to be considered bank accounts or not. PayPal has a very strong relationship with the IRS in The States, but in other countries, the relationship between tax regulators and PayPal corporate is muddled at best. People are expected to self-report, or flat out not report taxes at all, depending on how they actually use the funds. In many countries, receiving money through PayPal then using said money to purchase something online, isn’t considered tax fraud, by way of technicality. Regardless, it’s still tax fraud.

Now, don’t get me wrong, I’m not defending taxation of online income, especially in the case of nomad freelancers. I simply think we have to be clear on the technicality of the situation so that we never break the law accidentally. I have heard many a story where local tax regulators in third world countries actually advise citizens to avoid paying their taxes on online income, simply because of the implied complexity of verifying the accuracy of reports on such income. In other words, tax authorities don’t have the time to scan your online accounts, but some of them would like it if you’d self-report.

Self-Reporting

Before we discuss PayPal alternatives, let’s just look at the logistics of paying taxes for online freelance work. In the United States, there are extremely specific regulations that start with the premise that working online, from home, is self-employment. You’re your own boss and employee, and you have to pay a ton of taxes to compensate. However, the IRS has also allowed for a long list of tax exemptions that have to do with being both employer and employee.

You can deduct your home office, the food you eat while at “work”, your rent, and so forth. The paperwork is extremely complicated, and having multiple clients at a time means you’ll need to fill that many more forms, but at the very least, the IRS scratches your back if you scratch theirs.

In other countries, taxation of online work falls all over the spectrum. Usually, freelancers ask themselves whether their country can even find out how much they’re making and what payment methods they’re using. Then, they decide whether to report and how.

This might sound shady, and on the surface it is, but consider the following: If you’re a freelancer who lives in, say, France, and you work online for a living, you should pay the basic income tax to your country. It is the ethical and legal thing to do.

But say you’re a freelancer who is backpacking across Europe over the course of 12 months, and your country of origin has no way of peeking into your online accounts. Whom do you really owe the income tax to if you’re never in your country of origin, and you never form any roots? If you rest at AirBNBs, whose taxes are covered by the owners, you have no real obligation to pay taxes locally, and yet, it is illegal not to.

Unfortunately, we’re not going to get a clear answer on what the right thing to do is, in this case. Your best bet is to talk to a local accountant, in your country of origin or residence, and letting them figure out your safest approach.

Payment Methods

We leave the actual payment methods for last, because they don’t actually matter as much as you’d think. Payment gateways and online banks are only as good as the results they get you.

Take Payoneer as an example. It has been taking the internet by storm for years, by offering an internationally usable debit card, linked to a proxy US bank account. Your average clever freelancer has a Payoneer card.  However, while I have been praising Payoneer for their amazing fees and ease of use, some people I know have been complaining fervently about missing funds, slow response times and card issues. For some reason that I do not understand, different people from different countries have vastly different experiences with the same payment providers.

I highly recommend Transferwise, if you need to receive funds from another country. They have dirt low fees and their process is absolutely seamless. You can also use them as a gateway to receive money to your Payoneer, which makes them a great backup for certain clients.

Then there’s Skrill, the original savior of all third world freelancers. Chances are, if PayPal is not available in your country, Skrill is. They had really high fees back in the day, but have been reducing them regularly ever since. They’re not as easy to use as Transferwise, as they’re also an online wallet, but you can think of them as a viable PayPal substitute for when you’re in a pinch.

And if you’re really desperate, there’s always Western Union. Thanks to online standardization, WU has become everyone’s Plan X for when things go horribly awry. If you want to know that you’ll definitely receive funds, instantaneously, think Western. Their fees are far from negligible, and they vary depending on the payment method used and the countries in question, but they’re extremely reliable and perhaps the fastest when it comes to quick cash transfers.

My advice to you is that you try out several different payment gateways until you are satisfied, and when you find one that is right for you, stick to it until they change their terms of service. Personally, I’d suggest Payoneer for receiving funds and Transferwise for international transactions to your Payoneer. I’ve found that this approach saves the most money in transaction fees and it works for me. As for what works for you, that’s for you to find out. Just remember that no-one has a straight answer for you. If anyone claims to have the end-all solution to all of your financial problems, they’re probably blowing smoke.

 

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Online payment methods and taxation

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2 thoughts on “Online payment methods and taxation

  1. Wow! Great to know all these payment methods to implement! Yes it is important to get paid and give people more options for their convenience! Nice blog, signed up! Thank you, looking forward to more posts! Anna

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