At Time Doctor, we have a lot of customers who have employees/freelancers in other countries. One of the things we’re trying to do is to help our customers to find the lowest cost method to transfer money to those employees.
PayPal is one of the easiest ways to transfer money, but it’s often not the cheapest.
How much does it cost to send money via PayPal?
The cheapest legitimate transfer method on PayPal is “Mass Pay”.
This is an easy way to pay several people at once by uploading a CSV spreadsheet of allthe payment amounts. The cost is usually 2% to a maximum of $20 for offshore payments. The maximum fee can vary based on the sending & receiving countries. You can see the fees for your countries using the form on the right side of this page. If you send payments on PayPal without using Mass Pay then the cost will be higher, at around 4%.
Also remember that for global payments PayPal also charges a currency conversion fee which is actually a hidden fee, but it often comes out to around 2.5%, and is a cost on topPayPal’s stated 2% fee.
There may also be some fees charged to your employees by their local banks when they withdraw the payments you’ve sent them.
So the total cost? Let’s look at an example: If you send $1,000 from the US to one employee in the Philippines,PayPal will charge 2% ($20), plus an extra approximately 2.5% ($25) for the currency conversion, so the total cost will be 4.5% ($45)
The reason I said the cheapest “legitimate” method of sending money via PayPal is that some people will pay employees through PayPal, but claim that they’re transferring the money to a friend or relative. In this case 2% or 4% fee is waived, however the hidden currency conversion fee is still there. This is against the PayPal terms of service and I imagine would be problematic when sending larger amounts of money.
Declaring that your transfer was to a friend or relative may also get you into hot water with your own tax authorities when you try to claim it as a business expense. We suggest always being honest & following the terms of service.
How to determine the HIDDEN currency conversion fee?
Most transfer services will not tell you how much they charge for exchanging money. Sometimes these charges can be very high. PayPal charges around 2.5% in our experience, although this rate can vary depending on the currency.
Banks also can charge exorbitant rates when transferring money. As the rate is usually not declared there’s little incentive to charge a reasonable fee. For example most Australian banks will charge at least 2% and sometimes as high as 4% when converting money to other currencies. US banks generally charge lower rates but it’s unlikely you’llfind a bank that charges under 1% to convert between currencies.
Since the currency conversion fee is not declared, you’ll need to calculate it yourself. The way you can calculate it is to divide the currency conversion rate that they give you by the inter-bank rate at the time of the transfer. The inter-bank rate is the rate at which banks trade with each other. It’s the true market rate for exchanging currencies. You canfind the inter-bank rate at http://www.oanda.com/currency/converter/
Let’s look at a specific example. Let’s say you want to send money from the US to India using Western Union. According to the Western Union website, they’ll convert 1 US dollar into 61.1620 Indian Rupees. On the Oanda site, 1 US dollar converts into 61.7196 Indian Rupees.
Western Union: 1 USD = 61.1620 INR
Interbank Rate: 1 USD = 61.7196 INR
To determine the amount being charged by Western Union on the exchange, you just need to find the difference between the 2 amounts and turn it into a percentage:
61.7196 – 61.1620 = 0.5476
0.5476 / 61.7196 = 0.88%
So Western Union would charge 0.88% on this transaction (far below PayPal’s ~2.5%). This is an approximate calculation because the rates will vary throughout the day.
Local transfer fees
On top of the stated fees and hidden fees of the money transfer service that you’re using, there will often be some cost to transfer your funds to the transfer service in your own country, and then from the transfer service to your employee in the receiving country.
These fees are usually minimal and don’t vary between transfer methods, but it’s good to be aware that they exist.
For example if you want to transfer $1,000 from the US to your employee in the Philippines using Transferwise.com (one of the methods listed below), you’ll need to first get the $1,000 to Transerwise. This can be done through the ACH system in the US and usually costs less than $1 per transfer.
To do this you will need to make sure that your bank account is able to money via ACH. Most banks in the US will provide an ACH service only to business accounts. Sending the money to Transferwise via a wire transfer is a lot more expensive and can cost between $15 and $40.
Local banks in the Philippines may also charge some small amount to receive the money from Transferwise into your employee’s bank account.
The hassle factor in transferring money to offshore workers
PayPal is one of the easiest ways to transfer money to workers because it only requiresthat you know the email address of the recipient and it takes just a few clicks to send the money.
Also PayPal will automatically debit your bank account and withdraw the money you need to send it to the recipient. Most other transfer methods require several more steps and do not automatically withdraw the money from your bank account. You’ll need to consider whether the money saved is worth the extra hassle.
If you’re paying several workers you may save thousands of dollars which might be worth