All expenses directly related to your business are deductible expenses when figuring your actual 'taxable income'. When you keep track of your books, you should be entering for example to make it easy lets say the service was 50 dollars and the fee was five dollars. The five dollars would reduce your actual income for income tax purposes.
Everyone should take a look at schedule C under "other". It is good practice to have your bookkeeping match your schedule C as much as possible. This way at just a glance you can see where you stand when you print out a profit and loss report.
Here is the link to a schedule C at the IRS.gov site:
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
In short you probably may deduct (I say probably because every situation is different)
From the IRS.gov site:
Advertising, vehicle expenses (if you drive someplace to pick up work, it must have to do with work), commissions and fees, contract labor, depreciation and don't forget to look at Section 179 expenses, benefits if you have employees, insurance (not health), interest, legal and professional fees, office expenses, rent, repairs, supplies including office supplies, taxes and licenses, travel expenses (100%, or proportionate to work/vacation if at least 50 percent is for work) meals and entertainment (only 50% even if you're traveling), utilities (proportionate), Wages you pay anyone, and OTHER- which will encompass anything else you did not include that is an expense that you must have to do your job... such as bank fees, specialized clothing, club dues such as chamber of commerce for instance, or VA groups, Internet, Phone Utilities, books, magazines, some software, cell phones, etc.. if it must be to do your job it is deductible.
You simply must keep good records, real receipts (with Paypal make sure that you get a real invoice because if you look at paypal it is not a good record, ask to be invoiced via email or mail or sent to your freshbooks.com account)
The IRS likes real receipts, not credit card statements, and will take some notes at times if you lose something, but keep GREAT records. Even if all you do is throw them all in a shoe box all year long, do it, then tape it up, label it and save it in case of audit.
Many times in the start up phase your expenses will be more than you earn, and to the IRS that is OK. As long as you're attempting to make a profit and can prove it it's ok to take a loss on your OTHER INCOME (like your spouses) in conducting your business. They say 3 out of five years you can have a loss but the truth is, if you can prove your in business to make money and not just trying to have a write off you can win. KEEP GOOD RECORDS.
Follow ALL the IRS rules. For instance "Home OFFICE" this is a big one that many of us do qualify for but are scared to take. I do NOT qualify for it due to how my office is set up so I do not take it. I use my Home office for school and home office so it does not qualify this year. Read the rules and just follow them and you'll be surprised at how much is deductible right off the top of your income before your taxes are even figured.
This is where I have to say that a qualified tax adviser pays for themselves (and their fee is a deductible expense, in fact if you purchase turbo tax that is also a deductible expense).
This post is way too long. Sorry. But it is something I feel strongly about. Please if you're earning any kind of money, get the advice of a professional. It will save you money in the long run. Hire someone who is qualified, don't just rely on HR Block tax preparers. Get a CPA or a Certified Bookkeeper, or buy the bookkeeping for dummies book at least.
Paypal Fees - do you pass fees on to clients?
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