Our charity currently uses PayPal to processes credit card payments for donations. We ask anyone who uses this payment option to include an extra amount to cover the transaction fees that the site charges. Is the total amount tax deductible to the donor? (i.e. if I donated $508, $500 to the organization, $8 for transaction fees, is the entire $508 tax deductible or just the $500 that goes to the organization?)
I don’t see why the entire payment would not be considered a contribution to the charity. If the donor gave $500 and the charity got only $492 because of the service fee, no one would seriously consider that the deduction should be limited to $492. I would state your situation slightly differently than you did. The person donated $508 to the charity and the charity used $8 to pay the costs of fundraising and $500 for its charitable program. The entire payment is a gift is to the charity.
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I would note that Paypal prohibits additional fees for processing. They are VERY specific on this issue. Our organization did do this but were questioned about the practice. When we queried PayPal they were very clear that you may not assess a fee for using PayPal.
Since this is a contribution and not a sale, I don't think the organization would be "assessing a fee for processing," but would be merely asking for a larger contribution to cover its costs.
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