Guide to Deposit Invoicing (Upfront Payments Done Right)

A deposit invoice asks the client to pay part of the price before you start. You'd send one before you buy materials or set aside time for a job. Doing it right comes down to four things:

• the deposit amount and what it's calculated from;
• what happens to it if the job is canceled;
• recording it as money you still owe in work until you deliver;
• crediting it clearly on the final invoice.

Check one thing before you set the amount: some work has a legal cap on deposits. In California, for example, the down payment on a home improvement contract is capped: the CSLB says it "cannot be more than $1,000 or 10 percent of the contract price, whichever is less" (Contractors State License Board).

What a deposit invoice should say

• A clear title, such as "Deposit invoice", with its own invoice number.
• The agreement it belongs to. Give the quote, proposal or contract number and date, so the deposit is tied to a defined scope. See invoice payment terms explained.
• The amount and its basis, for example "40% of $18,000 per quote Q-2291".
• How it will be applied: "credited in full against the final invoice".
• What happens on cancellation. Is the deposit refundable, partly refundable after costs, or non-refundable once materials are ordered? Use the same wording as your contract. For consumer sales, a legal cooling-off right can override it. In the US, where the FTC Cooling-Off Rule applies to a sale, a buyer who cancels in time must get a refund of all payments within 10 business days (16 CFR 429.1(g)). In the UK, a consumer who cancels an off-premises or distance contract is reimbursed (regulation 34), but if they expressly asked you to start a service during the cancellation period, they pay a proportionate amount for what you'd supplied (regulation 36).
• Due date and how to pay. If the start date depends on the deposit, say so, and make paying easy.

The rest of the layout is a normal invoice. See how to create a professional invoice, or start from the deposit invoice template.

How much to ask for

Base the deposit on your exposure, not on a round number. A useful test: if the client walked away the day after paying, would the deposit cover what you'd already committed to the job, such as special-order materials, subcontractor bookings and calendar time you turned other work down for? If it wouldn't, either ask for more or don't commit those costs until the next payment comes in.

Then check the rules for your trade and location:

• In California, home improvement contracts have a capped down payment. The CSLB says it "cannot be more than $1,000 or 10 percent of the contract price, whichever is less," and "There are no exceptions for special-order materials." It adds that "The payments to the contractor cannot exceed the value of the work performed" (CSLB). The contract must include that cap in at least 12-point bold type. Violating the down-payment and progress-payment rules is a misdemeanor (CSLB industry bulletin 22-14).
• Elsewhere, check your state or national licensing body and consumer protection agency before you set deposit terms for consumer work.

If a large upfront payment isn't possible or allowed, use stages instead: a small deposit, then milestone invoicing or progress invoicing as the work is done.

How to record a deposit in your books

A deposit isn't revenue yet. In accrual accounting, a customer's advance payment is unearned (deferred) revenue: "Until the customer is provided an obligated product or service, a liability exists" (OpenStax, Principles of Accounting).

• When the deposit arrives, debit cash and credit a liability account such as "Customer deposits" or "Unearned revenue".
• As you deliver the work, move it from the liability to revenue.

That also keeps your forecasts honest: deposit cash is already spoken for by work you owe. More detail in what is deferred revenue.

Tax on deposits

Tax can be due when the deposit is paid, not only when the job is finished. In the UK, a deposit or advance payment creates a VAT tax point. HMRC says: "The tax point will be either the date you issue a VAT invoice for the advance payment, or the date you receive the advance payment, whichever happens first." If you keep a deposit after the customer cancels, VAT remains due on it (HMRC: VAT on instalments, deposits and credit sales).

Elsewhere, check your tax authority's rules on advance payments, and show tax on the deposit invoice the same way you'll account for it.

Credit the deposit on the final invoice

The final invoice should show the full contract amount, then subtract the deposit by reference:

• Total contract charges
• Less: deposit received (invoice number and date paid)
• Balance due

Quoting the deposit invoice number lets the client's accounts team match the two documents. It also lets you match them when you reconcile your bank account. If the client pays the balance in several parts, see how to handle partial payments.

Worked example: a cabinet job from deposit to final invoice

Sample figures for illustration only. Tax is left out to keep the arithmetic clear. Oakline Joinery, a fictional cabinet maker, signs quote Q-2291 to build and fit cabinets for a café: $18,000 in total. The café is a business, so this isn't a home improvement contract for a homeowner. The contract asks for a 40% deposit, with the balance due on completion. If the café cancels after materials are ordered, Oakline keeps the cost of non-returnable materials and refunds the rest.

1. Deposit invoice DEP-0107. 40% × $18,000 = $7,200. The invoice says "Deposit for quote Q-2291, credited in full against the final invoice", and states the cancellation term. The café pays by card, and Oakline records $7,200 as cash and $7,200 as a customer-deposit liability.

2. Oakline orders materials. It spends $5,900 on cabinet boxes, hardware and a worktop, all special order. The deposit covers this exposure with $1,300 to spare, which is the point of sizing it from costs.

3. Job completed: final invoice INV-0215.

Oakline now recognizes $18,000 of revenue. $7,200 comes out of the deposit liability, and $10,800 is owed by the café.

What-ifs:

• If the café had canceled after step 2, Oakline would refund $7,200 − $5,900 = $1,300, hand over the materials the café has now paid for, and send an itemized statement with the supplier invoices. A credit note records the refunded part cleanly. What you can keep depends on your contract and local law. See how to cancel a signed quote.
• If the same $18,000 job were a home improvement contract in California, 10% of the price would be $1,800. The lesser figure, $1,000, would be the maximum down payment, and the special-order materials would have to be funded another way (CSLB).
• If Oakline were VAT-registered in the UK, VAT on the deposit would be due by the earlier of the deposit invoice date or the payment date, not when the job was finished (HMRC).

Making deposits easy to send and pay

• Start from an invoice template or the free invoice generator for one-off deposit invoices.
• With Billed you can accept payments by credit card, debit card or PayPal directly on the invoice, so the client can pay the deposit as soon as it arrives.
• If a long job has fixed, calendar-based stage payments, recurring invoices can create and send them automatically on a daily, weekly, monthly or yearly schedule.
• If you quote with estimates, you can turn approved estimates into invoices instead of retyping them.

Don't order non-refundable materials until the deposit has cleared. If the client wants to add scope after paying, agree on a written change before the next invoice, so the deposit isn't stretched over work nobody priced. See how to handle scope creep.

Frequently Asked Questions

What percentage should I charge as a deposit?

There's no single right percentage. Size the deposit to cover what you will have committed to the job before the next payment, such as special-order materials, subcontractor bookings and reserved time. Check for legal limits first. In California, for example, the CSLB says a home improvement down payment "cannot be more than $1,000 or 10 percent of the contract price, whichever is less."

Is a deposit revenue when I receive it?

Not under accrual accounting. A customer's advance payment is unearned revenue, a liability, until you provide the work it pays for. You move it to revenue as the work is delivered. Tax can follow different timing: in the UK, for example, VAT on a deposit is due at the earlier of the invoice date or the payment date.

How do I show a deposit on the final invoice?

List the full contract amount, then a negative line such as "Less: deposit received, invoice DEP-0107, paid on [date]", then the balance due. Quoting the deposit invoice number lets both sides match the two invoices.

Do I have to refund a deposit if the client cancels?

It depends on your contract, the law where you work and whether a consumer cooling-off right applies. In the US, where the FTC Cooling-Off Rule applies, the seller must refund all payments within 10 business days of a valid cancellation. In the UK, under the Consumer Contracts Regulations 2013, a consumer who cancels in time is reimbursed, but one who expressly asked for a service to start during the cancellation period pays a proportionate amount for what was supplied. Elsewhere, and outside a cooling-off period, what you can keep depends on your contract and the rules where you work, so check them before you set your deposit terms.

Is a deposit invoice legally binding?

The deposit invoice is a request for payment under an agreement. The binding terms are in the quote or contract it refers to. That's why the deposit invoice should name that document and repeat its deposit and cancellation terms rather than introduce new ones.