Sometimes clients make mistakes and send invoice overpayments. For example, if you bill them $500 and they send you $1,000 because they accidentally submitted a wire transfer twice. Other times, they may have just misread the invoice and sent you wrong the amount.
This is no fault of yours – as long as you followed the best invoicing practices. It’s just a mistake that happens occasionally.
So, how do you handle overpayments?
The most obvious choice would be to issue a refund. As John Vincent writes in AP Recovery, that “you should never apply credit memos, overpayments, refunds, or rebates to unpaid invoices,” for following reasons;
- The client could have paid you instead of someone else.
- It can lead to an accounting nightmare.
- There may be tax implications.
- It may cause disputes between you and the client.
- You lose control on where expenses are applied.
However, sometimes issuing a refund isn’t possible, or it’s too much of a hassle for your specific business. And, thanks to invoicing software, you can easily and painlessly accept invoice overpayments.
Accepting Invoice Overpayment
The easiest ways to accept invoice overpayments would be to;
Apply It to an Unpaid Invoice
If you have multiple invoices from a client this could be the easiest option. For example, if they overpaid one invoice by $100, and they still have an unpaid invoice of $300, then just subtract the $100 overpayment from the $300 invoice. The client now has $200 on that unpaid invoice.
Most invoicing platforms allow you to select the invoices that you want to apply this credit too.
Create a Credit
This is probably your best option if you and the client plan on working together in the future. If the overpayment was $500, then this could be applied as a credit for future invoice. This would create a negative amount, in this case -$500 that informs the client that they $500 credit with you. When you process the next bill, that credit will be applied.
Another way to credit for future work is using the overpayment as a retainer or down payment for future work. When it’s time to bill the client for a completed job you would make note of the retainer and deduct it from the final amount.
As mentioned above, invoicing software lets you automatically apply credits to any invoice you like.
Apply the Credit as a Tip
Some platforms will allow you to accept an overpayment as a tip. This may work if the client paid you $50 extra, but it’s not a recommended option if you were overpaid hundreds of dollars. Just remember, if you accept tips you’re responsible for paying income, Social Security, and Medicare tax on the tip money that you received.
Write-off Overpayments
Sometimes the overpayment is so small, of the client hasn’t used the credit and it’s been almost a year, you can write the overpayment off. To do this, you would create a new invoice for the overpaid amount and apply a credit to the invoice so that it can be closed. Just make sure that you note why you decided to make the adjustment.
