Invoicing Basics

Invoicing and payroll are intertwined. Not only are both a major part of a business’s accounting department, invoices are needed to keep a positive cash flow, which can be used to put towards payroll.

If you’ve never put together an invoice, there are the essential components needed to make ensure that your business gets paid on time.

Since your invoice is an official document from your business it should reflect your brand. Your invoice may include the same colors and wording that your organization already uses. It is beneficial to add your logo to help your clients have an immediate recognition of who sent the invoice. If your company is called “Legal Eagles” then you may want to have your invoice reflect your professionalism by writing the terms in lawyer’s English. If your company is more quirky, then it would be fine to have more casual language used on your invoice.

Legal Structure and Tax Considerations

Your invoice might include your corporate legal status – in Europe invoices would include VAT if registered. In the U.S. the most common forms of businesses are:

  • Sole Proprietorships. This is someone who owns the business themselves.
  • Partnerships. Two or more people who own or run a business.
  • Corporations. This is when shareholders exchange money, property, or both, for the corporation’s capital stock.
  • S Corporations. These are corporations who pass corporate income, losses, deductions, and credits through their shareholders.
  • Limited Liability Company (LLC). Business structure allowed by a state statute. (These rules differ by state.)

The reason that you should be aware of your business structure and include it on your invoice is because each business must complete the correct forms and file them with the IRS so that they can meet the correct tax obligations.

Speaking of taxes, you must also determine if you are required to include sales tax. This varies depending on the industry that you are in and which state the business is located. If you are in the service industry, most states allow for sales tax to be exempt.

Establishing Terms

Prior to starting a project, you and the client must agree on the scope of the work, deadlines, how much you’ll be paid, and how you’ll be paid. You must also discuss what happens if you accrue additional charges and whether or not the work will be kept until the payment has been made. Other details, such as deposits, late fees, and taxes also need to be addressed.

While you don’t necessarily have to a contract written, you should have the terms written down – even an email will work, so that you have evidence to protect both employee and employer.

What Should an Invoice Include?

Businesses and freelancers should incorporate the following elements for a more effective and professional invoice:

  • The word “Invoice” should be on the top of the document.
  • Essential company information: name, address, contact number, and business number. You also need to include the name and address of the client.
  • Invoice ID number for your records; this makes tracking invoices easier. Use a different invoice number starting with 001 and working your way up.
  • Details of the products and services that were provided.
  • The date of delivery and the date that invoice was sent.
  • An itemized breakdown of the tasks that made up the project so that the client can see exactly what they’re paying you for. If you charge by the hour you should list how long it took you to complete certain tasks.
  • The final amount due.
  • Payment details, such as PayPal, check, direct deposit, etc..
  • A due date for the payment; use plain English, such as “Please note that payment is due on or before 10/21/2015,” as opposed to, “net 30,” or “Due Upon Receipt.”

Getting Paid on Time

Getting paid on time starts with your invoicing system. If you use effective invoicing software, such as, the faster you’ll get paid – which keeps a positive cash flow. With invoicing system you can quickly create and send out invoices. If you have recurring clients you can store their contact and billing information so that you just have to fill-out the details of the new invoice. Additionally, you can set-up an automated billing system so that each month the client’s credit card or bank account is automatically charged the amount that they owe you.

Here are some other ways to ensure that your invoice gets paid on-time.

  • Send out invoices frequently or as soon as you complete a project.
  • Know your client’s payment schedule, if it’s on the 15th of the month then send out the invoice on that date.
  • Offer multiple forms of payment, such as checks, credit card, or PayPal.
  • Send the client a reminder prior to a payment due date.
  • Offer the client a discount on payments that are made on or before the invoice due date, such as 10% off the total amount due.
  • Include late fees or interest charges if payment is not paid by the due date.
  • Break the project into milestones and bill when each milestone has been reached, such as 50% down, 25% during half-way point, and 25% when completed. This can make payments easier for the client since they don’t have to make larger payments and it keeps the cash flowing in your business as you work.

Every business owner and employer should be familiar with invoicing basics – even if they’re not handling the invoices themselves. If you happen to be an independent contractor, such as a freelance writer or consultant, you should especially be familiar with invoicing since it will be a task that you’ll have to perform yourself if you want to get paid for your services.

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