How to Invoice for Deposits and Advance Payments

Deposits and advance payments move cash to your side before you finish the work, which matters when you front materials, book subcontractors or hold a date for one client. The deposit invoice must read as a defined prepayment toward a known engagement, not a vague "send money" note. Cash you collect before doing the work is not yet earned in the accounting sense, so ask your accountant how to record deposits in your books before you take your first one.

Why take a deposit

Hard costs: hardware, fabrication, travel, venue holds
Calendar protection: creative work, events and bespoke services where you turn other clients away
Serious-buyer filter: it reduces drift on scopes prone to scope creep

Contract essentials

Spell out:

Amount or percentage and what it credits against
Refund and forfeiture rules, with dates
How the final invoice nets the deposit
Tax treatment in your jurisdiction; see invoice tax compliance

What the deposit invoice should include

Label it Deposit or Advance payment and put what it secures in the line itself, for example "Deposit 25%, website build, SOW-0412", not just "Deposit". Reference the SOW, quote or master agreement. Show the total contract value when known, this invoice's share and the next billing trigger: delivery, a milestone or a calendar date. The structural basics are in how to write an invoice, and the deposit invoice template has a filled-in example.

Limits on how much you can ask for

Some jobs have legal caps on deposits. The best-known is California home improvement work: the Contractors State License Board says the down payment may not exceed $1,000 or 10% of the contract price, whichever is less, and later payments may not run ahead of the work done or materials delivered. On an $8,400 repaint the most you can take up front is $840; on a $25,000 kitchen it is $1,000. The contractor invoicing guide covers the rest of California's progress-payment rules.

For consumer work in the UK, the Competition and Markets Authority's guidance on unfair contract terms (CMA37) treats large non-refundable deposits with suspicion: the amount you keep on cancellation should reflect costs you cannot recover. Other places have their own rules, so check your licensing board or consumer protection authority before you set a deposit percentage.

Final invoice and true-up

On completion, issue a closing invoice that shows the full price, the deposit already paid (with the deposit invoice number and date) and the balance due. If you are using progress billing, the deposit is often the first application of funds; pick one presentation and keep it the same on every invoice so the client's accounts payable team can follow it.

Worked example: a $12,000 website build

A web studio signs a $12,000 fixed-price build with a 25% deposit, no sales tax.

Invoice	Line	Amount
INV-0101 (on signing)	Deposit 25%, website build, SOW-0412, credited against the final invoice	$3,000.00
INV-0108 (on launch)	Website build per SOW-0412, $12,000.00 less deposit paid on INV-0101 ($3,000.00)	$9,000.00

The client pays $3,000 + $9,000 = $12,000 in total, and neither invoice charges anything twice. If you invoiced the full $12,000 at the start instead, there is no closing invoice: the client pays the remaining $9,000 against the same invoice.

Deposits vs retainers vs milestones

Deposits secure a specific project. Retainers buy capacity over a period (retainer invoicing). Milestones bill defined deliverables; a deposit can precede the first milestone or replace it, so say which in writing.

Tax on deposits

Tax timing depends on where you are. In the UK, HMRC's guidance on VAT for instalments, deposits and credit sales treats a deposit for a later supply as an advance payment: VAT is due when you issue a VAT invoice for it or receive it, whichever is earlier, and it stays due if the customer cancels and you keep the deposit. A returnable security deposit, refunded when hired goods come back safely, is not taxed. In the US, sales tax rules on deposits vary by state, so check with your state revenue department. The deposit invoice template walks through a VAT example.

How to handle a deposit in InvoiceQuickly

InvoiceQuickly has no deposit feature. There are two ways to handle one:

Separate invoices (as in the worked example). Issue an invoice for the deposit amount, then a later invoice for the balance. Line amounts cannot be negative, so describe the deduction in the balance line, for example "$12,000.00 less deposit paid on INV-0101 ($3,000.00)".
One full-price invoice plus a partial payment. Issue the invoice for the full price and record the deposit as a partial payment when it arrives. This works on every plan and tracks the remaining balance; the invoice keeps its status until the full balance is paid. The PDF shows the full total, so write the deposit and balance schedule in the notes before you send it.

On Pro you can add a Stripe or PayPal payment link from your own account. The link charges the invoice's remaining balance, so if you want the client to pay only the deposit by card, use option 1 and put the link on the deposit invoice.

Payment and collections

Ask for the fastest acceptable method (payment methods) and keep a record of every remittance (audit trail). If the balance lingers, run your follow-up strategy and reminders on the final amount, after you have confirmed the deposit is credited correctly.

When clients push back

If they resist deposits, offer a smaller good-faith advance plus tighter payment terms, or shorten the first milestone cycle. The goal is shared risk, not winning an argument.

Structuring deposit invoices step by step

Step 1: Size the deposit from your downside cost

Ask what you would have spent if the client cancelled the day after paying: materials ordered, subcontractor bookings, days you turned down. That is the floor for the deposit, subject to any legal cap for the type of job.

Step 2: Issue the deposit invoice when the contract is signed

Send it the same day, and say on the invoice that the date, materials or slot is not secured until it is paid.

Step 3: State the refund rule on the invoice

Write it next to the amount, with dates, for example "Refundable in full until 1 March; 50% kept after 1 March; non-refundable from 1 April". For consumer work, keep the amount you keep linked to costs you cannot recover.

Step 4: Reference the deposit on every later invoice

Show "Total contract $X. Deposit received [date] on [invoice number]: $Y. Balance due: $Z." It answers the "what about the deposit?" question before it is asked.

Step 5: Define what triggers forfeiture

Typical triggers are cancellation, a client breach such as not providing access or materials, or a long silence during an active project. Write them in the contract so a forfeiture is never a surprise.

Operational tracking

Keep a deposit ledger listing client, project, amount, date received, invoice number and percent of contract covered, and reconcile it before every final invoice. If deposits sit for a long time before work starts, confirm refundability in writing. For staged builds, map each deposit to the purchase orders or cost codes it pays for. If the deposit and the final invoice are in different currencies, document the rate you used (currency conversion). Withhold final deliverables until final payment only when the contract allows it.

Closing checklist

Zero the deposit ledger line for the engagement once the final invoice is paid.
Keep the deposit invoice and its payment record with the final invoice for your bookkeeper.
Confirm the tax treatment of the deposit matches the final invoice (tax guide).
Review stale deposits quarterly: start the work, refund it, or apply the contract's forfeiture terms.

Frequently asked questions

Can a deposit be non-refundable?

Only if your contract and invoice say so, and even then the law may limit it. For consumers, a deposit you keep should reflect costs you cannot recover; very large non-refundable deposits risk being treated as unfair, for example under UK consumer law as described in the CMA's CMA37 guidance. Some jobs, such as California home improvement contracts, cap the deposit itself. Check local rules or ask a lawyer before relying on a forfeiture clause.

What if the client wants to cancel before any work has started?

Follow the refund rule you wrote down. A common approach is a short window in which the deposit is refundable in full, for example "refundable within 7 days of signing", after which the forfeiture terms apply.

Do I charge sales tax or VAT on a deposit?

It depends on the jurisdiction. In the UK, VAT on a booking deposit is due when you invoice or receive it, whichever is earlier, according to HMRC. US states set their own rules for when sales tax applies to advance payments, so check with your state revenue department.

Can I take a deposit by card?

Yes, through a card processor such as Stripe or PayPal, which charge their own fees. In InvoiceQuickly Pro, connect your own Stripe or PayPal account and add a payment link to the deposit invoice; the link charges that invoice's remaining balance.

What if the client disputes a card deposit with their bank?

Respond to the dispute through your processor with the signed contract, the deposit invoice showing the refund rule and a timeline of work delivered. Clear refund terms written on the invoice before payment are your best evidence.

Bill the deposit and the balance as separate, clearly cross-referenced invoices. Start free.

This article is general information, not legal or tax advice. Last reviewed 28 October 2026.