How not to screw up your business with invoicing
Ok, so there is a lot of myth and conjecture around invoicing when it comes to freelancing. And it is always best to speak to an accountant if you want the best possible customised advice.
Here are a few off the cuff tips and myths you should avoid to remain happy in the eyes of the tax department.
Invoicing process
We’ve covered some of these before, but it really does need repeating.
You are legally entitled to negotiate payment terms. An agency or individual cannot say you don't get paid until they do. They also can’t set you up with 90 day payment terms and run late. You are entitled to negotiate.
You are legally entitled to charge interest on late payments. This varies from state to state. NSW for example allows up to 20% interest charge in some cases. VIC will only allow a maximum of 12.5%. Check with your state government about when and how you can start charging interest on late payments.
Always get a deposit for anything over $500. If they ask why you need it, explain it’s an agreement of good faith between two parties.
Ask to be paid in full for anything under $500. Most will be perfectly fine with this.
To deter jobs dragging on for months in review cycles where you’ve handed over the work and they are still pfaffing about, include a clause that states you can invoice after 14 to 28 days of delivery (whichever you prefer).
Always include an invoice number on your jobs. Whether you use Xero, an accountant, Excel or whatever- invoice numbers make it easier to track payments at both ends for payer and payee.
Make sure you include the following information on all your quotes and/or invoices:
Your ABN
Your Business name
Your Email address
The contact name and company of the person paying the invoice
The payment details including payment methods and how to complete payment using them (invoice only)
The date of issue for the invoice
Tax Invoice or Invoice status
A breakdown of GST if applicable
A link to your terms and conditions- and that paying the deposit is an agreement to those terms
How many days before the invoice is overdue
The fact the quote/invoice is based on a particular scope
An outline of that scope
The amount of revisions included within that scope
How long the quote is valid for (quote only)
Tax related stuff
Consider using Xero. You can easily manage this yourself or take advantage of the many cloud accounting supporting accountants to keep the books in order. Having an accountant you can give as registered proof that you pay and do all the right things when it comes to rental, personal loan and home loan applications is also strongly advised.
Whether you have a TAX INVOICE or simply INVOICE comes down to if you are registered for GST. If you earn over $75K per year, you need to register for GST and issue TAX INVOICES. Under that amount, you do not charge GST, you do not have to register for GST and you use INVOICE instead.
The stories going around among bloggers and some freelancers that you don’t have to pay tax until you get to $75K are completely false. The tax free threshold in Australia is $18K. Even then, you still need to do a tax return and issue invoices if you are in the business of providing a business service. To check if you qualify as a hobby or a business, contact the ATO. But if you are doing this course, let’s not kid ourselves- you are in business, baby!
Failure to provide an ABN on an invoice for anyone earning under $75K means you include your tax file number as a sole trader. However, businesses legally have the right to reserve 50% of that amount if they so choose. So it’s far easier to use an ABN and avoid that kind of situation.
It’s a heck of a lot easier to pay an amount based on the previous year’s BAS and do a return and make up the difference then be in debt to the ATO. Ask for time to pay if you end up in debt, but be aware that you will be required to pay back your debt plus stump up each quarter for the next year at the same time.
For further detailed tax advice, contact the ATO or Orbit Accounting and Tax or MJC Accounting. The first is obviously the guys who set the rules and the 2nd our two small business accountancy firms who specialise in helping freelancers and small businesses.
If you are working for an arts body or charity, the ATO does not recognise you have dropped your rates. The smarter and more tax effective thing to do when asked for a discount in this situation is to bill your usual rates and make a donation back to the organisation for the difference. If they don’t like that, they’re probably trying to stooge you.
Always keep your invoices for anything remotely business related. If you have an accountant, they’ll usually push back on what does and doesn’t count towards deductions.
Start investing in your retirement through super. Orbit Accounting and Tax are the specialists in super for freelance and small business. They can help you work out how to get a self managed super fund happening and how to get to your kick off funds. They can also advise on investment strategies to help grow it through real estate investment and so on. Even if you want to avoid the SMSF route, get yourself into a retail fund. Socking 12% of your earnings a year away for retirement makes good sense. Plus, you also get a 50% tax break on it in most circumstances. This is best discussed with an accountant so they can work out the best way forward for you.
Free work, trials and Interns
There is no such thing as an unpaid internship or volunteer work at a business place in Australia. The exemptions ONLY apply to arts classified establishments and NFPs. If you are offered an unpaid internship, it needs to be tied to a vocationally approved and course convenor approved arrangement via a university or TAFE. In other words, if it doesn’t go towards your degree and the internship isn’t at an arts body or NFP, it’s breaking the law. Check with Fair Work Australia to see exactly where your intern offer fits.
Trial work to win a job is not a legal obligation. You do not need to supply samples in order to secure work. You can decline this process. I always do. Because it’s usually a pointless exercise. In QLD, the laws are very loose around trial work and I’ve heard horror stories about free work being used as finished products without payment – and having no recourse to fight the situation. Don’t let that be you.
If you decide to do free work, always outline the outcomes for both parties so you don’t end up doing an awful lot of work for no reason.
Free work rarely ends in paid work with the same people or company. So make sure it is done strategically to get you a case study, some PR or other kind of reward.
You will not get a tax break through working for free, no matter how cool the charity.
Chasing late payments
Don’t be embarrassed about chasing outstanding money. The day after an invoice is late, send a reminder. It may seem quick to you, but it sends them the message you are serious.
I’ve worked at countless agencies that pay the nice guy last. Get your hustle on and get paid.
The standard situation for me is to:
Send a reminder email after the first late day
Send a reminder every couple of days if they don’t respond
Send them an email stating they need to pay interest from X date at Y rate
Anyone over 21 days gets daily calls and emails
I’ve never lost a client by pursuing this method of invoice chasing. I have lost sleep about money I don’t have when I have not.
Exercise:
Review your invoices and terms to ensure you can get paid on time, every time
Start hustling when it comes to late payers- set down your cycle, write your hustle emails and get onto it!
Check in with the ATO and an accountant to ensure you are getting the best out of your taxation situation
Consult an accountant regarding retail and self managed super funds
Vet all free work, intern and charity work opportunities against strategic goals
We’ve covered how to respond to bad clients previously. Next lesson, we’ll talk about the people who can steal your joy and what to do about them.