To calculate late fees on invoices, multiply the unpaid balance by the daily interest rate (your annual rate divided by 365) and then by the number of days the payment is overdue. That gives you an interest-based late fee. The alternative is a flat charge: a fixed dollar amount, or a fixed percentage of the invoice, added once the payment misses its due date. Whichever method you use has to be written into the contract or invoice terms before the work starts, and the rate has to stay under your state’s usury cap to be enforceable.
What You Need Before You Run the Numbers
Three figures drive every calculation: the unpaid invoice balance, the annual interest rate from your contract, and the number of days overdue. The balance is the original invoice amount before taxes or any previously added penalties. The rate lives in the payment terms section of your contract, usually expressed as an annual percentage. The overdue count is today’s date minus the due date on the invoice.
Most invoices label the due date with shorthand like “Net 30” or “Net 60,” meaning payment is expected within 30 or 60 days of the invoice date. Some contracts add a grace period of five to ten days after the due date before interest starts accruing. If yours does, count from the end of the grace period, not the invoice due date. A few days’ difference at the front end changes the total.
The Interest-Based Formula
Interest-based fees charge a small amount for each day the invoice sits unpaid. Three steps:
- Convert the annual rate to a daily rate by dividing by 365. An 18% annual rate becomes 0.18 ÷ 365 = 0.000493, or about 0.0493% per day.
- Multiply the daily rate by the invoice balance. A $10,000 invoice at that daily rate produces roughly $4.93 per day.
- Multiply by the days overdue. Fifteen days late gives you $4.93 × 15 = $73.95.
Written as one formula: Late Fee = Invoice Balance × (Annual Rate ÷ 365) × Days Overdue.
This is simple interest. You charge interest on the original balance only, not on interest that has already accrued. That distinction matters legally: simple interest is the default when a contract doesn’t explicitly authorize compounding. Stacking interest on interest without contract language allowing it will likely be treated as unauthorized if you end up in court.
The Flat-Fee Method
Flat fees skip the daily math. A fixed amount gets added once the payment goes overdue. Your contract might specify a one-time $25 or $50 charge, or a recurring flat fee for every week or month the debt stays open.
If your contract says $50 per occurrence and the payment is one month late, the late charge is $50. If it says $50 per month and the payment is three months late, the total is $150 added to the original balance. Some agreements use a flat percentage of the invoice instead of a dollar amount, such as 5% of the total due. On a $2,000 invoice, that’s a one-time $100 charge.
Flat fees fit smaller invoices where simplicity outweighs precision. On large invoices, interest-based fees are more common because they scale with both the amount owed and the length of the delay. A $50 flat fee on a $100,000 invoice barely registers as an incentive to pay.
What Rate Can You Charge?
Across most industries, B2B late fees fall between 1% and 2% per month, which works out to 12% to 24% per year. The most common figure is 1.5% per month, or 18% annually. That level is high enough to motivate timely payment without looking punitive or running afoul of usury laws in most states.
Two constraints shape the ceiling. First, every state has a usury statute capping the maximum interest a creditor can charge. These caps generally fall between 6% and 25% per year, though the exact number depends on your state, the type of transaction, and any industry-specific exemptions. Consumer transactions and commercial ones sometimes have different caps.
The consequences of exceeding the limit can be harsh. In many states, a usurious rate triggers forfeiture of all interest on the debt, not just the amount above the cap. Some states let the borrower recover double or triple the interest already collected. Willfully charging rates far above the ceiling can even be treated as a criminal offense in some places. Look up your state’s usury statute and set your rate well below the cap.
Second, even a rate that clears the usury test can still be struck down as unreasonable. Late fees function legally as liquidated damages: a pre-agreed estimate of the harm caused by late payment. Courts ask two questions. Was the amount a reasonable forecast of the creditor’s probable loss when the contract was signed? Was actual damage from late payment difficult to calculate in advance?
A $50 flat fee on a $500 invoice (10%) draws more scrutiny than the same $50 on a $5,000 invoice (1%). A 1.5% monthly interest charge is easy to justify as covering your cost of borrowing, administrative follow-up, and disrupted cash flow. A 5% monthly charge on the same invoice is much harder to defend. Judges look at whether the fee was designed to compensate you or to punish the client, and punitive-looking fees get thrown out.
Wording That Makes the Fee Enforceable
A late fee is only enforceable if the client agreed to it before the payment became overdue. The terms need to appear in a signed contract, in your terms of service, or on the invoice itself before the work begins. Vague language like “late fees may apply” isn’t enough. Spell out three things: the payment deadline, the exact rate or dollar amount, and when the fee starts accruing.
A workable example: “Payment is due within 30 days of the invoice date. A late fee of 1.5% per month will be applied to any balance not received within 30 days of the invoice date.” One sentence, all three elements.
Avoid the word “penalty” anywhere in your terms or your later communications about the debt. Courts treat penalties differently from fees meant to compensate for collection costs and lost cash flow, and calling your charge a penalty can undermine its enforceability if a judge ever reviews it.
When Your Contract Is Silent
If your contract and invoice say nothing about late fees, you can’t invent a rate after the payment goes overdue. You may still be entitled to interest under your state’s statutory default, sometimes called the legal rate, which applies when the parties didn’t agree on a specific figure. These default rates typically run from about 5% to 12% annually, though they vary widely, and some states impose no interest obligation at all when the contract is silent.
Relying on a statutory default is weaker than having clear contractual terms. The rate is usually lower than what you could negotiate upfront, and collecting it can require more work in a dispute. Better to include an explicit late fee provision from the start.
How Partial Payments Get Applied
When a client sends less than the full amount, the payment typically gets applied in a specific order: first to any outstanding fees (including late fees), then to accrued interest, and finally to the original invoice balance. Partial payments chip away at the fees and interest before touching the principal, which can surprise clients who assumed their money went straight toward the invoice amount.
Your contract can override this default. If you’d rather partial payments reduce the principal first, which slows the growth of future interest, say so clearly in your terms. Either way, send an updated statement after every partial payment so the client sees exactly what they still owe and how you allocated the money.
Reporting Late Fee Income at Tax Time
Late fees and interest you collect on overdue invoices count as taxable income. If you collect $10 or more in interest from a single client during the tax year, you’re required to file a Form 1099-INT reporting that interest to the IRS and to the client.1Internal Revenue Service. About Form 1099-INT, Interest Income Flat late fees that aren’t structured as interest may instead be reported as ordinary business income on your regular return rather than on a 1099-INT, but the income is taxable either way. If late fee revenue is a meaningful piece of what you collect, talk it through with your accountant before filing.
A Note on Federal Government Invoices
The rules above cover private clients. If you invoice a federal agency, the Prompt Payment Act creates the interest obligation on its own, and you don’t need late fee language in your contract to collect. The payment office calculates and pays the interest penalty without you having to invoice for it, as long as you submitted a proper invoice and the agency accepted the goods or services. The rate is set by the Treasury Department and changes periodically.2Acquisition.GOV. Subpart 32.9 – Prompt Payment Many states have parallel prompt payment laws for state and local government contracts, with their own rates and timelines.