To calculate late fees on invoices using the standard simple-interest method, multiply the unpaid balance by the annual interest rate stated in your contract, divide the result by 365 to get a daily charge, and multiply that daily charge by the number of days the payment is past due. Commercial late fees commonly run 1% to 2% per month, or 12% to 24% annually, but your contract terms and your state’s usury cap determine the actual ceiling.
The Simple Interest Formula
Three numbers go into the calculation: the unpaid principal on the invoice, the annual interest rate your agreement specifies, and the number of calendar days the payment is overdue. The principal is the amount owed on the invoice itself, excluding previously assessed taxes or shipping unless your contract says otherwise.
Work it in three steps:
- Multiply the unpaid balance by the annual rate to get a yearly interest figure.
- Divide that yearly figure by 365 to get the daily charge.
- Multiply the daily charge by the number of days late.
Example. A client owes $5,000 and your contract sets a 12% annual rate. The yearly interest is $5,000 × 0.12 = $600. The daily rate is $600 ÷ 365, or about $1.64. If the payment arrives 45 days late, the fee is roughly $1.64 × 45 = $73.97.
Counting the Days
Day one of the late period is the first day after the due date. If the invoice is due on the 30th, start counting on the 31st. Count every calendar day, including weekends and holidays, through the date you receive payment or issue the revised invoice.
Flat Fee as an Alternative
Not every contract uses interest. Many specify a flat late charge instead, a fixed dollar amount added once the deadline passes. A $25 or $50 flat fee is simple to apply and easy for the client to understand, but it stays the same whether the payment is 10 days or 90 days late, so it stops creating pressure to pay the moment it triggers.
Percentage-based fees grow with time, which keeps the pressure on and better covers the cost of carrying the receivable. Some contracts combine the two: a one-time flat fee at the missed deadline plus interest that accrues until the balance clears. If you combine them, confirm the total still fits under your state’s legal ceiling.
Picking a Rate That Will Hold Up
Every state has usury laws that cap the interest you can charge, and the ceilings vary widely. Depending on the transaction and the parties, state caps run from as low as 5% to above 25% annually. Consumer transactions face tighter limits than commercial ones, where the parties have more freedom to negotiate.
Federal law generally does not preempt state limits on late charges. Even where federal rules override state usury caps for certain mortgage products, federal regulations explicitly preserve state-law limits on late charges, attorneys’ fees, and other borrower protections. For federally regulated manufactured housing loans, late charges cannot exceed 5% of the unpaid installment and cannot be assessed until at least 15 days after the due date.1eCFR. 12 CFR Part 190 – Preemption of State Usury Laws
Setting a rate above the state maximum carries real consequences. Depending on the jurisdiction, a court may void the late fee provision, reduce the interest to the legal maximum, or impose civil penalties on the creditor. A number of states also have criminal usury statutes, though those generally target lending arrangements rather than ordinary commercial invoices.
Making Sure the Fee Is Enforceable
A late fee is only as enforceable as the agreement behind it. Your contract or service agreement should state the specific rate or flat amount that applies to overdue balances, when the charge starts to accrue, and whether a grace period applies first. Both parties should agree to those terms before work begins. Adding late fee language to an invoice after the fact, without prior agreement, makes the charge much harder to collect if the client pushes back.
Grace periods are a related question. No federal rule requires one for business-to-business invoices, but some states impose minimums, commonly 5 to 15 days, most often in rental and consumer-lending contexts. Check your state before you assume you can charge from the day after the due date.
If your contract is silent on late fees, you may still have a fallback. Most states have a default legal rate of interest that applies when no rate is specified, typically a modest figure in the 4% to 10% range. For debts owed to the federal government, the default rate for 2026 is 4%, with interest waived if the debt is paid within 30 days of notice.2Office of the Law Revision Counsel. 31 U.S. Code 3717 – Interest and Penalty on Claims That particular rate governs government receivables, but it reflects how modest default rates generally are compared with negotiated contract rates.
Simple Interest or Compound Interest
Most states follow a longstanding rule against compound interest, meaning you generally cannot charge interest on accumulated unpaid interest unless the contract specifically authorizes it and state law allows it. The policy is to keep debts from growing faster than the debtor can track or repay.
For commercial invoices, simple interest is the safe default. If you want to compound, by adding each month’s unpaid interest to the principal before the next month’s calculation, read your state’s usury statute carefully. Even where compounding is permitted by agreement, the resulting effective rate still has to sit below the usury ceiling.
One statutory exception runs the other way. The federal Prompt Payment Act specifically allows compounding on late government payments: any interest penalty left unpaid after 30 days is added to the principal, and interest accrues on the increased amount from there.3Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties
When Your Client Is a Federal Agency
If you invoice a federal agency, you do not need to calculate your own late fee. The Prompt Payment Act entitles you to automatic interest when the government pays late. The agency owes payment for each delivered item or completed service by the required payment date, typically 30 days after it receives a proper invoice, and interest starts accruing the day after that deadline.3Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties
The Secretary of the Treasury sets the rate and publishes it in the Federal Register. For January 1 through June 30, 2026, the Prompt Payment Act rate is 4⅛% per year.4Federal Register. Prompt Payment Interest Rate; Contract Disputes Act You do not have to negotiate this into your contract. The government owes it by statute.
Applying the Fee: Partial Payments and the Revised Invoice
When a client sends a partial payment, the order of application matters. The general rule in most lending and credit contexts applies payments first to accrued interest and fees, then to the principal balance. A partial payment can therefore clear the late fee and some interest without reducing the underlying invoice amount, and interest keeps accruing on what remains of the principal.
Your contract can override that default and set a different order. If the agreement is silent, follow your state’s rules, which typically prioritize interest and fees before principal. Whichever method you use, document the allocation on each receipt or statement so both parties can reconcile.
Once you have the number, issue a revised invoice that separates the original charges from the penalty. Add a distinct line labeled something like “Late Payment Fee” or “Interest on Overdue Balance,” and show the delinquency date range and the rate applied. That transparency reduces disputes and gives the client enough information to check your math.
Deliver the revised invoice through a method that creates proof of receipt: certified mail with a return receipt, a tracked email, or a billing platform that logs delivery. For electronic delivery, the federal E-Sign Act sets the baseline where law requires verified access to electronic records: the recipient must have affirmatively consented to electronic delivery and must not have withdrawn consent.5Office of the Law Revision Counsel. 15 U.S. Code 7001 – General Rule of Validity Keep copies of every communication; the paper trail protects you if the debt eventually goes to court or to a collector.
Tax Treatment of What You Collect
Late fees you collect are taxable income. The Internal Revenue Code defines gross income broadly to include all income from whatever source, and specifically lists interest as a category.6Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined Whether the charge is a flat fee or interest, it counts as business revenue in the year you receive it, or the year it accrues if you use accrual accounting.
Late fees you pay your own vendors are generally deductible as ordinary business expenses. Federal rules disallow deductions for fines and penalties paid to a government for legal violations, but that limit does not apply to payments between private parties in a commercial relationship.7eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts A late charge billed by a vendor under a supply contract is a cost of doing business, not a government-imposed penalty.