For goods, the default rule is to invoice at delivery; for services, at completion. That’s what the Uniform Commercial Code and most service contracts assume when they’re silent on timing. But plenty of businesses invoice earlier or on a schedule instead, and knowing when to invoice a customer means picking the model that fits the work: on delivery or completion, in advance with a deposit, at project milestones, or on a recurring cycle. Whichever you choose, the timing has consequences beyond cash flow. It affects when the income hits your tax return, when sales tax is owed, and how long you have to collect if the customer doesn’t pay.
The Default: Invoice at Delivery or Completion
Under the Uniform Commercial Code, payment for goods is due at the time and place the buyer receives them, unless the contract says otherwise.1Cornell Law School. Uniform Commercial Code 2-310 – Open Time for Payment or Running of Credit; Authority to Ship Under Reservation So if your written agreement doesn’t spell out a payment schedule, the customer owes you the moment delivery happens, and that’s your cue to send the invoice.
For services, the equivalent trigger is finishing the work you agreed to do. Completion creates the customer’s legal obligation to pay. If you haven’t fully delivered, the customer may have grounds to hold payment back until you have. The cleanest way to avoid a fight over this is to define “completion” in the contract itself: a final deliverable, a written sign-off, a specific event you can point to.
Invoicing in Advance
Plenty of businesses invoice before starting, especially when the project requires buying materials or setting aside time for one client. An advance invoice, sometimes called a pro forma invoice, lays out the estimated costs and payment terms before the transaction is final. It shifts some financial risk off the provider by covering upfront costs.
Deposits commonly run 25% to 50% of the total project value, though the amount is negotiable. Those funds usually get credited against the final balance at project close. Put in writing whether the deposit is refundable if the customer cancels, and under what conditions you keep some or all of it.
A Deposit Isn’t Revenue Yet
Money you collect before doing the work is a liability on your balance sheet, not revenue. You’re recording an obligation to either perform or refund. You only recognize the deposit as revenue once you’ve delivered the goods or completed enough of the service to satisfy the contract. Booking a deposit as revenue too early distorts your financials and can create tax reporting problems.
Taxes on Advance Payments
Cash-method taxpayers generally report advance payments as income in the year they receive them. Accrual-method taxpayers can elect to postpone reporting an advance payment until the following tax year, but no further than that.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods A large December deposit can still create a tax obligation by the following December, even if the project isn’t done.
Milestone and Progress Billing
For long projects, waiting until the end concentrates risk and squeezes cash flow. Milestone billing ties each invoice to a defined project phase instead of a calendar date. A construction project might trigger invoices when the foundation is poured, when framing is done, and at final closeout.
The amount at each milestone is usually a percentage of the total contract price based on work completed. Both sides benefit: you get paid as you perform, the customer pays for visible progress. Define each milestone in the contract precisely enough that there’s no argument over whether you’ve hit it.
Retainage
In construction and some other industries, the customer holds back a portion of each progress payment, typically 5% to 10%, until the whole project is finished. That withheld amount, called retainage, gives the customer leverage to make sure you close out the punch list. Some contracts drop the retainage percentage after the project passes a halfway mark. Several states cap how much can be retained, so check your jurisdiction before agreeing to the terms.
Recurring and Subscription Billing
Subscription services, consulting retainers, and SaaS agreements typically invoice on a fixed cycle: weekly, monthly, quarterly, or annually. The trigger is the passage of time, not the completion of any specific task. That predictability helps both sides budget, but your agreement needs to spell out the billing date, the amount, the payment deadline, and what happens if the customer pays late.
Late-payment penalties are set by your contract, not by any universal rule. Common approaches are a monthly interest charge, often 1% to 1.5%, or a flat late fee. Whichever you use, put it in writing before the engagement starts so the customer has notice.
Rules for Automatic Renewals
If you charge customers on auto-renewal, federal law adds specific obligations. Under the Restore Online Shoppers’ Confidence Act, you must clearly disclose all material terms before collecting billing information, get the customer’s express informed consent before charging, and provide a simple way to cancel.3Office of the Law Revision Counsel. 15 USC Chapter 110 – Online Shopper Protection
The FTC’s 2024 final rule expanded these obligations to all negative option programs in any medium, not just internet transactions. Businesses must provide a cancellation mechanism at least as simple as the sign-up process and stop charging immediately once a customer cancels.4Federal Register. Negative Option Rule Compliance with the cancellation and disclosure provisions has been required since May 14, 2025.
How Invoice Timing Affects Your Taxes
When you send an invoice doesn’t automatically decide when you owe taxes on that income. Your accounting method does.
Cash Method
Under the cash method, you report income in the tax year you actually or constructively receive it.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods “Constructively received” means the money was credited to your account or made available without restriction, even if you haven’t deposited the check yet. Invoice in December 2026, receive the check on December 30, and it’s 2026 income even if you cash it in January.
Accrual Method
Under the accrual method, you report income in the year you earn it, whenever payment actually arrives.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods Income is earned once all events fixing your right to payment have occurred and you can determine the amount with reasonable accuracy. Finish and invoice in November 2026, get paid in February 2027, and the income belongs on your 2026 return.
Sales Tax
Sales tax follows its own timing. In most states, the liability is triggered by when the sale occurs, not when you invoice or get paid. Deliver taxable goods in March, invoice in April, and the tax is owed for the March reporting period. Mismatching your invoice dates against your actual sale dates is a common way businesses end up filing incorrect sales tax returns.
If the Invoice Goes Unpaid
If a customer refuses to pay a valid invoice, you have legal options with time limits attached. For contracts involving the sale of goods, the UCC sets a four-year statute of limitations from the date the breach occurs. The parties can agree to shorten this to as little as one year but cannot extend it. For service contracts and other written agreements outside the UCC, the deadline varies by state, generally three to fifteen years.
Communication runs both ways. If a buyer accepts goods and later finds a defect, they must notify you within a reasonable time or lose their right to any remedy.5Cornell Law School. Uniform Commercial Code 2-607 – Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance A customer who stays silent for months and then disputes your invoice has a harder time avoiding payment.
Federal Agency Customers
If you invoice a federal agency, the Prompt Payment Act requires payment within 30 days after the agency receives a proper invoice, unless the contract specifies a different date.6Office of the Law Revision Counsel. 31 USC 3903 – Regulations If the agency pays late, it owes interest. The Prompt Payment interest rate for January through June 2026 is 4.125%.7Bureau of the Fiscal Service. Prompt Payment Interest Rates Many states have their own prompt payment laws covering state contracts and, in some cases, private commercial transactions.
Writing Off What You Can’t Collect
If collection efforts fail and the debt is genuinely uncollectible, you may be able to deduct it. A business bad debt from an unpaid invoice can be deducted in full or in part, but only if you previously included that amount in your gross income.8Internal Revenue Service. Topic No. 453 – Bad Debt Deduction Cash-basis taxpayers who never received (and therefore never reported) the payment generally cannot claim the deduction. You take it in the year the debt becomes worthless, and you must show reasonable collection efforts, though not necessarily a court judgment.