When a client doesn’t pay an invoice, the first concern is usually getting the money you’re owed.
But an unpaid invoice can raise another question: what happens at tax time?
Do you owe taxes on an unpaid invoice you never received?
Can you write off an unpaid invoice as a bad debt?
The answers depend largely on how you account for your income.
Here’s what creators and freelancers should know about unpaid invoices and taxes.
Do You Owe Taxes on an Unpaid Invoice?
It depends on your accounting method.
Under the cash method of accounting, you generally report income when you actually or constructively receive it. So if you send a client an invoice and they never pay it, you generally don’t owe federal income tax on that amount simply because you sent the invoice.
Under the accrual method of accounting, income is generally reported when it’s earned, regardless of when payment is received. That means an accrual-basis business may have already reported income from an invoice even though the client hasn’t paid it yet.
Most individuals use the cash method of accounting, but your own tax treatment depends on your business and accounting method.
If you’re not sure which method you use or how an unpaid invoice should be handled, this is a good question for a tax professional. GAME ON Financial specializes in accounting and tax support for creators and understands the issues that come with running a creator business.
Can You Write Off an Unpaid Invoice?
This is where cash versus accrual accounting makes another important difference.
If you use the cash method and never received the money, you generally can’t claim the unpaid invoice as a bad debt deduction. Because you never included that unpaid amount in your income, there’s generally nothing to deduct when the client doesn’t pay.
For an accrual-basis business, the answer can be different. If the amount owed was previously included in income, an uncollectible business debt may qualify for a bad debt deduction.
But an invoice isn’t a tax write-off just because it’s late. Whether a debt is considered worthless depends on the facts and circumstances, and the IRS generally expects you to have taken reasonable steps to collect it.
That’s one reason to check with your tax professional before deciding how to treat an unpaid invoice on your return.
An Unpaid Invoice Is Still Money You’re Owed
The tax treatment of an unpaid invoice doesn’t solve the underlying problem: you did the work and haven’t been paid for it.
Most creators start by following up themselves. Sometimes that’s enough. An invoice was overlooked, there’s an administrative delay, or the right person simply hasn’t seen it.
But one follow-up can quickly turn into weeks or months of emails, reminders, and time spent trying to collect money you’ve already earned.
You don’t have to keep chasing it yourself.
DUPAY subscribers with Tools + Protection can submit eligible unpaid invoices for professional advocacy. We handle the follow-up and advocate for payment so you can get back to running your business.
What Should You Do When a Client Doesn’t Pay an Invoice?
Start by checking the payment terms in your contract and invoice. Confirm that the payment is actually overdue and make sure you’ve completed any requirements that trigger payment.
Then keep your documentation together, including:
- Your contract or agreement
- The invoice and payment terms
- Deliverables
- Approvals
- Emails and other communications
- Records of your payment follow-ups
Follow up promptly when an invoice becomes overdue. If your own follow-ups aren’t resolving the issue, consider getting professional help rather than letting months pass while you continue chasing the payment yourself.
For DUPAY subscribers with Tools + Protection, unpaid invoice advocacy is already built into the subscription.
Don’t Wait Until an Invoice Is Unpaid to Protect Your Income
Recovering an unpaid invoice matters. So does reducing the likelihood that you’ll end up there in the first place.
Put your payment terms in writing. Make sure your contract clearly states when payment is due and what triggers payment. Keep your contract, invoice, deliverables, approvals, and communications organized. And when an invoice becomes overdue, address it instead of letting months pass while you continue following up on your own.
DUPAY’s lawyer-built tools are designed to protect creator income from the beginning, including our Contract Creator, Contract Check Report, invoices, and e-signatures.
And if an invoice still goes unpaid, Tools + Protection subscribers have human-led advocacy available to help recover it.
Getting Paid and Getting the Taxes Right
An unpaid invoice can create two separate questions.
How do I get the money I’m owed?
That’s where DUPAY can help.
How should the unpaid invoice be handled for tax and accounting purposes?
That’s where a creator-focused tax professional like GAME ON Financial can help.
The important thing is not to make assumptions either way. An unpaid invoice doesn’t automatically become a tax deduction, and simply sending an invoice doesn’t necessarily mean you owe federal income tax on money you never received.
Keep good records, know which accounting method you use, and address unpaid invoices before they turn into months of your own unpaid follow-up work.
FAQ: Unpaid Invoices and Taxes
Do I owe taxes on an unpaid invoice?
It depends on your accounting method. Cash-method taxpayers generally report income when it’s actually or constructively received, so an invoice that was never paid generally isn’t taxable simply because it was sent.
Accrual-method businesses generally report income when it’s earned, even if payment hasn’t been received yet.
Can I write off an unpaid invoice?
If you use the cash method and never included the unpaid amount in income, you generally can’t claim a bad debt deduction for it.
If you use the accrual method and previously included the amount in income, an uncollectible business debt may qualify for a bad debt deduction.
When is an unpaid invoice considered a bad debt?
Being overdue isn’t necessarily enough. Whether a debt is considered worthless depends on the facts and circumstances. The IRS generally requires reasonable efforts to collect a debt before it can be treated as worthless.
What should I do when a client doesn’t pay an invoice?
Review your contract and payment terms first to confirm that payment is due. Keep your contract, invoice, deliverables, approvals, and communications organized, and follow up promptly once the payment is overdue.
If your own follow-ups aren’t resolving it, DUPAY subscribers with Tools + Protection can submit eligible unpaid invoices for professional advocacy.
Should I talk to my accountant about an unpaid invoice?
If you’re unsure how an unpaid invoice should be reflected in your books or on your tax return, yes. A creator-focused tax professional like GAME ON Financial can advise you based on your accounting method and individual circumstances.
This article provides general educational information and isn’t tax or legal advice. Tax treatment depends on individual circumstances. Consult a qualified tax professional about your specific situation.