The profitability of many companies and freelancers depends primarily on the order situation. If you attract a customer’s attention with your products or services, and they send you a request, you should try to create a quote as quickly as possible and send it back to them. We explain what you need to include when writing a quote and the correct way to structure it.
An error-free invoice is an important requirement for businesses who want to avoid legal conflicts with customers or the IRS. Though invoices are not subject to strict regulation in the US, and there are no input tax deductions that can be claimed from them like there are in many other countries, maintaining proper invoices is nonetheless important. We explain to you which components an invoice should include and which additional requirements there are for the issuance of a correct invoice.
- What is on an invoice?: Invoice requirements
- Tax regulations for small businesses
- Invoice recordkeeping
- Special rules for invoicing
- Common errors with invoice creation
What is on an invoice?: Invoice requirements
An invoice is a written document where the supplier lists the goods and/or services provided in detail and requests payment from the customer. There’s no real obligation to issue an invoice, since the claims of the contract partners - the money claim on the one hand and product liability on the other - are binding even without one. But legally speaking, it is always better to have clear documentation of any claims you may want to make.
For a commercial document to be legally recognized as an invoice in the United States, the following mandatory specifications are made in Title 19 §141.86 of the Code of Federal Regulations and the document must contain the following:
✔ Merchandise port of entry destination (if imported)
✔ Name and address of both seller and recipient, as well as the date of sale
✔ Detailed description of the merchandise
✔ Quantities of merchandise in weights and measures
✔ Price of each item of merchandise
✔ Currency type, both according to system (i.e. dollars, euros, etc.) and kind (i.e. gold, silver, paper)
✔ All additional charges on the merchandise (shipping, insurance, etc.)
✔ All rebates, drawbacks, and bounties, separately itemized
✔ Country of origin of merchandise
✔ All goods and services for the production not included in the invoice price, such as dies, molds, tools, and engineering work (if furnished outside of the USA)
As with sales tax, requirements regarding recordkeeping vary from state to state. Be sure to check the legislation in your state of business to make sure that you’re compliant with the specific guidelines. For countries other than the US, a VAT number or tax identification number would also generally be included in the invoice. The IRS does supply businesses with identification numbers for taxing purposes, but these are not required on invoices.
Delivery or service date
Here is where you list the date on which the delivery was received by the customer or the service was performed. For service performance dates, it’s pretty decisive - simply list the date when the service was completed. For the delivery date, you can either specify the date from the delivery note or write the expected date if the exact time hasn’t been determined yet.
Numbering your invoices is the best way to keep track of your records and avoid any issues with missing documentation. There are multiple methods of doing this, but all employ a sequence of consecutive numbers. The unique invoice number is used to clearly identify the invoice. Combinations of number and letters are also possible, as is including the date of service or customer number.
You can start your consecutive invoice number sequence wherever you want to. For example:
Invoice number: D-052317-P-4602
In this number, the D stands for domestic, 052317 is the invoice date (May 23, 2017), and P stands for a delivery warehouse in Pittsburgh. The 4602 is the consecutive invoice number, meaning that the next invoice would need to use the suffix 4603.
You can also form invoice numbers without any letters, such as the following example:
In this case, the number starts with the date (May 23, 2017), the 4602 is the customer number, and the 00 suffix denotes the first invoice of that particular customer’s sequence. The next invoice for customer 4602 would have to end with 01.
Quantity and type of deliver or scope and type of service
Make sure that you include all delivered goods or all billed services individually and with a commercial description in the invoice. That way, you can simply use collective terms like “Office furniture”, “Tableware”, “Drainpipes”, etc. But terms that are too general, such as “Gift items”, aren’t sufficient descriptors. In the same line, enter the prices (total price and price per unit, if applicable).
If prepayments have been calculated, then you need to specify this separately on the invoice with the addition “Billing for service yet to be rendered”. If you already know the date that the payment will be made, you need to include this as well
Charges, tax, and tax rate
The charges (net and gross invoice), the tax amount (price plus sales tax), and the tax rate (sales tax in percent) must be listed individually in the invoice. If the customer receives a tax exemption, then the invoice also needs to indicate which delivery or service the exemption is applied to. This also goes for any other reductions such as discounts, bonuses, etc.
Tax regulations for small businesses
As a small business, considered by the IRS to be any business with assets under $10 million, there are some different regulations to pay attention to. Tax exemptions, returns, and payroll regulations are points of concern when running your own business and still attempting to meet federal tax obligations. Small Business Taxes: The Virtual Workshop, available on the official IRS website, is a specialized resource for answering all taxation questions and keeping your small business tax compliant.
As with any kind of recordkeeping, it’s recommended to hold onto any tax-related records for as long as they are applicable - if the expenses have yet to be filed or have just recently been filed, it’s a good idea to hold onto any paperwork. That way, if questions of proof arise, you will have them for reference. IRS recommendations for recordkeeping are available on their website.
Special rules for invoicing
As it so often goes, there are exceptions when it comes to invoicing. Special cases include credit items, advance payments or partial services, as well as travel expenses. There are also special rules for invoicing outside of the US.
Credit instead of bill
Credit is issued by the recipient. This doesn’t settle an invoice in the classic sense, where payment is collected, but instead the service provider receives a credit in the amount of the agreed price for the service rendered.
If a freelancer is working for a company for a particular amount of time, they can relieve themselves of bureaucratic expenses by not issuing an invoice for their work. Instead, they receive a credit from the company as their fee.
Here, sales tax regulations work just like they would with a regular invoice. The credit issued is treated just as a cash payment would be. It’s important that you identify the credit as such for the taxation authorities.
Advance payments and partial services
In general, invoices don’t have to be paid in advance. Customers are frequently given the option to divide services and pay in installments. For you as the company, it’s important that you record payments that have already been made in the final statement. Partial services must also be properly taxed.
Use the same tax rate regardless of the amount of service being billed. Partial invoices are applied in the same way as complete ones.
Travel expenses in the invoice
Whether by train or plane or bus, travel expenses can also be submitted as invoices. These are dealt with as tax deductions by the IRS and include the following:
✔ Travel between home and business destination
✔ Fares for taxis or other transportation between locations (e.g. airport, hotel, work location, etc.)
✔ shipping of baggage or material between locations
✔ Car use while at business destination
✔ Meals and lodging
✔ Dry cleaning and laundry
✔ Business calls while on business trip
✔ Tips paid for any expense-related services
✔ Other expenses related to business travel
Keeping good records is essential for successfully claiming any business-related travel expense deductions.
Invoicing outside the US
When doing business with entities outside of the US, it’s important to check the rules and regulations of the country you’re doing business with to make sure both you and your business partner are in compliance. Tax regulations tend to follow vastly different, and much stricter, standards and therefore will likely require you to alter your invoice format. When doing business with partners in the EU, for example, including your company’s VAT identification number is an essential component of the invoice. Any North American business conducting business with an EU country should apply for a VAT number.
Check the IRS regulations for international business as well as the regulations of the specific country or countries with which you are doing business.
Common errors with invoice creation
Invoicing has the potential to be absolutely riddled with errors. By submitting an incorrect or incomplete invoice with your taxes, you might be denied the right to deduct and be stuck with extra costs. These are the most common mistakes that happen while invoicing that you should be sure to avoid:
Required information is missing or incorrectly entered
If you don’t take account of the requirements mentioned above when making your invoice, then you won’t fulfill the minimum requirements and your invoices will not be accepted for taxation. Deductions aren’t issued if the necessary data is not complete and correct on the invoice. Small typing errors generally won’t deny your right to deduct, as long as they aren’t on important information. But incorrectly listing the tax identification number can lead to significant problems.
Tax rate listed too high or too low
If you specify a tax rate that’s either too high or too low, this is a serious billing error. Always make sure that the correct information has been entered here. If, for example, you issue a tax rate that’s too high, you’ll have to pay that rate to the tax office. Your customer, though, can’t put the excessive tax rate toward their deduction.
But a tax rate that is too low also has consequences. It’s true that the company applying the tax will only have to pay that rate on their product, but it also means that the recipient can only deduct at the specified rate.
Unauthorized tax credit
Invoices that contain false data are referred to as unauthorized tax credits. If, for example, you list the expense as office improvements but instead buy a game console for your own use instead of an office computer, the extra tax must be paid.
If an invoice has been drawn up without any services actually being performed or deliveries taking place, it’s called a bill. Bills are also available if the invoice issuer isn’t actually a business. In such cases, the IRS reserves the right to refuse the invoice recipient’s request for deductions.
Always check your invoices! It is the best way to ensure that you only submit complete, compliant invoices with your taxes. This goes for paper invoices as well as electronic version.