Freelance deposits and retainers explained: deposit vs retainer, how to invoice them, and tax notes

A deposit is money taken before the work (or a stage of it); a retainer is usually prepaid time or access over a period. Here's how freelancers use deposits, retainers, milestones and prepaid hours, how to invoice a deposit and credit it on the final invoice, what "refundable" usually means in practice, GST/HST and UK VAT notes from official pages, and wording you can copy.

The tax and payment rules mentioned (CRA GST/HST on deposits, the Excise Tax Act deposit clause, GOV.UK payment terms, and HMRC VAT on advance payments) were checked against official pages on 2026-10-14. What "deposit", "retainer", "milestone" and "prepaid hours" mean, and the advice here, is general practice, not something those pages define. Not written by a lawyer or a tax adviser.

The short answer

• Agree the deposit or retainer in writing before you start (quote, proposal or contract), including the amount or hours, when it's due, whether it's refundable, and how it's credited.
• Invoice the deposit on its own, then show it as a credit on the final invoice so the client sees the balance clearly.
• Refundability is a contract term, not a universal rule. Say it in writing. Consumer deposit-forfeiture laws are usually for consumer sales, not ordinary freelance business-to-business work.
• Tax timing differs by country. In Canada the CRA says not to collect GST/HST on a deposit until you apply it to the price (CRA). In the UK, HMRC treats an advance payment or deposit as creating a VAT tax point when you invoice or receive it, whichever is first (HMRC). We haven't checked US state sales-tax rules for deposits.
• A retainer is usually prepaid hours or monthly access; say what happens to unused hours.

1. Deposit vs retainer vs milestone vs prepaid hours

These labels are general practice among freelancers and agencies; they aren't legal definitions from the official pages we read. Clients sometimes use them interchangeably, so define them in your agreement.

GOV.UK: "You can set your own payment terms, such as discounts for early payment and payment upfront." (GOV.UK: Payment obligations). "Upfront" there is the idea of being paid before or as you supply; it doesn't define freelance deposits or retainers.

2. Why freelancers ask for a deposit

• Cash flow: materials, subcontractors or simply the gap between starting and the final invoice.
• Commitment: a client who pays something before you start is less likely to vanish mid-project.
• Risk: if the job is cancelled after you've blocked the calendar, a non-refundable (or partly refundable) deposit is how many freelancers price that risk — in writing, not by assumption.
• New clients: a deposit is a common way to test whether invoices get paid at all before you've done most of the work.

None of that needs a statistic. Match the deposit to the job: a small one-day fix may need none; a multi-week build often does.

3. How much and when (worked examples)

There is no official "right" percentage. The splits below are our own made-up numbers for a project fee of 2,000 (any currency), not a recommendation.

• When: invoice the deposit when the client accepts, and make it due before you start (or before you release a first deliverable).
• Milestones: define each stage by something both sides can see, and give each milestone invoice its own due date (see our payment terms guide).
• Large changes: a big change order can carry its own deposit; see scope creep and change requests.

4. How to invoice a deposit and credit it

1. Deposit invoice — one line (or a few) for the deposit on [project], the due date, and a note that it will be credited to the final invoice and whether it's refundable.
2. Do the work — keep the deposit invoice number handy for the credit line later.
3. Final invoice — list the full fee as usual, then a credit line for the deposit already paid (negative amount or "less deposit"), then the balance due.
4. Receipt — when each part is paid, a receipt helps both sides' records (our receipt generator).

Our invoice generator and invoice template can print each of those invoices; the quote generator can show the deposit on the quote the client accepts first. Where a written freelance contract is required, New York City's page says the contract must spell out the work you will perform, the pay for the work and the date you get paid (NYC DCWP); Illinois has its own list including how and when you're paid (Illinois DOL). Put the deposit schedule in that writing.

5. Refundable vs non-refundable

General practice, not a legal rule: "refundable" means you return the deposit (or the unused part) if the project is cancelled under the conditions you named; "non-refundable" means you keep it as agreed (often as a cancellation fee or to cover time already blocked). Many agreements are partly refundable (for example, refundable until work starts, then not).

• Say it in writing on the quote and on the deposit invoice. Silence invites a dispute.
• Be clear who cancels. Client-cancelled vs you-cancelled vs mutual can have different outcomes.
• Consumer rules are different. Deposit-forfeiture and cooling-off laws aimed at consumers buying for themselves are usually not the default for business-to-business freelance work. If you sell to individuals as consumers, check the consumer rules where you and they are — we haven't checked those consumer rules for this page.
• Tax on a forfeited deposit can still apply even when no work is done (section 6).

6. GST/HST, VAT and sales tax notes

Sales tax on deposits is one of the places official rules actually speak. Read the live page before you rely on a figure; this is not tax advice.

Page dates on the check date: CRA and ETA 2026-06-18; GOV.UK payment obligations 2015-08-07; HMRC VAT deposits guidance last updated 2019-02-28.

7. Retainers: prepaid hours vs monthly access

Again, general practice. Two common shapes:

• Rolling prepaid hours — the client prepays for a block of hours each period; you log time against it (our timesheet helps). Example with our made-up numbers: 10 hours/month at 75/hour = 750 per month.
• Monthly access / priority — a flat fee for availability, a set number of small tasks, or first place in the queue, whether or not every hour is used.

Unused hours: say in writing whether they roll over (and for how many periods), expire, or are refunded. Silence here causes most retainer disputes. Over 3 months at the example above, the prepaid total is 2,250 before any overage hours.

8. Wording you can copy

Paste into your quote, proposal or contract; replace everything in [brackets]; delete what doesn't apply. Have a lawyer review anything high-stakes.

Deposit clause:

Deposit
- A deposit of [percentage]% of the project fee ([amount and currency]) is invoiced when you accept this [quote / proposal / contract] and is due before work starts.
- The deposit is credited in full against the final invoice.
- The deposit is [refundable / not refundable / partly refundable as follows: …] if the project is cancelled by [you / either of us] before [milestone or date].
- Prices [include / exclude] [sales tax / VAT / GST/HST]. How tax is shown on the deposit invoice follows the tax rules where I am registered.

Retainer clause:

Retainer
- Each [month / period] you prepay for up to [number] hours of [work type] at [rate and currency] per hour (the "retainer").
- Unused hours [roll into the next period for up to [number] periods / expire at the end of the period / are refunded].
- Hours beyond the retainer are billed at [rate] and invoiced [with the next period / on their own invoice], due [number] days after the invoice date.
- Either of us can end the retainer with [number] days' written notice; prepaid unused hours then [are refunded / expire / are used first].
- This is not an employment agreement.

Deposit and final invoice lines:

Deposit invoice
Invoice number: [number]
Invoice date: [date]
Line: Deposit on [project name] — [percentage]% of [fee] — [amount and currency]
Payment terms: Due before work starts (due [date])
Note: Credited to the final invoice. [Refundable / Not refundable] if cancelled as set out in [quote / contract].

Final invoice (excerpt)
Line: [work description] — [amount]
Line: Credit — deposit paid on invoice [deposit invoice number] — −[amount]
Balance due: [amount]
Payment terms: Net [number] (due [date])

9. Checklist

• Before the job: deposit or retainer amount (or hours), due date, refundability, unused-hours rule, and tax treatment — in the quote or contract.
• Deposit invoice: sent on acceptance, due before work starts, notes the credit and refundability.
• Start work only after the deposit clears (or you've agreed otherwise in writing).
• Final invoice: full fee, then a credit for the deposit, then the balance.
• Retainer: log hours, track unused hours against the written rule, invoice overage promptly.
• Tax: follow the rules where you're registered (section 6); ask an accountant if deposit vs part payment is unclear.
• Keep records: the agreement, both invoices, payment confirmations and any cancellation emails.

Free tools and kits

• Free quote and estimate generator: show the deposit and a valid-until date before you invoice.
• Free invoice generator: deposit invoice and final invoice with a credit line, any currency (runs in your browser; nothing is saved).
• Free freelance invoice template (.xlsx).
• Free receipt generator: when the deposit or balance is paid.
• Free timesheet: for retainer hours.
• Invoice payment terms explained: Net terms, milestones and late fees alongside the deposit.
• Our paid Freelance Billing Kit by Small Rows (US$12, one-time) keeps each client's payment terms (including a deposit note), gives every invoice a due date, and shows what's paid, part paid, open or overdue. It doesn't decide whether a deposit is refundable or how tax applies.
• Our paid Quote & Proposal Kit by Small Rows (US$12, one-time) puts a deposit percentage and a valid-until date on the quote the client accepts, so the deposit is agreed before you invoice it.
• With the client tracker kit too: the All-Kits Bundle by Small Rows (US$24, one-time).

Where the sources differ

We read the pages under Sources on 2026-10-14. A few details to watch:

• CRA vs HMRC timing. The CRA says not to collect GST/HST on a deposit until you apply it to the price; HMRC says an advance payment or deposit creates a VAT tax point when you invoice or receive it (whichever first). Different taxes, different rules — don't copy one country's timing onto the other.
• Deposit vs part payment (Canada). CRA "Deposits" and Excise Tax Act s. 168(9) vs s. 168(2) part payments can point different ways; the label in your agreement matters. Our Canadian guide hedges the same way.
• Returnable hire deposits (HMRC) are about goods hired out and returned, not a typical freelance project deposit.
• Old but current pages. GOV.UK's payment-obligations page shows public-updated-at 2015-08-07; HMRC's deposits guidance was last updated 2019-02-28. Both were still the current guides on the check date.
• No official "retainer" definition on the pages we read; unused-hours rules are yours to write.

When to get legal or tax advice

• a large deposit or retainer, or a client who wants strong non-refundable language you don't understand;
• you're unsure whether your "deposit" is a deposit or a part payment for GST/HST or VAT;
• you sell to consumers (individuals) and cancellation or cooling-off rules may apply;
• you and the client are in different countries and it's unclear whose law or tax rules apply;
• a client disputes a forfeited deposit or unpaid retainer balance (see our Canadian late-payment guide for chasing unpaid invoices).

Related free resources

• Invoice payment terms explained: deposits, milestones and due dates in the wider terms picture.
• How to write a freelance proposal: put the deposit in writing before work starts.
• Scope creep and change requests: when extra work needs its own deposit or change order.
• Getting paid on time as a freelancer in Canada: GST/HST on deposits, late fees and reminder emails.
• Free quote and estimate generator and free invoice generator.
• All free tools.

Sources

Official pages read on 2026-10-14. Check the live page before you rely on it. New York and Illinois written-contract pages were read for our proposal guide on the same captures' date.

• Canada: CRA: GST/HST in special cases (Deposits) · Excise Tax Act, s. 168 (Justice Laws)
• United Kingdom: GOV.UK: Payment obligations · HMRC: VAT instalments, deposits, credit sales
• New York and Illinois (payment timing in written freelance contracts): NYC DCWP: Freelance workers · NY DOL: Freelance Isn't Free Act · Illinois DOL: Freelance Worker Protection Act

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