A merchant selling on credit has a security interest in the goods that they are selling and can repossess the goods if the buyer fails to pay.

Service providers, however, have no security interest in what they are selling. Once they perform the service, there is no getting it back. The only option is collections based on the terms of the contract.

Professional services contracts are called fee agreements or engagement letters. Like any contract, a court assumes an agreement between two willing parties, each looking out for their own interests, and will enforce the terms as written.

Lawyers are required to have written fee agreements with their clients. Accountants, for the most part, are not required to have written agreements but it is strongly encouraged. [1]. Treasury Department Circular 230 § 10.33 lists best practices for tax advisors, including “communicating clearly with the client regarding the terms of the engagement.”

Can Accountants charge advance fees?

Yes. There are restrictions on contingent fees under federal and state law as well as under the rules of professional ethics. [2]. There is also a rule against unconscionable fees, or any fee that ‘shocks the conscious.’ But there are no professional rules against charging advance fees.

Engagement letters are contracts governed by common law, usually codified in state statues, and accountants can set their own fees in a free marketplace. They can also charge different rates based on complexity, urgency or other circumstances. Subject to the professional limitations, also can also decide how the fee is structured.

Consequently, there are no restrictions that would prevent advance fees. [3].

Why would you charge an advance fee?

Advance fees have several benefits. A clear advantage is reducing accounts receivable and smoothing out irregular cash flows during annual cycles like tax season.

Advance fees can avoid the risks of non-payment. The deposit is the security interest in the services performed. The accountant does the work; the fee deposit ensures that the client pays. Even small fee deposits can mitigate the costs of a non-paying client.

Advance fees prevent ‘ghosting.’ For example, an accountant may have an initial meeting with a potential client who then stops returning emails and phone calls without letting the accountant know that they have made other arrangements. Meanwhile, most accountants will have invested time in preparing for the meeting and may have incurred some costs in setting up a new client. Charging an advance fee allows the accountant to at least recover these sunk costs. A potential client who balks at paying some money up front may very well balk at paying the bill, making this a direct way to find out if a client is committed. The result is a stronger accountant-client relationship because the client knows they have an accountant working for them and the accountant knows that he or she really has a client.

There are a few reasons an accountant may not want to charge an advance fee. For example, existing clients may be put off by the change in the payment terms or the accountant doesn’t want to pay the online payment transaction fees. Most find that the fees are a small price to pay compared to the advantages of collecting client fees in advance.

How do I charge advance fees with Engage?

First, make sure you have an account with Stripe. [4]. If you don’t have an account, you can set one up here.

Once your account has been verified, you’ll need to link your Stripe account to Engage. There is a pull-down menu at the top, right hand of the screen that is titled with your user name.  Go to ‘My Account’ and scroll down to Link to payment gateway and follow the instructions.

Now you can add advance fees to your client engagement letter.

Click on ‘Clients’ on the left side of the dashboard, or create a new client using the ‘+’ in the green circle. Enter the client information and confirm it is correct.

Scroll down to Engagements. On the right side, click ‘+ Engagement’ to create a new engagement letter.

Then, add the specific terms of the engagement. Select either a flat fee or hourly fee arrangement. [5]. Under ‘Terms’, enter the amount of the fee deposit. Let’s say you select $250. This amount will show up on page 1 of the engagement letter:

          “Our policy is to require an advance fee to be paid at the onset of any engagement. We have set this fee to $250.00.”

Engage uses both an engagement cover letter and a policies, practices and procedures addendum (the PPPM). Once an advance fee is designated for the engagement, the contract is modified so that the engagement doesn’t start until you get paid:

          1.2 When the engagement starts:
          “The engagement starts when you click accept to sign this letter and authorize payment of the deposit.”

This means that the accountant doesn’t have any obligation to the client until they receive the advance fee.

How much should I charge as advance fee?

The amount to collect as an advance fee is entirely up to you. You may want to charge a small amount, like one hour’s time, just to ensure your client is on board.  It is a good idea to at least request enough to cover any pre-engagement administrative costs and the time needed to set up a new client.

Some firms collect the entire estimated fee at the beginning of the engagement. For example, you can collect the amount you charged to prepare last years’ tax return as a deposit; then, adjust the final bill for the actual fees when you finish. This eliminates account receivables and you will effectively collect your fees at the beginning of tax season instead of after April 15.

Once you have finished the work and closed the engagement, you can immediately send the engagement letter for next year’s tax return. You may even be able to carry your client’s deposit forward, in which case you will have already locked in next year’s tax clients.

How do I account for advance fees?

Advance fees can be either refundable or non-refundable. Non-refundable fees are earned when paid and recorded as income.

A refundable advance fee is recorded as a credit to the client’s account. The total due on the invoice is reduced by the amount of the deposit. The remaining balance on the invoice is an account receivable.




[1] One exception is the ACIPA’s Statements on Standards for Accounting and Review Services (SSARS) No. 21 and No. 23 requiring a written agreement for compilation and review engagements.

[2] Treasury Department Cir. 230 §10.27; AICPA Code of Professional Conduct §1.510.001; California Accountancy Act § 62; CalCPA Code of Professional Ethics §302.

[3] This article is based on California law, specifically. Other state’s laws may vary. Consult with a lawyer if you have questions about your jurisdiction.

[4] Currently, Engage for CPAs links user accounts with Stripe accounts. PayPal, CPA Charge and Amazon Pay will be added in later releases.

[5] Note that you will need to set up a Fee schedule under ‘My account’ before you can use the hourly fee option.

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