What to Do When a Client Doesn’t Pay

Ask questions. Negotiate. And be ready to cut your losses.

By Michelle Long and Sandi Leyva

How many times have you been unable to collect from a client?

MORE SMALL FIRM GROWTH STRATEGIES: The Dreaded ‘Quick Question’ | How to Manage Client Expectations | How to Handle Price Sensitivity | How to Handle Referrals – And How Not To | Trashing the Spreadsheet: Best Practices in Modern Expense Management | How to Find Hidden Money for Your Clients | Why Clients Need Dashboards | 3 Ways to Implement Value Pricing | How Small Firms Can Use Value Pricing | 3 Ways to Raise Your Prices | Building Reputation to Build Your Business | 3 Killer Lead Generation Channels | Your Existing Clients Are Your Best Leads | Need More Business? Focus on Referrals

When we asked this question in a poll, 26 percent of you had never gotten stiffed from a client... yet.

That’s good. But a lot of us have gotten stiffed or burned when we’ve not collected money from a client. It's happened to us.

If you’re one of the smart ones it’s only happened once and never again.

What do we do when there is a billing dispute? First, yes, get paid up front and that’s a good policy.

Let’s talk about some situations where there is a billing dispute. First, if you have a big job and they want you to do some cleanup or catchup work and you estimate it will be a minimum of $2,000, you want them to pay you $1,000 up front before you do the work. If they’re not willing to pay you $1,000 now what makes you think they’ll pay you $2,000 later? Right, so they should be willing to pay some money up front.

What if there’s a dispute? So you’ve done the work and sent the client the invoice. We should now be collecting up front but let's say you invoiced them and they didn’t pay.

What I would do in that situation is follow up with the client and say, "I realize this is past due, did you have any questions about the bill? Why didn’t you pay it?" They may have a good answer: "I’m sorry, so and so was out sick and didn’t cut the check."

But you need to find out if there is a problem. Was it the services you provided? Did they think it took you too long or you charged too much? Was there another problem or reason they weren’t happy or dissatisfied? Are they not paying the bill for a reason and not we don’t have enough cash right now? Are they unhappy? Is there a problem? Why are they dissatisfied? What if there was miscommunication and did they not understand the billing policies up front?

Think about the things you need to communicate with the client. Maybe there has been a misunderstanding and they think you charged them $2,000 to only do this and didn’t realize that $2,000 also included the fact that you did this and that. They may not realize everything involved.

A lot of times when there is a dispute, it’s a situation where there’s been some miscommunication. You need to talk to the client to try and figure out

  • what went wrong,
  • what the problem is and
  • what you need to do.

Do you need to set up a payment plan? Do you need to say you’re right and we promised you’d have it by XYZ date and we’ll take however much money off because we were late getting it to you?

What do you have to do to work it out with the client? You always want to try and work it out for the client and make both sides happy. You don’t want to feel like you got burned; the client doesn’t want to feel like they got burned either. What is a win-win for you both to be happy if you want to maintain that relationship?

Do you want to continue working with the client? Do you want to make this right? Or you know there are a few bad apples out there and they’re trying to get something for nothing. You did all the work and everything right and they just don’t want to pay you. Unfortunately that happens and hopefully not often, 1 in 100, but occasionally it does happen.

The best thing to do is try to negotiate an amicable agreement to resolve it. You don’t want to pay me $2,000 and I did all this work, you are a PITA and I don’t want to work with you anymore. What do we need to do to resolve this? You’re not going to pay me 2 grand but would you pay me $1,500 or $1,000? Try to get whatever you can voluntarily.

People will ask should I sue them when they don’t pay me. Most insurance providers – and you need to check with your E&O provider – say don’t sue because you open yourself up to the fact that you didn’t do this or that or failed to provide adequate services, etc. and they can possibly countersue you. So you need to talk to your insurance agent.

The amount will make a difference, too. If we’re talking $2,000 that’s one thing but someone sent me a message about $200 grand and I hope that was a typo. Is it $2,000 or $20,000 or $200,000? First, you never ever want to keep running that bill up and yes I did this myself.

Way back when, when I was first starting out, I had a client who wasn’t paying me and I could see the books and see the other vendors who weren’t getting paid. Why the heck did I keep doing the work? Why didn’t I say no?

"You know what, Mitch, I’m sorry, you’re not paying me so I can’t keep doing the work for you. I’m not working anymore, stop, finito and done." But no, I ended up losing $3,000 or $5,000 and I saw the sinking ship and didn’t get off. Why? I don’t know. I’ll never do it again though, I’ll tell you that.

We need to learn to stop doing the work if we’re not getting paid. Don’t do it. It’s as simple as that. They can understand that…if a client says why aren’t you doing this? "I’m sorry but you haven’t paid me and I don’t work for free. I have bills and a family and I need to get paid. I’m not doing the work if you’re not paying me. I’m going to work on other clients who are paying me."

Here are some comments from conference attendees. Vicky says "because it’s hard and I feel bad." I know, Vicky, but if you take your car in and need a new tire or you need this or that, they’re not going to fix it for free because they feel bad. We need to quit feeling bad. And yes, Beverly said the same thing, "We feel sorry for the clients." They take advantage of that. She says we see their financial situation and we get stuck.

You’re right, Beverly, sometimes they take advantage of that. Sometimes we need to see that and say, "I’m so sorry and I wish you the best of luck and I’ll do everything I can to make it easier for you. Here is the file and here is what you need to do and you do it on your own." You can try to help but you don’t want to go down with the ship.

It’s really hard I know because we do develop relationships with our clients. But as Rebecca said, "Remember the client has to take responsibility for their actions." Lynn said, "I felt bad twice but no more." Someone else said, "I feel bad when I start and then I realize that I’m not in business with my clients and my creditors aren’t cutting me a break."

You’ve got to realize that we can’t go down with the ship. Try to do what you can and then from there you’ll have to cut your losses.

Yes, we get caught up in the emotional part. We get in there and we feel sorry for them and want to help them, but we have to learn to say, "Here is everything you need and what you need to do. I’m sorry, I can’t keep working for free."

Hopefully they will learn their lesson from a former social worker, don’t work harder than your client is working at managing their cash flow. That’s a good one. We can’t care more than they do.

14 Responses to “What to Do When a Client Doesn’t Pay”

  1. Daddy Don

    Every client must complete a letter of engagement for us to accept and process their tax information. We require a retainer for all client intakes of the base amount for completing tax returns. Also, a definitive page acknowledges the retainer for services. We accept credit cards and will process the retainer upon intake. At the completion of the returns the computer prints out an invoice with the return and the balance is charged against the credit card on file. It has reduced non payment for services. The retainer is non refundable, but as a credit on the work performed. That way when a client comes in we discuss their return, not my bill. Easy breezy, If they are looking for the blue light special, we acknowledge we are a professional firm and can refer them to any one of a number of franchises along the boulevard. There is value in the service we provide to our clients. If they don’t feel that, well the Dear John letter goes out. I love my work….

    • kenneth lansford

      Just curious: Do you use a bank product, and, if so, which one. I think This is a GREAT idea but I could see some legal issues if not done completely correctly or if certain forms are or are not signed. Just curious if this is something you personally came up with or the bank product you use offers this. Thanks

      • Daddy Don

        I created the forms and followed the letter of engagement with notations on payment processing.
        The client must initial and sign the acknowledgement that they are paying a retainer, and the final billing will be charged when completed. I process thru square and quickbooks payment services.

  2. John G Miller EA,RP

    Our engagement contract has provisons for entering an estimate, a non-refundable deposit, and a credit amount toward services to be rendered. Depending on the circumstances, it allows an individualized approach to handling payment situations. It also states that all work done by our firm must be paid for in full before it is released to the client. We also have monthly billing and retainer arrangements, especially for audit clients with a failure to pay resulting in termination of representation. It is not really a matter of trust. Some clients will take advantage of any professional who will sympathize and allow leniency in making payments. It is human nature to do so as most people pay their bills when it is nescessary subject to a consequence for not doing so. We are not a charitable organization. However, I have given discounts on fees up front for certain situations as an accommodation and these are mostly for marketing purposes for business expansion or package pricing of multiple services.

  3. Sue

    While I don’t do taxes I do the accounting up to the point of taxes being done – I always get a 50 percent retainer for new clients – if they are a catchup or cleanup then it’s 50 percent of the estimate for the work. If they are a fresh start from today client going on month to month I get 500 up front to start and keep filling their credit up for the first 3 months. After that they go on an after that month end payment. By 3 months I can figure out which ones are having to be constantly reminded “no work till I get paid” and I can get rid of them in short order.
    Only client I ever had to take to court a few months after I disengaged from her and she was a daily/weekly client who I let get up to 14 K in owing me (yeah I know I know) I filed but then she arranged a payment plan to keep it out of the courts. 6 months later she asked me to take her back on as a client and in a little less than a year she’s not only paid up the entire past due amounts but also kept current on every month billed since then. I’ll never let any client get that far behind again…. now when I have a year end of annual client especially they don’t get their financials from me until I am paid in full… not even to “look at”

  4. Hank Burba, CPA

    In 2010, we began our conversion to a subscription model, a fixed set of services and software tools for an automated weekly fee. Our cash conversion cycle has dropped from 47 days in 2010 to a 3 year average of 4.67 days. Year to date 2016 our cash conversion cycle is -1 days! (Cash Conversion Cycle=AR days+WIP days-AP days)

    I would like to suggest the problem is not slow or no pay clients but in our business model for routine services.

  5. Dennis Brager


    Be very careful about sending out that Form 1099. The former director of practice for the IRS has stated publicly that she believes that is a violation of Circular 230

    • Ray Froy


      Thanks for raising that question. Actually the director refused to state either way in February 2015. In IRS SCA 1998-020, the IRS tackles this subject and seems to conclude that it’s acceptable for businesses to issue a 1099-C to a non-paying client, even though such reporting is not required. However your point should be well taken by anyone who does issue a 1099-c. The director warned to make sure that false information was not sent to the IRS and the bill is accurate and not disputable. I should have made this distinction in my first comment.

  6. Tom Baldwin

    Continuing to work for a client who is in arrears is a conflict of interest, pure and simple. Every dog gets to bite once, but why expose your professional and personal self to additional injuries? If a payment arrangement can’t be worked out, or if the client won’t hold up his end of the bargain, you have to cut the cord. Not “should”. HAVE TO!

  7. Warren Bainter

    I don’t normally charge up front. Doing that (like marital prenups) says, “I really don’t trust you, but I expect you to trust me”. Out of about 500 clients I have maybe 10 who are slow to pay and maybe 2 who do not pay each year. We need to keep the focus on our good clients and not worry so much about the outliers, IMHO.

    In the past I have taken people to court if they have not paid in a year for their tax return. That has weeded out the folks who don’t intend to pay. The court cases are published in the local newspaper so deadbeats just go someplace else.

    I absolutely will not let anyone get more than one free tax return. I have a pretty good local network of information. People have often warned me about new people who are no good, and I add them to the “do not fly” list. That has avoided some trouble.

  8. Ray Froy CPA

    Good Article. When all else fails, cut your losses. Before writing it off , I type a message stating that” failure to pay the invoice will result in this information being reported to the IRS.” Gets good results. When they still do not pay. I send them a 1099 for Forgiveness of Debt. Most ignore it until they receive the IRS letter cp2000.

  9. Frank Stitely

    The best thing to do in the tax world is not filing a return until you are paid. We actually have a workflow step before e-filing called “waiting on payment.”

  10. Karl Nebeker, CPA

    Great article. Over the last couple of years, I’ve begun to have more difficulty with “dead beat” clients that don’t pay. I’ve had to learn the hard way not to do work for those kind of clients, or insist on a up front retainer. Some of my other colleagues have also instituted a policy for their bookkeeping and accounting clients that they have to have a credit card and charge authorization on file, and that card is charged each month before the work is done (works best in “fixed-fee” arrangements). That seems like a good strategy because if a client is unwilling or unable to do that, it should be a huge red flag that you may have difficulty collecting from them and should strongly consider not accepting the engagement.

    In the last year, I’ve developed and arrangement with a bankruptcy attorney who refers client to me that need to file their tax returns, often for several years back, before the bankruptcy can be filed. If I don’t collect either up front or before releasing the returns, I know I won’t get paid by those clients, so my policy has had to be “no money, no return.” Even then, I’ve sometimes been burned by doing the work of preparing the return(s), but not releasing it/them, or filing them electronically, because the client decides that they aren’t going to go through with the bankruptcy or some such thing. The best strategy appears to me to be the one recommended in the article to get something up front before proceeding with doing any work. Like you said in the article, “If they’re not willing to pay you $1,000 now what makes you think they’ll pay you $2,000 later?”

  11. Eric Hjortness

    I completely disagree.

    We have gone to court at least 10 times, although only once in the last 5 years. We do quality work, and that showed through in court. We’ve had two malpractice filed against us, and they both completely fell apart in the courtroom. We just finished one and the client and their “expert witness” (a 30 year old who just got their CPA a year ago), were a complete flop. The judge never considered not paying us.

    The simple fact is that we often do a substantial amount of work for a client (ie, $5000 bill). We do the work in a short period of time, and granting credit comes with the territory. I’ve only gotten “stiffed” for over $1000 2-3 times, and with the exception of these cases, it was because they didn’t have the money and we gave them the chance to stay alive, and they simply didn’t. I feel good about that.

    I also feel good that our policies and procedures held up in court, and when I talk to clients who are past due I KNOW they will hold up. That came from experience and going to court. Every CPA needs it, it’s highly underrated, and CPAs should understand how a courtroom works so they can give good advice to their clients.


Leave a Reply