Choose a billing method for a client and be consistent, writes Kevin Cheung
With the end of the year fast approaching, billing for work in progress (WIP) and collecting on accounts receivable should be high on our priority list. This is particularly the case as taxation of WIP will continue to increase incrementally, as set out in the federal budget of 2017.
WIP and taxes
As many will recall, the 2017 changes to the Income Tax Act removed the ability for lawyers and other professionals to defer including WIP as income until the work or file was completed and invoiced. The change meant that WIP must be included as income for the taxation year, calculated as the lower of cost or fair market value.
The legislation allows for a five-year transition period, with annual 20-per-cent increases to the percentage of WIP to be included as income. For the 2020 tax year, lawyers must include 60 per cent of their unbilled WIP as income.
The tax regime makes billing for WIP and collecting on outstanding accounts even more important. Otherwise, it is the lawyers holding the bag for taxes. If you have been slow to change your billing practices, now is the time to do so.
Billing practices
Billing can be a struggle for many lawyers. Many of us underbill, wait until the WIP accumulates to a high amount before billing, or simply delay billing until well after the file is complete. To overcome this we need to develop better billing practices.
At the outset of a file, decide on the criteria for when you bill the client. Options include monthly billing, billing when WIP hits a certain monetary threshold, or billing when the matter has reached a certain stage.
Considering the tax pressures on unbilled WIP, billing on a monthly basis will keep unbilled WIP relatively low and reduce the risk of significant tax exposure. However, monthly bills may stress or overwhelm certain clients, and hence the need for clear communication from the beginning to set client expectations.
Unless one is doing contingency personal injury work, for larger files do not wait until the file is complete before billing. If billing by monetary thresholds, set reasonable amounts that would be acceptable to the client. If billing by stages of a matter, consider breaking down the stages into smaller component parts so that WIP can be billed more frequently and in lesser amounts.
Whatever method you decide on, communicate what you are doing to your client so that their expectations are set. Then you must slavishly follow the chosen routine. Deviating from that throws off the client's expectations and allows you to form bad habits.
Clear communication also entails having clear, detailed and easy to understand invoices. A client needs to know what they are paying for. If your invoice is disorganized, filled with legal jargon, or too vague, it makes it more difficult to comprehend and increases the likelihood of a dispute.
Follow up on outstanding accounts
Collecting on unpaid accounts is not fun, but the longer the account goes unpaid the less likely it is to be paid. Again, developing good billing habits will minimize the number of unpaid accounts one needs to chase.
Proactively minimize the chances for outstanding accounts. Try to avoid accounts receivable that you have no control over. This means receiving enough of a retainer to pay your bill before you start working, as possible. Where feasible, no work you want to be paid for should be done until you have money in the bank.
If there is an outstanding account, consider using software to send automatic invoice reminders to clients for unpaid bills. This saves time and reduces the risk of forgetting about a bill. If bills remain outstanding, follow up with a phone call from the lawyer. A personal call directly from the lawyer may prompt a more positive response from the client.
Make it as easy and painless for the client to pay their bills by offering them multiple options to pay. These would include staggered payment plans, online credit card payments and e-transfers.
Many of us want to help our clients at all costs and will bend over backwards to do so. However, with the tax burden of unbilled WIP increasing each year, we need to develop better billing habits to ensure that taxes do not compromise our practices.
As with many matters in a lawyer-client relationship, clear communication and expectation-setting is the foundation of good billing practices.
