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Getting Stiffed: What Can You Do?
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Getting Stiffed: What Can You Do?
In business, it’s inevitable that sooner or later you won’t get paid for the goods you shipped or services you performed. Or you may have lent money to an employee or your business, but won’t be repaid. Being passive about the whole thing doesn’t help. Learn what you can do to get your money!
If a customer or someone else owes you money, it’s up to you to diligently try to collect. Invoices aren’t like fine wine -- they don’t get better with age. The longer you wait to collect, the less likely it becomes that you will collect all or even some of what you’re owed.
Collection efforts include:
- In-house efforts. You or someone in your firm should contact the non-payer. Maybe the invoice was misplaced. Maybe the person just needs more time to settle up. Maybe you can work out terms to help the person pay what’s owed.
- Sue in small claims court. If the amount outstanding is below the small claims limit in your area, you can quickly and easily proceed against the non-payer. Usually, you don’t need an attorney and the small claims court process is relatively inexpensive. For example, say you are a photographer who took pictures at a wedding but have not been paid because the couple didn’t like them. As long as you fulfilled your contract to take a certain number of pictures and they aren’t blurry or otherwise “bad,” you’ll likely win your claim when you present your case to the judge.
- Attorneys. When your efforts fail to produce results, you can have an attorney help you. The attorney can send a letter to the non-payer, asking for prompt payment and stating that nonpayment can lead to your pursuing the claim to the fullest extent of the law.
- Collection agencies. Instead of using an attorney, you might turn to a collection agency. Doing this means you won’t ever see the full amount you’re owed (the agency typically takes a percentage of between 25% and 40% of what it collects). For instance, say you’re owed $1,000 and agree to pay the agency 25% of anything it collects. After some time, it collects $600. You’ll only receive $450 ($600 - 25% fee). But something is better than nothing and leaving collection to professionals frees your time for other business matters. Check with your *Better Business Bureau when engaging a collection agency to see that they are reputable.
If you can’t collect what you’re owed, you may be able to at least take a tax deduction for your loss. Business bad debts are deducted on your business return as an ordinary write-off. For example, say you weren’t paid for a shipment of goods. After all collection activities have been used and you know that the funds are uncollectible (e.g., you shipped them to a company that has since gone out of business), you can deduct your loss.
When you lend money and are not repaid, determine whether it’s a business bad debt or a non-business bad debt. Clearly, if your company lends money to an employee who cannot repay the loan (e.g., he’s gone bankrupt), it’s a business bad debt. It gets tricky when you lend money to your corporation that doesn’t repay:
- If you lent the money to protect your job, it’s a business bad debt and you can deduct whatever is not repaid as an ordinary business loss.
- If you lent the money to protect your investment, it’s a nonbusiness bad debt. This is deductible only if the debt is wholly worthless. It is treated as a short-term capital loss (regardless of how long the debt was outstanding).
Caution: If you are on the cash method of accounting and are not paid for your services, too bad. Unfortunately, you can’t take a tax deduction for your lost time and effect.
Tax rules on deducting bad debts are in IRS Publication 535.
Lessons for the future
If collecting from tardy or delinquent customers has been a painful experience, don’t let it happen again. Change your payment arrangements so you are no longer in the position of having to collect after you’ve completed your job (e.g., shipped the goods; fulfilled the contract for services).
Get paid up front. This can be done by offering customers a wide range of payment options, such as cash, check, credit/debit card, or electronic payment (e.g., PayPal; AmazonPayments). Accept electronic payments on the spot using attachments from Square, Intuit, and others that turn your mobile devices into processors.
If you absolutely, positively must invoice, then adopt smart invoicing policies. Send them electronically and follow up if payment isn’t received promptly.
*denotes a non-government website
About the Author:
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.