2

I am a software engineer that has several clients that need me to do simple ad hoc tasks throughout the year for various projects. I have began considering setting up a retainer-based service for them where they would pay money into a retainer account for a specific project, and if I don't bill enough time to earn all of the retainer, then I would refund the unearned portion.

My concerns:

  • do retainers typically go through a 3rd party the same way escrow does? or would I just manage the retainer myself in one of my own business accounts?
  • can retainers be used for purchasing supplies, renting servers, purchasing licenses, "business expenses" related to the project, etc. or are they only allowed for use w.r.t. billable time?
  • from a tax perspective, are there different tax rates, terms, forms, etc. that I would need to submit each year at "tax time" for operating this way (using retainers)?
  • any other caveats or pitfalls I should be aware of before going down this route?
Improve this question
3
  • 1
    I know in the legal universe it's very common to have a client trust account for this purpose. Client funds are held in such an account until the time which they are earned (whether that's an hourly charge or expense reimbursement or whatever), then you would transfer the funds to your business account and it would be income at that point.
    – quid
    Commented Mar 22, 2021 at 22:33
  • Thanks @quid (+1) but who owns the "client trust account", me, a 3rd party or the client? Thanks again!
    – hotmeatballsoup
    Commented Mar 22, 2021 at 22:45
  • I really don't know enough to write a whole answer. I believe you set up the account and you would be the trustee of the account and you have to keep records but the money is still technically your clients' until such time that it's earned by you which is why it's not income until that point. In some avenues of the legal universe you, the lawyer, actually submits fee statements that need to be approved by the court before you can take ownership of the earned funds. But I only know the bullet points not the technicalities.
    – quid
    Commented Mar 22, 2021 at 22:55

1 Answer 1

Reset to default
1

You aren't regulated like an attorney. You and your client can set up whatever arrangement is mutually convenient.

E.g., a $5000 up-front payment is required to start. You then invoice your hours and expenses to the client until it dips below $1000, at which point you notify them to pay another $5000. You agree to return unused deposited money whenever the client asks, of course stopping work at that point until a new $5,000 is deposited with you.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .