An American Editor

August 4, 2014

The Business of Editing: You Want a Deposit!

One of the first pieces of advice new freelancers receive from more experienced freelancers is “get a deposit”! Interestingly, that advice is generally given to editors who work directly with authors; the assumption is that publishers will honor invoices just to avoid hassles but that is not always true of authors.

Rarely, if ever, discussed is the editor’s responsibilities when it comes to taking a deposit.

Commonly, the editor’s contract lays out a payment schedule, such as 25% of the estimated fee as a deposit before work begins, 25% when half of the manuscript is edited, the balance when editing is done. The variations on this theme are endless but they all begin with that prework deposit or retainer.

Retainer is really the wrong word to use. A retainer is a payment in exchange for setting aside a certain amount of time to deal with a client’s needs. It can be argued that you are entitled to keep the retainer no matter what happens because you are willing to give the client the amount of time the client is paying for. A deposit, on the other hand, is clearly refundable until it is earned.

The general practice, based on conversations I have had with colleagues who ask for deposits, is to take the client’s funds and comingle them in the editor’s regular accounts. Although this is commonly done, it is not necessarily the best idea, especially if a taxing authority comes round to do an audit.

From my perspective, the biggest problem with commingling is the ethical problem: the editor has yet to earn the deposit or any portion of it.

The idea of the deposit is to ensure that the editor receives payment for work that is done. If the editor and client have agreed on a fee of $50 per hour, then at the end of 1 hour of work, the editor is entitle to withdraw $50 from that deposit. Should the client then decide that the editor is not a good fit for her manuscript and cancel the contract, the client is entitled to a refund of the balance of the deposit — the unearned portion.

In other words, deposits, although under the immediate control of the editor, remain the property of the client until such time as some portion of it has been earned by the editor, at which point only that earned portion belongs to the editor.

What colleagues have said to me is that they do not disagree with who owns what, but see no reason why they need to segregate in a special account any deposits pending earning. All they need to do is keep good records.

Unfortunately, that is not quite true. The first problem is a tax problem. Tax codes usually take the position that any money in the editor’s account is taxable as belonging to the editor. Because most editors are on a cash basis and not an accrual basis for accounting and tax purposes (if you are on an accrual basis you should revisit this with an accountant), as soon as the editor deposits any money to a personal account, it is the editor’s for tax purposes. Consequently, if the editor’s tax year ends December 31 and the editor has unearned deposits commingled in the editor’s personal accounts, that unearned money counts as income for the preceding tax year.

The second problem occurs should some disaster befalls an editor, whether it be health-related or bankruptcy or some other financial disaster. Because the finds are not segregated, they are treated as the editor’s funds. The client’s money becomes the editor’s money — even though not yet earned by the editor — and subject to use for payment of the editor’s debts.

Included in this second problem is the not so rare instance where an editor runs short in a month because some clients have delayed payment or contested an invoice, and now some bill is due and the editor does not have enough in the bank unless the editor taps the unearned deposit. The temptation becomes great to “borrow” against the deposit because the editor expects to earn that money soon.

The third problem, and to me the biggest problem, is that by commingling the money the editor says the client should trust the editor with the client’s money even though the editor doesn’t trust the client with the editor’s money. I view trust as of necessity being mutual. Placing the money in a designated escrow or trust account alleviates much of the distrust. The client sees that the editor recognizes that the deposit belongs to the client until it is earned; the editor is affirmatively acknowledging that she must earn the deposit.

The relationship between editor and client is a business one. Everything needs to be kept at arm’s length. Editors need to treat clients as equals and with dignity. One way to do so is to recognize that until the editor earns a portion of the deposit, that deposit is held in trust for the client. The editor demonstrates acceptance of that relationship by segregating client funds from the editor’s funds and by providing a regular accounting to the client.

In the past, when I would receive deposits, the deposits not only were placed in an escrow account, but the client received a monthly report advising the client of the balance and of any transactions. (I also would send the client immediate notification saying that I had withdrawn $x as payment against a particular invoice.)

Segregating client funds from our personal funds tells clients we are professionals, that we want our relationship with the client to be a professional one, and that we are trustworthy. It helps establish a positive working relationship. And from the editor’s perspective, if the client feels assured about how the deposit is handled, there will be less reluctance to replenish the fund as the editor withdraws earnings from it.

Because the request for the deposit is generally part of the contract, what the editor does with the deposit should also be part of the contract. The contract should outline how the editor will handle the deposit and what kind and frequency of reports the client can expect to receive as regards the disposition of the funds. The contract should also state that the deposit remains the property of the client except as sums are withdrawn to pay the editor for work completed per the contract.

Do you agree that the funds should be segregated? Is that what you do?

Richard Adin, An American Editor

11 Comments »

  1. Typo in the name of the article…

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    Comment by ellenkmichel — August 4, 2014 @ 4:38 am | Reply

    • Thanks. The titles seem to be my downfall when it comes to making errors.🙂 I have corrected the error.

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      Comment by americaneditor — August 4, 2014 @ 5:38 am | Reply

      • There’s also a typo in the first sentence: “form” should be “from.” (And thank you for writing this blog. So much helpful information.)

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        Comment by Katharine R. Wiencke — August 4, 2014 @ 9:16 am | Reply

  2. Oh, deposits are a two-edged sword! They permit the cash flow that enables me to steadily pay my bills. But yes, they should be held separate, for reasons cited in this blog. So I always start by putting them in escrow. If necessary, I tap into them to keep the show on the road. I do have an ultra-emergency fund that’s never touched (and hopefully never will be) that I can pull from should I ever need to return a deposit and it’s not in my working funds or escrow. That’s the best I’ve been able to do so far, having crawled up to solvency from the brink of ruin some years ago.

    Deposits have helped me to attain this because they provide income while a multi-week or multi-month job is in process. In my early freelance years, I had to wait and wait for checks to come, long after the work was completed. In those days, I worked solely for publishers and corporations, who only paid for completed work, and at their convenience. Nowadays I work primarily for indie authors/publishers and either set my own terms or comply with the terms of an organization that funnels work to me (for which I pay a commission, and for which a deposit is required from clients to reserve the space on my calendar). The change of client type and business practice has allowed me to succeed.

    A key concept about deposits lies in the above paragraph: that a deposit is required to reserve a professional’s block of time. That is subtly different from paying for work not yet performed. The contract that includes this clause is careful about defining under what conditions a deposit would be returned, and what percentage. So far, no client — or calamity! — has challenged the concept/contract, and everyone who has signed it has been a speedy payer and delightful to work with. I’ve held up my end by delivery quality editing on or before deadline.

    Indeed, since I started requiring deposits, the quality of my clientele has improved. The practice sends the message to both of us that we are dealing on a professional level. It’s not just me suggesting distrust — “show me the color of your money!” — but also the client suggesting “show me the color of your integrity.” It gives them leverage should I fail to start and finish their job in the appointed time, with the contract specifying who will do what under different circumstances. We both enter into the project assured that we can follow our guts and take each other at face value while having our respective behinds covered in case our trust is misplaced and things go afoul. It’s a rational/emotional equation that balances out nicely.

    Meanwhile, I look forward to the day when my income is high enough, steadily enough, that all deposits I put in escrow will always be able to stay there until the project is complete.

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    Comment by Carolyn — August 4, 2014 @ 6:37 am | Reply

  3. Addendum: Guess I can’t say I deliver quality work when I post with a typo! Make that sentence, “held up my end by *delivering* quality editing…” : )

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    Comment by Carolyn — August 4, 2014 @ 6:49 am | Reply

  4. I don’t do that much work directly for authors, and if I did, I still don’t think that comingling deposit funds and payment for services rendered is any problem taxwise or otherwise. Putting on my tax preparer hat for a moment (I trained and worked in a tax office and then did freelance tax prep), the money in your bank account, whether a personal or business account is not taxable per se. If you’re reporting on a cash basis, as most sole proprietors do, then, yes, you’d report any money taken in (gross receipts in IRS lingo) including any deposits, but that is not the amount the IRS (and state and local, if applicable) taxes. The net income of your business (gross receipts minus business expenses) is what is taxed, and that is still only the Self-Employment tax (Social Security and Medicare), not income tax. All of your net income is subject to Self-Employment tax, but when it comes to federal income tax, it’s more complicated. Your business net gets put in with all your other household income to arrive at your gross income. That is still not the amount that gets taxed. First, you take exemptions for yourself, spouse, and dependents; then standard or itemized deductions; various adjustments (e.g., contributions to IRAs, health insurance premiums for self-employed people, HSAs), and various tax credits (e.g., tuition credit, EIC, energy credits). Way down p. 2 of the 1040 is your taxable income. It may be $0 after all those deductions.

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    Comment by Teresa Barensfeld — August 4, 2014 @ 9:31 am | Reply

  5. Now, say you get a deposit and put it in a separate account. For IRS purposes, AFAIK, that is still considered part of your gross receipts. Perhaps an accountant could set up some sort of financial structure whereby you don’t get taxed for deposits until you complete the work, but it seems to me that that would be unnecessarily complicated for most freelancers. The larger issue here is how the cash basis of accounting works. Gross receipts are counted in the year they’re received, and business expenses in the year they’re paid. Rich pointed out what happens when a freelancer is paid a deposit at the end of the calendar year but does not complete the job (or the portion of the job that the deposit would cover) until after the new year, thus incurring tax liability on income that has been received but not “earned” yet. I put “earn” in quotes because part of the deposit has been earned by virtue of bidding for and being awarded the job (contractors for big jobs (of any kind) work in the time-cost of the estimating and bidding process into their prices). That’s another whole discussion. To turn the tables a bit, what if you spent considerable time working on a bid at the end of the year, was awarded the job, but did not receive any payment, whether deposit or other, until after the new year? Or put another way, what about a job you completed and billed for in December but weren’t paid until January (no deposit involved)? That usually happens at one time or another to every freelancer. According to the cash method of accounting, all those funds are part of your business gross receipts in the year when they were received, not the previous year, even if the work was done in the previous year. I don’t really see a difference between deposits and payment for work done in these cases. It’s more to do with the accounting method.

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    Comment by Teresa Barensfeld — August 4, 2014 @ 9:41 am | Reply

  6. I work with individual authors and Indie publishers. Any pre-payments, regardless of what they are called, are kept in a separate account. This isn’t for tax purposes, but rather for the integrity of my agreement with the client. When the portion of the work covered by those funds is complete I consider those funds to be mine to use as I wish. My clients are reserving my time and support with a pre-payment.

    The ticklish situation I have encountered has been refunds when the client backs out or encounters a need to conclude the project before it has been started or completed. I have always found, in those cases, that generosity to the client and the ‘rip the bandaid off quickly’ approach are best.

    Thanks for the great post.

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    Comment by TigerXGlobal (@TigerXGlobal) — August 4, 2014 @ 12:35 pm | Reply

  7. Rich, to me, keeping deposits in a separate account goes under the heading of “overthinking things.” All funds I receive from clients go into my business checking account, period.

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    Comment by Samantha Enslen — August 4, 2014 @ 2:55 pm | Reply

  8. I never used to ask for deposits, but as I was working on lengthy manuscripts or theses, billing in full at the end was not only risky, it was also a long time between drinks, so to speak. Given that I had clients offering to pay me deposits, I decided to start charging 50% up front and 50% on completion (plus any extra for work I’m asked to do along the way that was not included in the quote). So far this has worked fine and I’ve had no problems with payments or complaints from clients.

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    Comment by Sally Asnicar — August 7, 2014 @ 5:46 pm | Reply


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