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