If you invoice only after delivery and are paid within the same month, this article is insurance. Read the last section before your first retainer.

You closed a strong autumn. Four clients booked work for next spring and paid to hold the slot. The bank account looks healthy and the diary looks full.

Then April arrives with a tax bill for a year in which, by your own reckoning, you barely worked.

The short answer

When the money reached you Taxed in
Client transferred it in November November's year
Cheque dated 30 December, deposited 3 January The earlier year
Client said it was ready in December; you asked for January The earlier year
Platform credited your balance on 28 December The earlier year
Genuinely held in escrow, terms not yet met Not yet

The rule is about availability, not work

Publication 334 gives the pattern almost exactly as freelancers live it:

"They were told in December that their payment was available. At their request, they were not paid until January 2026. They must include this payment in their 2025 income because it was constructively received in 2025."

And then removes the most popular workaround:

"Checks. Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you can't cash or deposit the check until the following year."

With its own worked example: a $500 cheque received 30 December, deposited 3 January, is income for the earlier year.

So three dates exist for every retainer and only one of them decides the tax year:

  • When you earned it — irrelevant on the cash method.
  • When it hit your bank — irrelevant.
  • When it became available to you — this one.
Why it feels wrongBecause the work is the part you remember. The tax code is looking at the money, and the money arrived months earlier.

The squeeze nobody mentions

It is not only that the income lands early. It is that the costs land late.

On the cash method you deduct expenses when you pay them. So a project paid for in November and delivered the following May produces:

Year one Year two
The whole fee, as income The subcontractor you hired
The software you bought for it
The travel to deliver it

Two tax years, and the one with the income is not the one with the deductions. A business with a strong booking season and a delivery season that follows it will feel this every single year.

That is not a problem to solve so much as a shape to plan around — which means reserving tax on a retainer when it arrives, not when the work happens.

Escrow is genuinely different

There is one arrangement the publication treats differently, and it is worth knowing precisely because it is narrower than people hope:

"If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you don't accept the money until the next year."

Note what does the work: a real escrow, with terms, that you have not yet met. Once the terms complete, the money is yours whether you collect it or not.

A client's bank transfer sitting in your account labelled "deposit" is not escrow. Neither is a platform balance you can withdraw at any time.

Refundable deposits, honestly

The genuinely unsettled case is money a client can take back.

If a deposit is fully refundable on demand and you have no right to keep it, it looks less like income and more like something you are holding. If it is non-refundable the moment it is paid, it is payment. Most real agreements sit somewhere between, and the answer depends on the wording rather than the label.

Anyone who tells you the answer without reading your contract is guessing. What is safe to say: calling something a deposit does not by itself defer the tax, and a great many freelancers assume it does.

What to do about it

  1. Record two dates on every payment — date available and date earned. Your bookkeeping needs the first; your business needs the second.
  2. Reserve tax when the money lands. The reserve percentage does not care that the work is in May.
  3. Watch the last two weeks of December. A cheque that arrives 30 December is this year; asking a client to hold off before they have made it available is a legitimate conversation, and asking after is not.
  4. Do not rely on the word "deposit". Read what the agreement says about whether you can be made to give it back.
  5. Treat a booking-heavy autumn as a tax event, because that is what it is.

The freelancers who find this painless are not the ones with clever arrangements. They are the ones who set money aside on the day it arrived, because that was always the day that counted.

Track it now. Thank yourself in April.

Common questions

A client paid a retainer in December for work I do in March. Which year?
On the cash method, the year you received it. Publication 334 works exactly this pattern: a taxpayer told in December that payment was available, who asked to be paid in January, "must include this payment in their 2025 income because it was constructively received in 2025."
The cheque arrived 30 December but cleared in January.
Still the earlier year. Publication 334: "Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you can't cash or deposit the check until the following year."
Can I just ask the client to pay me in January instead?
Not once the money is available to you. The publication's example is a taxpayer who did exactly that and was taxed in the earlier year anyway. Asking before the client is ready to pay is a different situation from deferring money already on the table.
What about a refundable deposit I might have to give back?
That depends on whether it is genuinely yours yet. Money a client can reclaim at will is closer to a liability than income, and how the agreement is written matters more than what it is called. This is worth a professional's eye rather than a rule of thumb.
What about money held in escrow?
Publication 334: "If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you don't accept the money until the next year."
Does the expense side move with it?
No, and that is the squeeze. On the cash method you deduct costs when you pay them, so a retainer received in year one and spent delivering in year two is taxed in year one and deducted in year two.
Should I switch to the accrual method to fix this?
Accrual changes when income is recognised, but it is a method change with its own rules and it is not automatically better for a service business. It is a decision to make deliberately with a professional, not a workaround for one awkward December.
How do I stop this being a surprise?
Record the date received separately from the date earned, and reserve tax on the retainer when it lands rather than when the work happens. The money and the obligation arrive on the same day; only the work is later.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional about your situation.

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