Whether you’re a freelancer or business owner, receiving payment and tracking your income is easy with invoices.

So, what is an invoice, and which one should you use? We have the answers, with the related U.S. tax laws and how invoicing software might be just the thing you need.

What This Article Covers

• What Is an Invoice?
• Invoicing and U.S. Tax Rules
• Types
• Elements
• Software
• FAQs
• Next Steps

What Is an Invoice?

An invoice is a payment request with information on sold items, cost and delivery timelines. It includes the contact information of the buyer and seller. As a seller, it helps you monitor cash flow and provide proof of business for tax audits.

For buyers, invoices are proof of expenses for their records. They also support inventory management for buyers and sellers.

Invoice vs. Bill

Though people mix the two terms, they are different.

Invoices are requests for payment in B2B transactions, while bills are common in B2C contexts. A restaurant would give a bill to a customer, while a website designer may send an invoice to their client.

Invoices must have the buyer’s and seller’s contact information and address of the buyer and seller. Bills are less formal and may not have the buyer’s complete details.

Invoicing and U.S. Tax Rules

What are the tax rules for invoicing in the U.S.?

Here’s what Kelly Hanley, an experienced tax attorney, told us.

The IRS does not specify the format of these records, meaning that both paper and electronic invoices are acceptable, as long as they are complete and readable.”

She further explained what the IRS requires.

The IRS hasn’t mandated specific standards for e-invoicing, although Rev. Proc. 97-22 states that businesses maintaining their records electronically must ensure these records are accessible and reproducible in a hard copy format upon request.”

These include “checks, bank statements, and tax returns, unless specific IRS authorization is obtained to dispose of them.”

Types

Invoices come in multiple shapes and sizes. Here are a few examples:

• Pro Forma Invoice: This type of invoice is best for businesses that need rates and quotes before the provider starts work. It’s also a popular choice with freelancers and contractors.
• Commercial Invoice: It’s a document for clearing goods with customs when exporting across borders.
• Credit Invoice: If a buyer pays extra, the seller issues a credit invoice as proof of surplus cash flow.
• Debit Invoice: If the seller pays the buyer’s moving or customs charges, they will issue a debit invoice.
• Timesheet Invoice: It’s best for sellers that charge by the hour.
• Recurring Invoice: It’s a payment request to buyers who commit to regular payments. It’s different from an interim invoice that you issue during the project tenure.

Elements of an Invoice

A successful invoice requires specific pieces to complete the puzzle. Here’s a sample with key elements like the invoice number, project details and contact information.

What else should you include?

• Title: Include the word Invoice and the company logo at the top to create a professional invoice.
• Invoice Number: It can be a mix of alphabets and numbers or only numbers.
• Invoice Dates: Add the promised delivery date and the date of sending the invoice.
• Business Details: Include the contact information of both parties.
• Terms: Add the payment timeline and late payment charges, if applicable.
• Product Description: Use a separate line to describe each product.
• Cost: Specify the cost for each line item with the tax amount.
• Total Amount Due: Display the due payment as a sum of the items mentioned above.

Software

Nicole Winters is a candle maker and business owner. She chose QuickBooks to manage payments and hasn’t looked back since. She finds it helpful to monitor cash flow and understand how her business is growing.

With invoicing software, you can say goodbye to manual math and payment delays.

• Give your payment request a personal touch with the company logo.
• Create requests quicker with invoice templates.
• Calculate the total amount, tax and rebate.
• Get payments safely.
• Delight customers with clear delivery terms.
• Bill clients for the time spent.
• Link to payroll systems.
• File taxes easily.
• Manage finances by feeding payment data into accounting systems.

Brandon Brown needed better billing for his graphic design business. MS Word invoices weren’t cutting it. Even adding a signature was tedious. He chose Zoho Invoice, an estimating and invoicing solution.

With Zoho’s customer portal, clients could approve/reject estimates and view payments. The tool converts approved estimates to invoices.

FAQs

1. Is an invoice a bill? What’s a receipt?

An invoice is a request for payment. It’s a specific type of bill and a record of a buyer-seller transaction. However, a receipt is proof of purchase.

2. Are invoices legal documents?

No, an invoice isn’t legally binding but can be a supporting document in tax audits and disputes. It’s why U.S. law mandates that you should retain any documents that support your tax claims for a certain period.

According to Hanley,

Businesses must retain these records for a minimum of three years, though some circumstances may necessitate longer retention periods, such as when the IRS determines there was a significant underreporting of tax, which extends the statute of limitations to six years.”

3. What are some considerations when invoicing international clients?

Include the payment terms, currency and country of delivery on the invoice.

Establish clear terms of sale during initial discussions. While getting paid in U.S. dollars may be convenient for you, are your clients on the same page?

• Find out the exchange rate for receiving payment in either currency and any other fees the client might incur.
• Factor in the taxes levied in the client’s country and who will incur the cost. VAT applies to trade in the European Union.
• Consider offering options like PayPal and Stripe or electronic fund transfer mode.
• Opt for a separate invoice number system for international invoices.

Next Steps

Now that you know what an invoice is and how software can help, it’s time to take your business to the next level. Get our free requirements template to match your business needs with the best invoicing solutions.

Which type of invoice do you use for your business? Let us know in the comments below.

Contributing SME

Nearly two decades into her legal career, Kelly boasts an impressive track record at industry giants like Aon, MetLife, KPMG, and DLA Piper. Her expertise in taxes, estate planning, and financial disputes equips her to tackle a wide range of tax issues.

Kelly earned her Juris Doctorate (JD) from John Marshall Law School and followed it up with a Master of Laws (LLM) in taxation at Chicago-Kent College of Law.