Working as a contractor is increasingly being taken up by many with the rise of the gig economy. From an employer’s perspective, there are many factors that legally distinguish your employees from your contractors. 

Contractors often can either operate their business and have many clients, or do work for one company at a time. 

If you’re a contractor, it can be difficult to navigate your responsibilities, particularly when it comes to complex areas like tax, insurance and putting together an invoice. 

But don’t stress! Below, we’ve outlined everything you need to know if you’re working as a contractor. 

Creating Invoices: What to include

As a contractor, it is a good idea to have a proper invoicing system. It helps you protect your business’ cash flow, maintain good records and ensure you’re on track to meet your tax obligations. 

An invoice shows the record of purchase for your customers and gives details of the purchase, the specific type of service or product and the agreed upon price. 

If your business is not registered for Value Added Tax (VAT), your invoice is called a ‘regular invoice’ and will not include a tax component. 

Tax invoices must be labelled ‘tax invoice’ and must include the VAT amount for each item. 

Different Types of Invoices

As a contractor, there are many different types of invoices you can send to your customers. 

Here’s a breakdown of the most common types of invoices: 

Pro forma invoice

This can be thought of as a pre-invoice, which is sent before completing work for a customer. It details to your customer how much to pay once you perform your service or deliver your goods. Whilst it does present a commitment to provide something, the terms in a pro forma invoice can change.

Interim invoice

This breaks down the value of a large project into multiple payments. This invoice can be sent in intervals as you complete a large project. It is very helpful in managing your small business’ cash flow as you can charge customers on an ongoing basis for materials, labour and other operating costs.

Final invoice

This is sent after you complete a project, and unlike a pro forma invoice, is a demand for payment. This generally includes an itemised list of goods and services you provided. Sending a final invoice as soon as a project is completed is helpful in keeping cash flows into your business at a healthy rate.

Past due invoice

When your customers do not send you payment by the due date on the final invoice, a past due invoice may be sent. This acts as a reminder and may also include any late fees or interest incurred as a penalty for the delayed payment.

Recurring invoice

This is used to bill customers for recurring, on-going work. Similar to a utility bill, these invoices allow you to charge the same amount regularly on an agreed-upon billing interval.

Credit memo

This can be used to acknowledge any dues you owe to your customer. It is generally equal to or less than the amount originally paid by the customer, and it is often used for returns, faulty goods or mistakes in shopping. 

Talk to a Lawyer

Having a contractor agreement is an extremely important document to secure your revenue streams and dictate payment terms. Whether you are a business engaging a contractor, or an independent contractor providing services to a client, we can help!

If you have any questions, or think you might need a Contractor Agreement or a Service Agreement, you can reach us by email at [email protected].

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