Invoice Legalities

Late Invoice Payment Charges: What You Can Legally Charge

Mar 13, 2026

6 mins read

Your invoice is 45 days overdue.

You've sent follow-up emails. You've made phone calls. You're frustrated.

And you're wondering:

"Can I charge them a late fee for making me wait this long?"

Short answer: Yes, probably.

Longer answer: It depends on where you are, what your payment terms say, and whether you actually want to enforce it.

Let me walk you through what you can legally charge for late invoice payments, how to calculate it, and the reality of actually collecting these fees.

Because there's what you're legally allowed to charge, and then there's what you'll actually get paid.

Those two things aren't always the same.

The Legal Reality: Australia vs United States

Late payment laws vary significantly depending on where you're operating.

Let me cover the two main markets for Invoice Nudge users: Australia and the United States.

Australia: What You Can Charge

In Australia, you can charge interest on overdue invoices under the Penalty Interest Rates Act (or equivalent state legislation).

The Statutory Rate:

Most Australian states allow you to charge the Reserve Bank cash rate + 6-8% on overdue invoices.

As of 2024, that's roughly 10-12% per annum depending on your state.

State-by-State Breakdown:

NSW: RBA rate + 6%
Victoria: RBA rate + 2% (capped at 10%)
Queensland: RBA rate + 6%
South Australia: 10% flat rate
Western Australia: RBA rate + 6%
Tasmania: RBA rate + 6%
ACT: RBA rate + 6%
NT: RBA rate + 6%

Important: This only applies if you've stated it in your payment terms upfront.

You can't just add interest after the fact if your terms didn't mention it.

Fixed Late Fees:

You can also charge fixed late fees (e.g., $50 or $100) if:

It's clearly stated in your terms and conditions
The client agreed to those terms before you did the work
The fee is reasonable (not punitive)

"Reasonable" typically means it roughly covers your actual costs of chasing payment.

A $50 fee on a $1,000 invoice? Reasonable.

A $500 fee on a $1,000 invoice? Probably not defensible.

United States: What You Can Charge

The US is more complicated because there's no single federal law. Each state has different rules.

Common Approaches:

Most US states allow you to charge either:

A fixed late fee (typically $25-50 or 1-2% of invoice amount)
Interest (usually 1-2% per month, which is 12-24% annually)
Both (a one-time late fee plus ongoing interest)

State-by-State Examples:

California: Up to 10% per year
New York: 16% per year (one of the highest)
Texas: 18% per year
Florida: 18% per year
Illinois: 9% per year (one of the lowest)

The Key Rule: It Must Be in Your Contract

Like Australia, you MUST have late payment terms in your original agreement or on your invoice before work begins.

You cannot add fees retroactively.

Usury Laws:

Be careful not to charge excessive interest. Each state has usury laws that cap interest rates.

If you charge above the legal maximum, the entire debt might become unenforceable.

Generally, staying at or below 18% per year keeps you safe in most states.

The Global Reality

For Invoice Nudge users in other countries:

United Kingdom: 8% above Bank of England base rate + £40-100 fixed fee (under Late Payment of Commercial Debts Act)

Canada: Varies by province, typically 1-2% per month (12-24% annually)

New Zealand: Similar to Australia, around 10-12% per annum

The Pattern: Most developed countries allow 10-18% annual interest if stated in advance.

But the key everywhere is: you must state it in your payment terms before you do the work.

How to Calculate Late Payment Charges

Let me show you the actual math for both fixed fees and interest.

Method 1: Fixed Late Fee

This is simpler and easier to enforce.

Example:

Invoice amount: $5,000
Payment terms: Net 30, $100 late fee after 30 days

If unpaid after 30 days, total due becomes: $5,100

Pros:

Simple to calculate
Easy to explain
Feels less aggressive than compounding interest

Cons:

Doesn't increase the longer they wait (less incentive to pay quickly)
Might feel arbitrary to clients

Method 2: Interest-Based Charges

More complex but potentially more money if they're really late.

Formula:

Interest = Principal × (Interest Rate ÷ 365) × Days Overdue

Example (Australia):

Invoice amount: $5,000
Interest rate: 10% per annum
Days overdue: 60

Interest = $5,000 × (0.10 ÷ 365) × 60 = $82.19

Total due: $5,082.19

Example (US - Texas):

Invoice amount: $5,000
Interest rate: 18% per annum
Days overdue: 60

Interest = $5,000 × (0.18 ÷ 365) × 60 = $147.95

Total due: $5,147.95

Pros:

Increases over time (incentivises faster payment)
More defensible in court
Can accumulate significantly on large, very late invoices

Cons:

Harder to calculate
Clients might dispute the maths
Feels more aggressive

Method 3: Combined Approach (My Recommendation)

Use both: a fixed late fee plus interest.

Example:

Invoice amount: $5,000
Fixed late fee: $50 (applied at day 30)
Interest: 1.5% per month (18% annually) starting day 31

Day 30: Total due = $5,050
Day 60: Total due = $5,050 + ($5,000 × 0.015) = $5,125
Day 90: Total due = $5,125 + ($5,000 × 0.015) = $5,200

Why this works:

The fixed fee covers your initial admin costs
The interest creates ongoing pressure to pay
It's still reasonable and defensible

How to Include Late Payment Terms in Your Contracts

Here's the critical part: you need to state these charges before you do the work.

Not after the invoice is overdue. Before.

Option 1: In Your Contract/Proposal

Include a payment terms section:

PAYMENT TERMS

Invoices are due within 30 days of invoice date.

Late payments will incur:
- A late payment fee of $50 for invoices up to $2,500
- A late payment fee of $100 for invoices over $2,500
- Interest at 1.5% per month (18% per annum) on the outstanding balance

[For Australia: Interest calculated at the Reserve Bank cash rate + 6% per annum]

Option 2: On Every Invoice

Include it in the footer or terms section:

Payment is due within 30 days of invoice date.

Late payments are subject to a $50 late fee plus 1.5% monthly interest (18% annually) on the outstanding balance.

[For Australia: Interest charged at RBA rate + 6% as permitted under state legislation]

Option 3: In Your Standard Terms & Conditions

If you have T&Cs that clients sign or acknowledge:

7. LATE PAYMENT

7.1 Invoices are payable within 30 days of invoice date unless otherwise agreed in writing.

7.2 Late payments will incur a late payment administration fee of $50-100 depending on invoice value.

7.3 Interest will be charged on overdue amounts at [1.5% per month / RBA rate + 6%]

The Key Requirement:

The client needs to have agreed to these terms before you did the work.

"Agreed" can mean:

Signed a contract
Clicked "I agree" on a proposal
Received an invoice with terms stated and didn't object
Acknowledged receipt of your standard T&Cs

The Awkward Reality: Will Clients Actually Pay Late Fees?

Here's where theory meets reality.

You're legally entitled to charge late fees. Your terms are clear.

But will clients actually pay them?

The honest answer: Sometimes yes, often no.

When Clients Will Pay Late Fees

Large companies with formal processes - They have policies for late fees. If it's in the terms, they'll usually pay it without argument.

Clients who want to maintain the relationship - If they value working with you and plan to use you again, they'll pay the fee.

Clients who know they're in the wrong - If they've been genuinely late and unresponsive, they often accept the fee as fair.

When the fee is reasonable - A $50 fee on a $5,000 invoice? They'll probably pay it. A $500 fee? They'll fight it.

When Clients Won't Pay Late Fees

Small businesses with cash flow issues - They're struggling to pay the original invoice. Adding fees just creates another argument.

Clients who feel the fee is punitive - "You're charging me $100 for sending an email?" They'll push back.

One-time clients - If they don't plan to work with you again anyway, they have no incentive to pay the fee to maintain the relationship.

Clients who dispute the original invoice - If there's any question about the work quality or invoice amount, late fees become impossible to enforce.

My Experience: 50/50 at Best

In my experience working with dozens of businesses:

About 50% of clients pay late fees without argument when they're included in the invoice.

The other 50% either:

Pay the original invoice but not the fee
Negotiate the fee down
Refuse to pay it entirely
Ignore it and dare you to escalate

The question becomes: Is it worth fighting over $50-100 on a $5,000 invoice if they've paid the $5,000?

Most business owners let it go. The original invoice is what matters.

How to Actually Enforce Late Payment Charges

So you've got late fees in your terms. The invoice is overdue. How do you actually collect the fees?

Step 1: Include Them in Your Follow-Up Emails (Optional)

Overall I don't like to have any mention of fees at all during the email process. But still going to cover it here.

Day 7-14 overdue:

Don't mention late fees yet. Too aggressive too early.

Day 21-28 overdue:

Mention them as a reminder, not a threat:

"Hi [Name], invoice #12345 for $5,000 is now three weeks overdue. Under our payment terms, a $50 late fee will apply from day 30. Can you sort out payment this week to avoid the additional charge?"

Day 30+ overdue:

Include the fee in the amount due:

"Hi [Name], invoice #12345 is now 35 days overdue. The total amount due including the $50 late fee is now $5,050. Payment link below."

Step 2: Include Them on Formal Demand Letters

When you send formal demand letters (day 35+), include late fees in the total:

See our guide on formal demand letters for full templates.

Step 3: Be Willing to Negotiate

If they pay the original invoice but baulk at the fees, ask yourself:

Is fighting over $100 worth potentially losing $5,000?

Often the smart move is:

"I'll waive the late fee if you can pay the full invoice amount today."

You get paid. They feel like they got a concession. Everyone moves on.

Step 4: Include Them in Debt Collection

If you engage a debt collection agency, give them the full amount including late fees.

They'll attempt to collect everything. If they can't get the fees, at least they'll get the original amount.

Step 5: Include Them in Legal Action

If you file in small claims court, include late fees and interest in your claim.

Courts generally uphold reasonable late fees if they were in the original agreement.

This is where having clear, written terms pays off.

The Strategic Question: Should You Even Charge Late Fees?

Here's the question nobody asks:

Just because you can charge late fees, should you?

Let me give you both sides.

Arguments FOR Charging Late Fees:

You've earned them - You did the work on time. They're paying late. Compensation is fair.
They create urgency - The threat of mounting fees encourages faster payment.
They cover real costs - Your time chasing payments isn't free. Late fees compensate you.
They're standard business practice - Most industries charge late fees. It's expected.
They filter bad clients - Clients who refuse to pay legitimate late fees are clients you don't want anyway.

Arguments AGAINST Charging Late Fees:

They create friction - Some clients will pay the invoice but fight the fee, creating unnecessary conflict.
They might delay payment - "I'm not paying that fee" can turn into "I'm not paying anything until we resolve this."
They damage relationships - Even if clients pay, they might resent the fee and not work with you again.
They're hard to enforce - 50% won't pay them anyway, so why include them?
Focus on the invoice, not the fee - Getting $5,000 paid is more important than fighting over $50.

My Recommendation:

Include late fee terms in your contracts, but use them selectively.

Have the terms there so you CAN charge fees if needed.

But don't automatically add fees to every overdue invoice.

Use them strategically:

Charge fees for: Repeat late payers, large companies, clients who are chronically unresponsive
Waive fees for: First-time late payments, clients with genuine issues, situations where the relationship matters more

Think of late fees as a tool in your collection toolkit, not an automatic penalty.

Real-World Examples: When Late Fees Work and When They Don't

Let me show you actual scenarios.

Example 1: Large Corporate Client (Fees Work)

Situation:

$12,000 invoice
Corporate client with formal AP processes
45 days overdue
Your terms clearly stated $100 fee + 1.5% monthly interest

What happened:

You sent invoice showing total due: $12,370 (original + fee + interest)
AP department processed it without question
You got paid in full including all fees

Why it worked: Large companies have budgets for late fees. It's just part of their process.

Example 2: Small Business Cash Flow Issues (Fees Don't Work)

Situation:

$5,000 invoice
Small business struggling with cash flow
60 days overdue
Your terms stated $50 fee + 1.5% monthly interest

What happened:

You sent invoice showing total due: $5,200
Client responded: "I can pay the $5,000 this week, but I'm not paying the fees. Take it or leave it."
You accepted the $5,000 and moved on

Why it didn't work: They're barely able to pay the original amount. Fighting over $200 risks losing $5,000.

Example 3: Repeat Offender (Fees as Deterrent)

Situation:

Client consistently pays 30-40 days late
You've waived fees before as a courtesy
They just did it again on a $8,000 invoice

What happened:

You enforced the late fee this time: $100
Client paid it without argument
Next invoice? Paid on time.

Why it worked: Enforcing the fee sent a message. They learned there were consequences for late payment.

Does Invoice Nudge Include Late Fees?

Invoice Nudge personalised, casual tone tends to work better than all other avenues - so adding late fees is another "break in case of emergency" situation.

If it reaches day 35+, then they add fees to formal demand letters and debt collection claims.

As mentioned earlier, it needs to be part of the agreement upfront.

Tax Implications of Late Payment Charges

Quick note on the tax side (not financial advice, talk to your accountant):

In Australia:

Late fees and interest you collect are considered income
You need to charge GST on late fees (they're part of your taxable supply)
Report them in your BAS as additional income

In the United States:

Late fees and interest are taxable income
Report on your Schedule C (sole proprietor) or business tax return
You may need to issue updated 1099s if fees are substantial

The Bottom Line:

If you collect late fees, you'll pay tax on them. Factor that into whether they're worth pursuing.

Your Action Plan: Setting Up Late Payment Terms

If you don't currently have late payment terms, here's how to add them:

This Week:

Review your payment terms - do you mention late fees or interest anywhere?
Decide your late fee structure (fixed fee, interest, or both)
Update your contract/proposal template to include clear late payment terms
Update your invoice template to reference late payment terms

For New Clients:

Include late payment terms in all new contracts going forward
Make sure clients acknowledge them before you start work
Reference them on every invoice

For Existing Clients:

You can't retroactively add fees to existing invoices
But you can update terms for future invoices
Send an email: "Just updating our payment terms for all clients. Going forward, late invoices will incur a $50 admin fee as per the attached updated terms."

For Current Overdue Invoices:

If your terms mentioned late fees, you can enforce them
If your terms didn't mention fees, you can't add them now
Focus on collecting the original amount first

The Bottom Line on Late Payment Charges

Here's what you need to remember:

You CAN charge late fees and interest on overdue invoices, but:

It must be in your terms upfront - Before you do the work, not after
The amounts must be reasonable - Not punitive, just compensatory
The laws vary by location - Australia: 10-12% annually, US: varies by state (usually 12-24%)
Clients often won't pay them - Even if legally owed, enforcement is difficult
Fighting over fees can delay payment of the original invoice - Sometimes waiving fees gets you paid faster

My Strategic Recommendation:

Include late payment terms in your contracts so you have the option to charge fees.

But use them selectively and strategically, not automatically.

Focus on getting the original invoice paid and keeping client relationships in tact.

Use fees as a tool for repeat offenders and unresponsive clients.

Waive them when it helps maintain valuable relationships or speeds up payment.

The goal isn't to collect late fees. The goal is to get paid what you're owed.

Late fees are just one tool to make that happen.

Related Resources

Want to improve your entire invoice collection process? Check out these guides:

Want to automate invoice follow-up before fees become necessary? Invoice Nudge handles systematic follow-up for days 1-28, catching 55-64% of overdue invoices before you need to add late fees or escalate. Most invoices get paid when you follow up consistently from your real email. Start your 14-day free trial.