Partial payment

Partial payments allow businesses to settle debts incrementally, maintain good customer relations, and provide financial flexibility.

  • Background

  • Definition

  • Best practices

Partial payments in business

Businesses are always making payments for services, materials, products, and payroll. Some of those payments are made in their entirety, while others may be made in installments. This is true for receivables as well. Customers invoiced for products or services may find those invoices due all at once or partially. Partial payments are also known as installment payments, split payments, down payments, or upfront payments.

What is partial pay?

The term partial payment refers to any payment that an employer makes to an employee, contractor, or service provider that is less than the full amount owed to that party. This kind of payment can also be referred to as partial pay, advance payment, or down payment. 

Partial payments can be made by companies in several situations, including meeting HR needs. In HR terminology, partial payments can describe employee payment structures, performance bonus payments, retention bonuses, incentives, or financial settlements such as severance settlements.

Split payments

A split payment is a similar type in that the full amount due is divided into two or more parts and paid for differently. Workers living remotely, for example, may have their pay divided into two portions each paid in one of two currencies - their home currency or that of the foreign country where they are living or working on assignment. 

If local laws allow it, an expatriate employee can continue having payment split between their home country and host country currencies, with some compensation intended for non-spendable income such as retirement accounts and the local currency earmarked for day-to-day spending. Disadvantages include increased complexity, exchange rates, and bank fees. An advantage to split pay is that it can be easier to comply with tax withholding. 

Upfront payment for services or employment

Independent contractors and other businesses may require your company to make a payment for a service upfront before any work is completed. Once the work is completed satisfactorily, the remainder of the invoice is paid. Signing bonuses, or sign-on bonuses, which are incentives offered to new employees to join a company, can be considered upfront payments, paid before employment begins.

Installment accounts

In some situations, a product, service, or property is not paid for all at once. In those cases, payments can be made at regular intervals. Examples of this kind of payment are mortgage payments or leases. Customers may also pay an overdue balance in installments. 

Retention bonuses, which are bonuses paid as a reward and incentive for an employee to stay with the company, can be paid as a lump sum or in installments. Severance packages may be paid in a lump sum payment when an employee leaves the company or can be paid in installments. 

Prorated salaries

A prorated salary is a type of partial pay whereby a salaried employee who is paid on a set frequency, such as monthly, starts work at some point other than the beginning of a pay period. The first payment to an employee receiving monthly wages and starting mid-month, for example, would be half the usual monthly pay. 

Flexible work arrangements

Employees with flexible work arrangements may work part-time temporarily or work only part-time on certain days. On those days, the employees would receive a partial payment. 

Performance bonuses

An HR department may initiate company-wide or department-wide performance bonuses. These bonuses can be partially paid, at the discretion of the management, as a way of incentivizing continued good performance. Employees who are incentivized with bonuses may receive partial pay before the completion of an objective, or may even receive installment bonuses added onto their paychecks. 

Partial payment best practices

Consider these best practices when handling partial payments:

  • Offer partial payments to entice customers to make a transaction. 

  • Indicate on product pages how much of a deposit is due at the beginning of a transaction, such as a 50% down payment, for example.

  • Clearly state transaction terms on invoices. Due dates for each payment or the date a remaining balance will be due must be transparent.

  • Include a minimum payment for balances due. 

  • Communicate your late payment policy and state the precise nature of any late penalty you will assess. (Late payment penalties can include late fees, interest charges on the balance due, credit reporting, and repossession.)

  • Use invoicing software that can automatically factor in partially paid invoice payments.

  • Take advantage of e-commerce software that can alert you to each transaction that has a balance due. 

  • Keep accurate records — use bookkeeping software to make it easier and to reduce the chance of errors. 

  • Always make payments on time and based on contractual terms. 

  • Consider partial payments of bonuses as an incentive.

  • When sending employees to other countries with other currencies, consider using an employer of record to handle foreign currency payroll and potential split payments. 

For tax-deductible payments, only those payments made within a tax year may be deductible. If an upfront payment was made at the end of the tax year and installment payments or the total balance due was made in the following tax year, only the initial payment can be deducted from the tax liability for the year in which it was made.

Next steps

If using partial payments, ensure you:

  • Utilize them strategically as an enticement for customers, by offering flexibility in payment terms.

  • Clearly communicate transaction terms on product pages and invoices, including the required deposit, due dates for each payment, and any minimum payment requirements.

  • Establish and communicate a late payment policy, specifying penalties for overdue payments, and utilize software tools to automatically factor in partially paid invoice payments.

  • Maintain accurate records using bookkeeping and invoicing software to reduce the chance of errors, track partial payments, and ensure compliance with contractual terms.

  • Understand the tax implications of partial payments, especially regarding deductibility. Payments made within a tax year may be deductible, and careful tracking is essential for accurate tax reporting and compliance.

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