How should an agency record retainers and pass-through costs in QuickBooks?

Start by naming what the money is

"Retainer" means different things at different agencies. Before choosing a method, sort each arrangement into one of three buckets:

• Monthly retainer. The client pays a set fee each month for that month's work. It is earned as the month goes by.
• Deposit or prepayment. The client pays before the work is done, such as half up front on a website project. You are holding it until you deliver.
• Pass-through costs. Money you spend on the client's behalf and bill back: ad spend, printing, stock licenses, a freelancer hired for their project.

Monthly retainers: a recurring invoice

If the client pays the same amount every month, set up a recurring invoice so QuickBooks creates it on schedule. Recurring transactions are available in QuickBooks Online Essentials, Plus and Advanced, but not in Simple Start.

Use a separate product or service item for retainer income, such as Monthly retainer, and another for project fees. A sales report by product or service then shows how much of the agency's income is recurring.

Deposits paid before the work

Intuit's method treats a deposit as a liability: money you hold that isn't yours until you do the work.

1. Create a liability account. In the chart of accounts, add an account with the type Other Current Liabilities and the detail type Trust Accounts - Liabilities. Name it something like Client deposits.
2. Create a Retainer item. Add a Service item named Retainer or Deposit, and set its income account to the new liability account rather than an income account.
3. Record the payment. A sales receipt for the Retainer item puts the money in the bank and increases the liability. Or send an invoice for the Retainer item and receive the payment against it.
4. Apply it at the end. On the final invoice, add the Retainer item as the last line with a negative amount. That reduces what the client owes and moves the deposit into income. The negative line can't be larger than the invoice total.

One catch: Intuit notes that cash-basis reports won't show the deposit as received until the final invoice is paid in full. Many small agencies file on a cash basis, so ask your CPA how they want deposits handled before you set this up. The tax treatment can differ from the bookkeeping, and that decision is theirs.

Pass-through costs: make them billable

When you pay for something the client will reimburse, mark it billable at the moment you record the expense. In QuickBooks Online Plus and Advanced:

1. Go to Settings, then Account and settings, then the Expenses tab. Under Bills and expenses, turn on Track expenses and items by customer and Make expenses and items billable. You can set a default Markup rate here too.
2. When you enter the bill, expense or check, tick Billable on the line and choose the client in the Customer column.
3. The next time you create an invoice for that client, QuickBooks shows the cost in an Add to invoice panel. Select Add and it goes on the invoice.

Billable expenses aren't available in Simple Start or Essentials. On those plans, put the client's name in the expense description and add the cost to the invoice by hand, or consider whether the agency has outgrown the plan.

Why it matters

Agencies that run media for clients can pass a lot of money through their books. If those costs sit in your expenses and never get billed, they come straight out of your margin. If they are billed but not tracked, revenue looks bigger than the business really is. Either way, it gets hard to say which clients make you money.

Seeing profit by client

Once retainers, project fees and billable costs are tied to the right customer, you can compare income and costs client by client. QuickBooks Online Plus adds project profitability tracking for agencies that want to go a step further. The busiest client and the most profitable one aren't always the same, and this is how you find out.

More on how this works in bookkeeping for marketing and creative agencies and monthly bookkeeping.

Common questions

Is a retainer income when I receive it?

A monthly retainer for that month's work is generally income for that month. A deposit for work you haven't done yet is different: in the books it can sit in a liability account until the work is invoiced. How it is treated for tax depends on your accounting method, so confirm with your CPA.

Which QuickBooks Online plan do I need for billable expenses?

Plus or Advanced. Simple Start and Essentials don't include billable expenses. Recurring invoices are available from Essentials up.

Can QuickBooks add a markup to billable expenses?

Yes. In Plus and Advanced you can set a default markup rate in the expense settings and adjust it on each expense line.

Should ad spend I pay for a client be my expense or theirs?

If the client reimburses it, record it as billable to that client so it gets invoiced and tracked. How your CPA wants reimbursed costs shown on the tax return is a question for them.

This guide is general information about bookkeeping, not tax or legal advice. Rules change, so check the details with your CPA before you act on them.