When work stops, calculate the refund by subtracting earned fees and incurred expenses from the deposit, using your agreement's pricing and payment terms.
Key takeaways
- List completed work and documented expenses before calculating the refund.
- Record when the work stopped and what ended it.
- Explain the calculation and payment timing in writing.
- Keep a record of the refund and check the client's remaining balance.
A deposit is money paid in advance for work that has not happened yet. When the work stops early, that advance is only partly matched to what was delivered. The rest is the part that needs a decision, a calculation, and a clear way to hand it back.
This post gives you 4 rules for working that out and returning the money cleanly. They are written for small-business owners and bookkeepers. The official wording behind some of them, however, comes from ethics rules for lawyers. Where we quote one, we name the place it applies. Those rules bind lawyers in that place. They are not rules for your trade, and they do not cover every contract. Read them as one profession's example of handling the same problem, then check what applies where you work.
This is general guidance, not legal advice. If the amount is large, or the client disputes it, talk to a lawyer or an accountant in your area before you send anything.
First, work out what you have actually earned
That is the core test, and it is the one the official text we checked uses.
For lawyers, Minnesota's rule addresses both earned fees and incurred expenses when representation ends. ( Minnesota Legislature, MN Court Rules, Rule 1.16)
The rule uses two words, earned and incurred. In plain terms, earned means work you have done, and incurred means costs you have taken on for the job. Both matter for a small business, because a deposit may cover both labor and expenses.
Notice what the rule does not say. It does not tell a lawyer to refund the whole deposit, and it does not tell a lawyer to keep it. It asks one question: has the money been earned or incurred? For your business, that question sorts the deposit into two piles. One pile holds completed work and costs you can show. The other holds everything else, and that is the money the client may be owed back.
Consider a simple case. A designer takes a deposit for a full brand package, then finishes the research and a first concept before the client decides to stop. The research and the concept are work done. The remaining design rounds, revisions, and final files are not. The deposit paid for the whole package, so the question is how much of it the finished pieces justify. The answer is a list, not a feeling.
Start with the job file. Date each entry as you add it, so the work and the costs can be shown in order. List the work you finished. Put both lists next to the deposit. If the completed work is small, most of the deposit may come back. If you have already bought materials that cannot be used on another job, those costs may reduce the refund. Whether they do depends on what you agreed with the client, so read your written terms before you count them.
If the split is hard to make, do not hide the uncertainty. Say in writing how you divided the deposit and why, and invite the client to point out anything you missed. A split you can explain is much easier to defend than one you cannot.
One mistake to avoid is keeping a flat fee because it feels fair, without checking it against the work. A figure you cannot tie to completed work or documented cost is hard to defend if the client asks how you reached it. Write down the reasoning as you go, so the number and the explanation match.
For related billing records, see how to split a deposit invoice's remaining balance.
Illustrative example: calculating the refund
Suppose an illustrative deposit is $90. Show the work and expenses separately so the client can follow the calculation.
Second, set a clear end date for the work
Set a specific end date for the work, and base the refund on what was done by that date. Vague endings can invite arguments, and a date gives both sides a fixed point to measure from.
The Minnesota rule for lawyers offers a useful way to think about that date. It says: "Ordinarily, a representation in a matter is completed when the agreed-upon assistance has been concluded." ( Minnesota Legislature, MN Court Rules, Rule 1.16)
That sentence ties the end of the job to the assistance that was agreed. For a lawyer, that is the legal help the client hired. For your business, the same idea points you to the work you promised. The word "ordinarily" matters, too. It describes the normal case and leaves room for others, so do not read it as a fixed test for every job.
Go back to the original agreement and read the description of the work, any stages or milestones, and the price. Use its pricing and payment terms to value completed stages, any compensable partial work, and incurred expenses. Write down the date work stopped and list what was done up to that date. That written record turns a loose "we stopped" into a fact you can show.
Write down what ended the job, too. It may have been a message from the client, a decision you made, or a problem neither side could fix. Record the event in plain words, with the date. The end date and the reason it ended belong together in the file, because a reader who sees only one of them will have to guess at the other.
Once you have set the date, use it in every message. If one email shows one end date and an invoice shows another, the client has a reason to doubt the whole calculation. Use the same date on the notice, the work list, the refund summary, and the books.
Partly finished stages need the same care. Describe what was finished, what was not, and what would have been left to do. That lets the client see why the refund is what it is, instead of taking your word for it. A short sentence like "the design was approved, but the build did not start" gives far more clarity than "most of the work is done."
Third, tell the client in writing and give them time
Tell the client in writing that the work is stopping, and give them time to respond or to arrange someone else to finish. Written notice gives you a record of what you said and when, and it lets the client plan around the change.
The Minnesota rule for lawyers lists these steps as part of ending a representation. A lawyer shall take steps, "to the extent reasonably practicable," to protect the client's interests, "such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled, and refunding any advance payment of fees or expenses that has not been earned or incurred." ( Minnesota Legislature, MN Court Rules, Rule 1.16)
Notice that the refund sits in the same list as notice and time. It is one step among several, and it is part of protecting the client's position, not a way to close the file. Your notice does not need to be formal. It does need to be clear.
A short letter or email can cover the essentials. Say the date the work stopped, what was completed, what the deposit was, what you are returning and how you calculated it, and when the refund will be paid. If you are also handing over files, drafts, or materials the client has paid for, list those too, so nothing is left unclear.
Keep the tone factual. Describe what happened and what the numbers are. Avoid blame, speculation about the client's motives, and words like "unfortunately you" or "you failed to." A notice that reads as a plain account of the work and the money is far easier for both sides to act on than one that reads as a complaint.
Give the client a real chance to respond. If they ask questions, answer them in writing, even if a phone call came first, and then confirm the call in an email so the record matches. If they want to hire someone else to finish, be ready to share the work done so far in a form they can use, as long as your agreement and the circumstances allow it.
Some clients will ask whether the deposit can be applied to a later job instead of returned in cash. Whether that works is a matter for the agreement and for both sides to decide. If you agree to it, write the agreement down, stating the amount and the future job it will cover.
Keep copies of everything you send and everything you receive. The job file is your proof of what you did, what you were paid, and when each thing happened. If the matter later needs to be explained to someone outside the business, that file is the clearest place to start.
Fourth, return the unearned amount without unrelated conditions
Return the unearned amount in full, by a method you can document, and do not tie it to demands the agreement does not already contain.
A refund that comes with conditions can turn a simple money question into a bigger dispute. Pay what is owed, and handle any other issue separately. If you believe the client owes you more for work already done, say so in your calculation, with the work listed, so the client can see exactly what you are claiming. That keeps the refund and any further claim clearly apart.
Pay by a method that leaves a record, such as a bank transfer or a check. Note the date and amount in the job file, and send the client a written summary that matches the payment. If the client has questions about the figures, go back to the work list and the costs, not to memory.
If the client disagrees with your figure, do not argue from the total. Walk through the list again, line by line, and ask which item they dispute. Often the question is about one item, not the whole calculation. If you can offer a call to go through the figures, do it, and then send a short written summary of what was agreed. If you cannot reach agreement, that is the point to get advice before you move any money further.
Bookkeepers have a part to play here too. The deposit and the refund both need to be recorded correctly, and the right entries depend on how your books are set up. Ask the business owner or your accountant how your system treats client deposits and refunds. After the refund, check that the client's deposit balance reflects only what is still held, and that the job file, the invoice, and the books all tell the same story. A mismatch between them is the kind of gap that is hard to explain later.
For the payment-matching step, see how to reconcile bank statements in software.
Before you send the refund, read the whole package once as if you were the client. Does each figure trace back to a line in the work list? Does the notice match the end date in the file? Small mismatches are easy to fix now and harder to explain later.
Finally, record who approved the refund and why. A short note in the file, dated and signed, is enough. It shows that the decision was made on purpose, based on the work done, and not on a whim.
Your next step today
Open the job file and draft a refund summary with the deposit amount, completed work, incurred expenses, end date, and proposed refund. Check each amount against the agreement before sending it.
Related guides: Deposit then default: 4 figures to work out what is owed · Retainer deposit invoice: 4 rules from CA, ND and SC.
Questions about deposit refunds
Must the whole deposit go back?
The refund depends on earned fees, incurred expenses, and the agreement's pricing and payment terms. Account for compensable partial work as well as completed stages.
What if the client disputes the calculation?
Ask which item they dispute and review that item against the agreement and work records. If you cannot reach agreement, get professional advice before moving more money.