To calculate a late fee on an invoice, multiply the unpaid balance by the annual interest rate stated in your contract, divide that figure by 365 to get a daily rate, then multiply by the number of days the payment is overdue. Commercial invoices commonly carry late charges of 1% to 2% per month, or 12% to 24% annually, but your contract terms and your state’s usury cap set the actual ceiling. The math is straightforward; the legal limits and the contract language behind the fee are what determine whether the charge sticks.
The Simple Interest Calculation
Simple interest is the standard approach. You need three numbers: the unpaid principal on the invoice, the annual rate your agreement specifies, and the count of calendar days the payment is past due.
Work it in three steps:
- Multiply the unpaid balance by the annual rate to find the yearly interest.
- Divide that yearly amount by 365 for the daily charge.
- Multiply the daily charge by the number of days late.
Say a client owes $5,000 and your contract sets a 12% annual rate. Yearly interest is $5,000 × 0.12 = $600. The daily rate is $600 ÷ 365, or about $1.64. At 45 days late, the fee comes to roughly $73.97.
Count days starting the day after the due date. If payment was due on the 30th, day one of the late period is the 31st. Every calendar day counts, weekends and holidays included, through the date the client pays or you issue the revised invoice.
Flat Fee or Percentage
Not every contract uses interest. A flat fee is a fixed dollar amount — say $25 or $50 — tacked onto the balance once the grace period expires, regardless of how long the invoice sits unpaid. Easy to calculate, easy for the client to understand, but the pressure to pay quickly disappears the moment the fee triggers. Someone 10 days late owes the same penalty as someone 90 days late.
Percentage-based charges grow with time, which pushes clients toward faster payment and covers more of your cost for carrying the balance. Some agreements combine the two: a one-time flat charge for missing the deadline plus interest that accrues until the invoice is paid. If you combine them, the total still has to stay within the legal ceiling.
What Rate You Can Legally Charge
Every state has usury laws that cap interest rates, and the caps vary widely. Depending on the transaction type and who the parties are, state ceilings run from around 5% to over 25% annually. Consumer transactions generally face tighter caps than commercial ones, where the parties have more room to negotiate.
Federal law generally does not preempt state limits on late charges. Even where federal rules override state usury caps for certain mortgage products, those rules expressly preserve state-law limits on late charges and related borrower protections. For federally regulated manufactured housing loans, late charges cannot exceed 5% of the unpaid installment and cannot be assessed until at least 15 days after the due date.1eCFR. 12 CFR Part 190 – Preemption of State Usury Laws
Setting a rate above your state’s cap has real consequences. A court may void the late fee provision, cut the interest down to the legal maximum, or in some states impose civil penalties on the creditor. Criminal usury statutes exist in some jurisdictions too, though those typically target lending arrangements rather than ordinary trade invoices.
Making the Late Fee Enforceable
A late fee is only as strong as the contract behind it. Your agreement should state the exact rate or flat amount, when it begins to accrue, and whether a grace period applies. Both sides need to agree to these terms before work begins. Adding late fee language to an invoice after the fact, without prior agreement, makes the charge much harder to enforce.
If your contract is silent, you are not necessarily without recourse. Most states have a default “legal rate” of interest that applies when no rate is specified. These statutory rates tend to be modest, often between 4% and 10% annually, and they vary by state. For debts owed to the federal government, the default rate for 2026 is 4%, with interest waived if the debt is paid within 30 days of notice.2Office of the Law Revision Counsel. 31 U.S. Code 3717 – Interest and Penalty on Claims
When the Clock Starts
Your payment terms decide when the invoice becomes overdue. Net 30 means 30 days after the invoice date; Net 15 and Net 60 work the same way. The late fee clock starts the day after that deadline.
No federal law requires a grace period for business-to-business invoices. Some states impose minimum grace periods, typically 5 to 15 days, before a late fee can be legally assessed. These are more common in rental and consumer lending contexts than in general commercial invoicing, but they can apply depending on the type of transaction, so check your state’s rules before you build a contract with no grace period at all.
Simple vs. Compound Interest
Most states follow a longstanding rule against compound interest — you generally cannot charge interest on accumulated, unpaid interest — unless the contract specifically authorizes it and state law permits it. The idea behind the restriction is to keep debts from growing faster than the debtor can reasonably track or pay.
For commercial invoices, simple interest is the safe default. If you want to compound (rolling unpaid monthly interest into the principal, for example), check your state’s usury statute carefully. Even where compounding is allowed by agreement, the effective rate created by the compounding still has to stay under the usury ceiling.
One exception worth knowing: the federal Prompt Payment Act allows compounding on late government payments. Any interest penalty left unpaid after 30 days is added to the principal, and interest accrues on the increased amount going forward.3Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties
How Partial Payments Apply
When a client sends a partial payment on an overdue invoice, the order of application matters. The general rule in most credit contexts is that payments hit accrued interest and fees first, then reduce the principal. So a partial payment may knock out the late fee and some interest without touching the invoice amount itself, and interest keeps accruing on the remaining principal.
Your contract can override that order and set a different application method. If the agreement is silent, follow your state’s default rule, which typically puts interest and fees ahead of principal. Whichever method you use, document the allocation on every receipt or statement so both sides can reconcile their records.
Adding the Fee to a Revised Invoice
Once you have the number, reissue the invoice with the original charges and the penalty on separate lines. Label the addition clearly (“Late Payment Fee” or “Interest on Overdue Balance”) and include the date range of the delinquency and the rate you applied. That transparency heads off disputes and lets the client verify the math.
Deliver the revised invoice through a method that creates proof of receipt: certified mail with a return receipt, a tracked email with read confirmation, or a billing platform that logs delivery. A short follow-up message confirming receipt often prompts faster payment and gives you an opening to discuss a payment plan if the client is genuinely struggling. Keep copies of every communication. If the debt eventually goes to court or a collection agency, the paper trail is what protects you.
Consumer Credit and Government Invoices Are Different
The rules above assume ordinary business-to-business invoicing. Two situations follow separate rules.
If you extend revolving credit to consumers, federal disclosure requirements attach. Under the Truth in Lending Act, a credit card periodic statement must conspicuously show the payment due date and the exact amount of the late fee. If a late payment could trigger a higher annual percentage rate, that fact and the penalty rate must appear near the due date on the statement.4Office of the Law Revision Counsel. 15 U.S. Code 1637 – Open End Consumer Credit Plans Federal law also requires a minimum 21-day window: a card issuer cannot treat a payment as late unless it mailed or delivered the periodic statement at least 21 days before the due date.5Office of the Law Revision Counsel. 15 U.S. Code 1666b – Timing of Payments
If you invoice a federal agency, you do not need to negotiate a late fee at all. The Prompt Payment Act entitles you to automatic interest when the government pays late, starting the day after the required payment date, typically 30 days after the agency receives a proper invoice.3Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties The rate is set by the Treasury and published twice a year in the Federal Register.6Federal Register. Prompt Payment Interest Rate; Contract Disputes Act
Tax Treatment
Late fees you collect count as taxable income. The Internal Revenue Code defines gross income broadly and specifically includes interest.7Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined Whether you structure the charge as a flat fee or interest, it is business revenue in the year you receive it, or the year it accrues if you use accrual accounting.
Late fees you pay to your own vendors are generally deductible as ordinary business expenses. Federal tax rules disallow deductions for fines and penalties paid to government entities for legal violations, but that restriction does not apply to payments between private parties in a commercial relationship.8eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts A vendor’s late charge under a supply contract is a cost of doing business, not a government-imposed penalty.