Late fees on invoices in the US: what you can charge and how to state it

The rule: a late fee must be agreed in advance.

Under US contract law a late fee is a term of the contract like any other. It binds the client only if the client accepted it before or at the time of the deal: in a signed agreement, in terms accepted when approving a proposal, or through a course of dealing in which the client has paid such fees before. A fee that first appears on an overdue invoice or in a reminder is a proposal, not an obligation. Put the clause in your contract, repeat it on every invoice, and cite it in your past due notice.

Two limits sit on top of the agreement. First, courts treat a fixed late fee as liquidated damages: it must be a reasonable estimate of what late payment costs you, or a court can strike it as a penalty. California’s Civil Code §1671, for example, presumes a liquidated damages clause in a business contract valid unless the party challenging it proves it was unreasonable when the contract was made, and voids most such clauses in consumer contracts. Second, interest-style fees can run into state usury statutes, which cap the interest rate on loans and, in some states, on other extensions of credit. Trade credit on an invoice is not a loan, and several states treat a late charge as something other than interest, but the analysis differs by state. Three examples, according to the statutes themselves:

• California: the state constitution (Article XV, §1) caps interest on loans for personal, family or household purposes at 10 percent a year, with a separate ceiling for other loans. Where a contract sets no rate, Civil Code §3289 provides 10 percent a year after a breach. Late charges in business contracts are judged under the liquidated-damages rule above rather than the usury cap, but a fee that works like interest invites the comparison.
• New York: the civil usury rate is 16 percent a year (General Obligations Law §5-501 with Banking Law §14-a), and interest above 25 percent a year is criminal usury (Penal Law §190.40). A corporate debtor generally cannot raise civil usury as a defense (General Obligations Law §5-521), but the criminal limit still applies.
• Texas: the maximum interest rate is 10 percent a year unless another law allows more (Finance Code §302.001). If nothing was agreed, Finance Code §302.002 lets a creditor charge legal interest of 6 percent a year starting on the 30th day after the amount is due, the closest thing to a statutory default among these three states.

If your state is not listed, check your state’s usury statute and the attorney general’s consumer pages before you set a rate, and keep the fee moderate. A rate of 1.5 percent per month is 18 percent a year, which is above Texas’s 10 percent general ceiling (other provisions can allow more) and below New York’s 16 percent; a flat fee avoids the interest question entirely.

How much to charge.

Common practice among US service businesses is 1 to 1.5 percent per month on the unpaid balance, which is 12 to 18 percent a year, or a modest flat fee per invoice, or both. The figure is custom, not law. Pick a rate you can justify as covering your cost: the time you spend chasing, the interest on the credit line you draw while you wait, and the risk of not being paid at all.

Worked example: an invoice of $2,000, a late fee of 1.5 percent per month, paid 45 days late. One month at 1.5 percent is $30, which is $1 per day on a 30-day month, so 45 days × $1 = $45. The same rate written annually is 18 percent, and $2,000 × 18% × 45 ÷ 365 comes to $44.38. Both methods are defensible; say on the invoice which one you use. Our late payment interest calculator does the math for any amount, rate and date range.

Wording for contracts and invoices.

The clause needs four things: the trigger, the rate or amount, the basis, and when it starts. Keep the same language in the contract, on the quote and on every invoice. Example wording to adapt:

• For the contract: “Payment is due within 30 days of the invoice date. Balances not paid within 10 days after the due date accrue a late fee of 1.5% per month (18% per year), prorated daily from the due date until paid in full. Client agrees that this fee is a reasonable estimate of the costs of late payment. Client is also responsible for reasonable collection costs, including court costs, to the extent permitted by law.”
• For the invoice: “Terms: Net 30. Due [date]. A late fee of 1.5% per month applies to balances unpaid 10 days after the due date, as agreed in our contract dated [date].”

Say “per month” or “per year,” never both without the conversion, and never “per day” unless you mean a daily rate; a daily percentage on an invoice reads as a penalty in any courtroom. If you charge a flat fee, state the amount and the day it applies.

Grace periods.

A grace period is the number of days after the due date before the fee starts. Common choices are none, 5 days or 10 days. A short grace period keeps the fee from firing on a check that is in the mail, which makes it easier to enforce without an argument. A grace period does not move the due date: the invoice is past due on day one, your reminder cadence starts then, and the fee simply begins later. State the grace period in the clause itself rather than relying on a setting in your invoicing software, so the client has agreed to it.

Monthly interest or a flat fee?

Monthly interest scales with the invoice and the delay, so it fits larger project invoices and long delays, but it is also the format most exposed to usury arguments and the hardest for a client to check. A flat fee, say $25 or $50 per invoice, is easy to apply and hard to argue with on a $500 invoice, but it looks like a penalty when it is out of proportion to a small invoice or a two-day delay. Many contracts combine the two: a flat administrative fee once the invoice is more than a set number of days late, plus monthly interest until it is paid. Whatever you choose, apply it consistently. Waiving the fee for everyone who complains tells clients it is optional, and charging it to some clients but not others invites accusations of unfair treatment.

Government clients: the Prompt Payment Act.

Invoices to federal agencies are the exception to “no statutory interest.” The federal Prompt Payment Act (31 U.S.C. §3901 and following) requires agencies to pay a proper invoice within 30 days of receipt unless the contract sets another date, and to pay interest automatically when they are late (5 CFR 1315.4). The rate is set by the Treasury every six months; for July 1 to December 31, 2026 it is 4.75% a year, according to the Bureau of the Fiscal Service (fiscal.treasury.gov). You do not need a late-fee clause for this; the statute supplies it.

Most states have their own prompt payment acts for state and local government contracts, many of them written for construction, with their own deadlines, interest rates and notice requirements that vary widely from state to state. If you contract with a state agency, a county or a school district, look up that state’s prompt payment statute before invoicing: some require specific language on the invoice to preserve the right to interest, and some make the right non-waivable.

Where Dunlio fits.

Dunlio does not calculate or add late fees. It sends the reminders that reference them. The three stages, friendly reminder, past due notice and final notice, leave room for the fee your contract states, and you fill in the rate or amount in the template once. Reminders go out on weekdays after the due date, manually or automatically, with delivery tracking per message. Invoices come in by CSV from whatever tool you bill with, or you write them in Dunlio; it does not collect payments. Free during early access, then Solo $9 or Team $19 per month, no contract. The reminder templates and the demand letter are in our guides.