How to Process an Advance to a Contractor

Let’s say you have a contractor who regularly provides services to your company and she has requested an advance of $200 on her future services. Two weeks later she submits a request to be paid for $400 for services performed.

This post details how to process this scenario in Quickbooks Online . It will meet the following requirements:

• The advance is reflected as an asset — like accounts receivable — in the company’s books.
• The advance, once paid back in services, is counted towards reportable income to the contractor on their year-end 1099.
• The amount of the outstanding advance is visible to the company so when processing the re-payment they know how much is outstanding.

Set Up

• Holding Account: If you don’t already have one, create an Other Current Asset account named “Contractor Advances.” This account will hold the advance amount. When it’s paid back, this account balance should be 0 for that contractor.

• Custom Report: Create a Custom Report to display the balances by Vendor. Note: Your contractor is considered a Vendor in QB parlance.
• This gives you a way to see what balance is left when it comes time to pay the contractor for their services performed.

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Pay Advance to Contractor

1. Write a check to the Contractor.
2. In the Category drop-down select the Contractor Advances account.
3. In the amount enter the advance amount. In our scenario we’d enter $200.

Results:

• A $200 check is written to the contractor.
• The Contractor Advances Account has a $200 balance and displays on your Balance Sheet as an asset.

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Contractor Provides Services Toward Advance

Two weeks later the contractor advises they’ve provided $400 in services.

Let’s assume you’ve forgotten how much you advanced them. To remind yourself, run the Advances to Contractors Report. It will show a $200 balance.

1. Write a check to the Contractor.
2. On the first line item, in the Category drop-down, select the account you use to report monies paid to contractors.
3. In the Amount field enter 400.
4. On the second line item, in the Category drop-down, select the Contractor Advances Account.
5. In the Amount field enter -200.00. The net check is now $200.

Results:

• A $200 check is written to the contractor.
• $400 has been added to the contractor’s 1099 tracking account.
• The Contractor Advances Account balance is 0.