What Is Self-Billing: A Full Guide to Buyer-Created Invoices

To understand what self-billing is, we should take a look at the standard process of invoicing. Traditionally, a supplier sends an invoice to a customer, requesting payment for goods or services. Self-billing flips this process and involves an arrangement where a customer sends both an invoice and a payment.

In this article, we’ll explain exactly what self-billing is and how it works. We’ll also look at the biggest pros and cons of self-billing, show you how to avoid the most common mistakes, and discuss alternatives for this method of invoicing.

Key Takeaways

• Self-billing is an invoicing process opposite to a traditional arrangement, since the buyer creates an invoice and sends it to the supplier along with the payment.
• For self-billing to work, the buyer and the supplier need to create a detailed and well-written agreement up front.
• There are numerous benefits to self-billing, including reduced administrative work, improved accuracy and consistency, expedited payment processing, and simplified tax reporting.
• Some of the drawbacks of self-billing include loss of control over invoicing for suppliers, an increased need for trust among the parties, and risks of noncompliance.
• Good alternatives to self-billing include standard invoicing, online invoice generators like the one at Paystubs.org, and automated billing solutions.

What Is Self-Billing?

By definition, self-billing is a financial arrangement between a supplier and a customer where a customer sends an invoice along with the payment. This is the opposite of the traditional invoicing process, where a supplier sends an invoice to the buyer as a request for payment.

This approach is common in industries where buyers have complete knowledge of all the information related to transactions. For instance, that makes them common with recurring invoices for repeat services or orders of goods. Another common use for self-billing is when the exact quantity of goods is determined upon delivery.

Self-billing is a legal practice, but both parties need to stick to an established self-billing agreement and comply with relevant regulations and tax laws. It’s frequently used in business-to-business (B2B) transactions with large volumes of orders and frequent exchanges. This includes work with subcontractors, supply chains, and even freelancers.

What Goes on a Self-Billing Invoice?

A self-billing invoice mostly matches a traditional one, however, there are some differences. For starters, it needs to be clearly marked with the words “Self-Billing” or “Self-Billed” to specify what type of invoice it is.

Following that, here are the key elements of a self-billing invoice:

• The names and contact information of the client and the supplier.
• A unique invoice number used for identification and record keeping.
• The date of issuing and transaction.
• Tax registration numbers (e.g., VAT or GST numbers) for both parties, when applicable.
• An itemized list of goods or services with clear descriptions, quantities, rates, and prices.
• Subtotal and applicable taxes.
• Total amount due.
• Payment terms, including a due date or net terms, payment methods, currencies for international invoices, late fees, etc.
• (Optional) Additional notes.

Differences Between Self-Billing and Traditional Invoicing

The table below shows a simple breakdown of the main differences between self-billing and traditional invoicing:

How Does Self-Billing Work?

Self-billing works by creating a structured process backed by mutual agreement, which results in streamlined payments. It’s an efficiency-focused arrangement between a buyer and a seller that provides benefits to both of them.

On the one hand, self-billing enables a consistent influx of goods or services for the client. On the other hand, it enhances the cash flow for the supplier.

However, for self-billing to work smoothly and efficiently, it’s essential to establish a secure and legally-compliant system upfront. This requires transparent communication and a strong relationship between the client and the supplier, as well as proficiency in all relevant laws and regulations.

Here are the three typical steps of a self-billing process:

• Supplier and buyer agree to the terms. This is the foundational step that typically involves a written contract. The contract will detail all the specifics relevant to self-billing, such as the amount of goods or the scope of services, frequency, payment terms, procedures for handling invoice disputes, and so on.

• The buyer generates the invoice. Once the goods have been delivered or services have been rendered, the customer generates an invoice on the supplier’s behalf. This buyer-created invoice is based on a previously signed contract, and it should accurately describe the current transaction.

• The supplier accepts the invoice and the payment. The buyer sends the completed self-billing invoice to the supplier for review and approval. The supplier needs to verify that the invoice correctly describes the goods sold or services provided, after which they will process the payment according to the initial agreement.

3 Key Benefits of Self-Billing for Businesses and Freelancers

Self-billing is an established method of invoicing that has many advantages for both customers and suppliers. Let’s see the most significant ones.

#1. Reduced Admin Work for Suppliers

One of the biggest benefits of self-billing is a significant reduction in administrative tasks and invoice management for suppliers. Since the responsibility for creating professional and accurate invoices shifts to the client, the supplier only needs to verify the validity of these documents and to process payments.

This saves a lot of time and work hours (especially with large companies that handle significant volumes of invoices), which can then be redirected toward core business operations.

#2. Accuracy and Consistency

Self-billing invoices are generally made once all the details (e.g., timesheets, rates, or accepted goods) are already known and pre-approved by both the supplier and the buyer. This reduces the risk of error when inputting rates and descriptions or calculating subtotals and totals.

Moreover, customers typically use templates for self-billing invoices, which ensures a consistent format. This further simplifies administrative processes as it makes verification streamlined and record-keeping effortless. The consistency also helps reduce the need for corrections, and it minimizes instances of disputes.

#3. Faster Payment Processing

Since self-billing is a much more streamlined version of supplier invoicing, it positively affects the billing cycle as well. Considering the goods or services have already been delivered at the time of making an invoice, the buyer can issue the payment, and the supplier can process it almost immediately.

This eliminates delays associated with traditional invoicing, where a buyer needs to wait for an invoice. Only after receiving it, they can begin the payment process in compliance with the payment terms and due dates.

#4. Simplified VAT/GST Reporting in Some Jurisdictions

Self-billing can significantly simplify tax reporting in jurisdictions where VAT (Value-Added Tax) and GST (Goods and Services Tax) apply.

When properly set up, VAT and self-billing go hand-in-hand, since invoices can be valid as VAT invoices. This means the customer can reclaim input tax as part of their VAT return, while the supplier will account for the output tax.

Common Drawbacks and Risks of Self-Billing

While self-billing offers many benefits, it also comes with some downsides. You need to be aware of them before setting up this kind of arrangement.

#1. Loss of Control Over Invoices for Suppliers

One of the biggest risks for suppliers is that they don’t have direct control over the invoices. Instead, they are trusting their clients and rely on them to generate and issue accurate invoices in a timely manner.

This dependence means that any mistakes or delays on the buyer’s end result in complications for the supplier. The most direct consequence is a negative impact on their cash flow. The problems can escalate further and result in additional financial issues and problems with record-keeping.

#2. Trust Issues and Legal Requirements

For self-billing to succeed long-term, it needs to be built on open communication and trust between the buyer and the supplier. A formal agreement is essential for this type of collaboration to succeed. It also needs to be well-written and precisely defined to ensure no concerns and disputes arise over supply, delivery, pricing, or any other aspect.

Achieving that typically requires a lot of work and communication upfront. Plus, there’s always the risk of one party breaking the trust down the line.

#3. Compliance Risks

Legal and tax compliance for self-billing is typically more complex than with regular invoicing. If a buyer makes a mistake while generating an invoice, the consequences can be severe for both parties.

For example, a self-billing invoice with incorrect details can make the buyer unable to recover input tax while still leaving the supplier liable for the output tax.

#4. Not Suitable for Every Business Model

Self-billing isn’t a one-size-fits-all invoicing model. Its strengths are best utilized with large volumes of invoices and regular transactions among partners with established relationships.

For professionals and businesses that deal with irregular or highly customized orders, the cost of setting up self-billing arrangements can far outweigh the benefits.

How to Avoid Common Self-Billing Mistakes

Let’s examine three of the most common self-billing mistakes you need to avoid if you want to minimize the drawbacks:

• Vague agreements. Self-billing agreements represent the foundation for collaboration and invoicing. Poorly drafted agreements and contracts leave room for mistakes and disputes, which can harm both the buyer and the supplier. That’s why it’s essential to clearly define all important aspects, like responsibilities, procedures, and tax treatment.

• Incorrect tax information. Applying wrong tax rates or including incorrect tax numbers are common mistakes in invoicing that can lead to payment delays and financial penalties. While the buyer is responsible for entering this information and generating an invoice, the supplier needs to validate everything to confirm the accuracy.

• Poor communication and record-keeping. While self-billing is meant to streamline invoicing and payment processes, it still requires an open and ongoing communication between the buyer and the supplier. Moreover, both parties need to keep meticulous records and all documents in case of mistakes or audits by government bodies.

Top Alternatives to Self-Billing for Businesses and Freelancers

When comparing self-billing vs. invoicing, the former offers some clear advantages. Still, it’s not the only solution or the best one for every situation, which is why it’s essential to familiarize yourself with the alternatives.

Here are the three most common alternatives to a self-billing arrangement:

• Standard invoicing. This is a typical invoicing method, where the service provider or supplier creates an invoice to send to their customer. It gives them full control over the process and requires very little upfront arrangement. The invoice must have all the necessary details and information needed for the client to make a payment.

• Online invoice generators. Online invoice generators streamline the process of invoicing by enabling suppliers to create them much faster and to avoid making mistakes. For instance, Paystub.org’s invoice generator offers several professional templates to choose from, and it automatically calculates subtotals, taxes, and totals based on your inputs.

• Automated billing solutions. Busy freelancers and small businesses who experience larger volumes of invoices may automate billing processes without resorting to self-billing. Many platforms can handle everything from invoice generation to tracking, sending reminders, and processing payments.

Final Thoughts

Self-billing is a convenient arrangement between a buyer and a seller that offers multiple benefits for both parties. It requires transparent communication, trust, and a well-written upfront agreement to set up, but the reward is a streamlined invoice process and reduced administrative burden.

It’s important to keep in mind that self-billing isn’t always the optimal solution, as sometimes the work required to prepare it outweighs the benefits. In these cases, it’s often best to resort to traditional invoicing or automated systems.

Don’t forget to try Paystub.org’s invoice generator, which is perfect if you need an intuitive and professional solution for invoicing for contractors, freelancers, and small businesses.

What is Self-Billing FAQ

#1. How are taxes handled in a self-billing arrangement?

In a self-billing arrangement, the customer is responsible for applying the correct taxes, calculating them accurately, and adding them to the invoice. However, the supplier remains responsible for reporting and paying the tax to the relevant authorities.

#2. Is self-billing legal and accepted for tax purposes?

Yes, self-billing is legal and accepted for tax purposes, as long as it is set up and utilized correctly. A self-billing invoice is only valid if it is a part of a formal agreement between the involved parties and if it contains all the necessary information.

#3. Can self-billing be used for freelancers and contractors?

Self-billing can be used for freelancers and contractors, typically when they have ongoing relationships with clients, with recurring invoices. In these cases, self-billing simplifies administrative processes for contractors (which is especially important if they don’t have dedicated accounting departments) and ensures timely payments.