You know the rhythm. A client signs, a deposit hits your account, and your bank balance looks great. It isn’t income yet. Treating it like income is the single most common accounting mistake design firms make.
Client deposits (retainers, design-fee prepayments) are one of the most misunderstood line items in interior design accounting. Booked wrong, they inflate your profit, distort your tax bill, and hide a cash-flow problem until it has already happened.
This guide covers how to record deposits correctly, what changes when a deposit includes taxable merchandise, what happens when a project falls apart mid-stream, and a risk almost no one talks about: what happens when you’re juggling deposits from five clients at once.
The basics: a deposit is a liability, not income
When a client pays a deposit before you’ve delivered any work or product, that money isn’t yours yet. You still owe the client the work, the goods, or a refund. Until you’ve earned it, it lives on your balance sheet as a liability, not on your income statement as revenue.
Booking it correctly
Set up a liability account on your chart of accounts, commonly Client Deposits or Unearned Revenue, separate from your income accounts. When the deposit lands, it increases that liability, not revenue. As you complete milestones and invoice the client, you move the earned portion out of the liability and recognize it as design fee or product revenue.
The mistake that quietly overstates your profit
The common error is booking the deposit as income the day it lands. Do that across several projects at once and your P&L shows a business far more profitable, and far more taxable, than it actually is. You end up pricing and hiring off numbers that aren’t real, and depending on your entity, prepaying tax on income you haven’t earned.
The systems that make this easy to get right
- Use project-based software (QuickBooks Online Plus or above, Xero, or a design platform like Studio Designer) so every deposit, invoice, and cost ties to a specific project.
- Run an Open Client Deposits report next to your Accounts Receivable report every month. It shows exactly what you’ve collected but not yet applied to an invoice, project by project.
- Keep deposits in cash you can trace. Even without a separate account per client, know at all times how much of your balance is client money you haven’t earned.
A Bay Area design studio we work with collected deposits into the same operating account they used for payroll and vendor bills, then booked every deposit straight to income. Their P&L showed a healthy six-figure profit for the year. Once we reclassified roughly $180K in open deposits back to a liability and matched them to actual project completion, the real number was closer to half that. It changed their estimated tax payments, and more importantly, gave them an honest read on which projects were actually profitable. That’s the same job-level view we build in our project profitability work.
The part most guides skip: sales tax on deposits that include merchandise
Nearly every guide tells you to record deposits as a liability. Almost none address what happens when the deposit isn’t just a design fee. Often it’s a blended payment that also covers furniture, fixtures, or other goods you’ll resell to the client.
In California, standalone professional design services are generally not subject to sales tax. The furniture, fixtures, and other tangible goods you sell to a client generally are. One caveat worth stating plainly, because it trips people up: your design fees stop being nontaxable once they’re tied to a specific merchandise sale. We cover that fully in our guide to how California sales tax applies to design fees and merchandise. For deposits, the timing is what matters.
When a deposit is collected before specific taxable items are identified, invoiced, or delivered, the sales tax generally isn’t due when you collect the deposit. It becomes due when the sale is completed: when you invoice the specific taxable goods or deliver them, whichever your contract and accounting method point to.
This cuts both ways. Remit sales tax on the full deposit the day you receive it and you may be paying tax too early on goods that haven’t been selected yet, which you then have to unwind if scope changes. Fail to track which portion of a deposit will apply to taxable merchandise and you can under-collect, then owe use tax out of your own margin later. The fix is structural. Keep invoicing clean enough that design fees, merchandise, freight, and installation are always broken out separately, so the taxable and nontaxable portions of any deposit are traceable from day one.
California’s statewide base sales and use tax rate is 7.25% for 2026, with local district add-ons that vary by delivery address. The rate that eventually applies depends on where the furnishings are delivered, not where your studio sits. This area carries real penalty exposure if you get the timing wrong, so confirm your setup with a CPA who works with design firms rather than relying on general bookkeeping advice.
When a project falls apart: canceled and forfeited deposits
Deposits don’t always resolve into finished projects. When a client cancels and your contract lets you keep some or all of the deposit as a cancellation fee, that forfeited amount stops being a liability and becomes earned income. But only at the point the cancellation is final and the money is no longer refundable, not before.
If any portion of that forfeited deposit was tied to merchandise you never sold or delivered, you generally shouldn’t be remitting sales tax on it. Sales tax applies to completed sales of tangible goods, not to a cancellation fee for services or unperformed work. Keep the paper trail: the signed contract clause allowing you to retain the deposit, the cancellation notice, and a clear note in your books showing the move from liability to income. That documentation protects you if the client disputes the charge or your books get questioned at tax time.
The multi-project deposit trap
Here’s a risk specific to firms juggling several active clients. If all your deposits sit in one operating account and you’re not tracking them by project, it’s easy to spend Client A’s deposit covering a shortfall on Client B’s project without ever meaning to. Your bank balance looks fine. Your books, if you’re not careful, look fine too. But you’ve quietly created a situation where you owe more in client liabilities than you have in cash to cover them.
This isn’t a bookkeeping nicety. It’s a cash-flow trap that surfaces at the worst possible time, usually when two clients both hit a milestone invoice in the same month and there isn’t enough real cash to deliver on both. Reconcile your Open Client Deposits report against your actual bank balance monthly. That’s the simplest way to catch it before it becomes a real problem, even without a separate account per client.
Frequently Asked Questions
Should interior designers record client deposits as income or a liability?
A liability. A deposit is money owed back to the client as work, goods, or a refund until you’ve earned it by delivering the corresponding service or product. Record it in Client Deposits or Unearned Revenue, and move it to income only as you invoice completed work.
Do interior designers pay sales tax on client deposits?
Generally not when the deposit is collected, if it covers items or services not yet identified or delivered. Sales tax on the taxable portion (furniture, fixtures, other tangible goods) is generally due when the sale is completed, invoiced and delivered, not when the deposit arrives. Standalone design consultation is nontaxable in California, but design fees become taxable once they’re tied to a specific merchandise sale.
What happens to a client deposit if the project is canceled?
If your contract lets you keep some or all of it as a cancellation fee, that retained amount becomes earned income once the cancellation is final and the funds are non-refundable. Any portion tied to merchandise you never delivered generally shouldn’t have sales tax applied.
Do I need a separate bank account for client deposits?
It isn’t legally required for interior designers the way trust accounting is for some licensed professions, but it’s a strong best practice. At minimum, run an Open Client Deposits report monthly so you always know how much of your balance is client money you haven’t earned.
What accounting software works best for tracking interior design deposits?
Project-based software that tags every transaction to a specific client and job: QuickBooks Online Plus or above, Xero, or design platforms like Studio Designer. It makes deposits far easier to track, invoice against accurately, and read for true project profitability.
Get your deposit accounting right before it costs you
If you’re not sure how much of your current cash balance is actually client money you haven’t earned, that’s worth a conversation before your next tax filing, not after. Basta & Company works with interior design studios across California to set up clean project accounting, correct deposit tracking, and sales tax handling that holds up to scrutiny. If you want a CPA who specializes in interior design accounting, start here.
Book a call and we’ll walk through your books together.
