You turned down two other projects to hold six weeks open for a client. Then, a week before kickoff, the email arrives: priorities shifted, the project is on hold indefinitely. No work done, no invoice sent, no money coming — and the calendar slots you protected are now worthless. If that scenario makes your stomach drop, your contracts are missing a kill fee.
A kill fee is a cancellation payment your client owes when they end a project early or before it starts, through no fault of yours. It compensates you for the two things a cancellation actually costs: the work you already did, and the opportunity cost of time you reserved and can no longer sell. This guide covers when you need one, how to price it, how to negotiate it without souring the relationship, and how to report killed-project income on your taxes.
What a Kill Fee Actually Is
The term comes from publishing, where a magazine pays a writer a kill fee when an editor accepts a story but the publication never runs it. The writer did the work, the decision to kill it was not the writer's fault, and the fee splits the difference between full payment and nothing.
In freelance and consulting contracts, the concept is broader. A kill fee clause answers one question in advance: if the client cancels, what do they owe you? Without a written answer, you are negotiating from weakness after the fact, when the client has zero incentive to pay. With one, cancellation becomes a routine contract term instead of a confrontation.
A good clause covers three distinct situations:
- Cancellation before work starts. You reserved time and possibly turned away other clients. The fee compensates pure opportunity cost.
- Cancellation mid-project. You are owed payment for completed work plus a fee on the remaining value for the disruption and the suddenly empty pipeline.
- Cancellation near completion. At this point you have done nearly all the work, so the fee should approach full payment for what remains.
When You Need One (and When You Don't)
A kill fee matters most in two situations. First, when a client asks you to commit to a fixed block of time — hourly or fixed-fee paid in stages — but cannot guarantee the work will last the whole period. Without a clause, you are committing your calendar and risking that an early cancellation leaves you with nothing for the reserved weeks.
Second, when the project starts well after you sign. If kickoff is a month or more out, plenty can happen in between: budgets get cut, sponsors leave, priorities change. You held the time; the client held an option. A kill fee prices that option.
There is one situation where a kill fee does not apply: finishing early. If you complete all the scoped work ahead of schedule, that is a success, not a cancellation — which is one more reason to define the scope of work precisely in the contract. Look for follow-on work with that client or move on to the next project.
How to Price Your Kill Fee
Keep the fee reasonable. Demanding full payment for half the work will feel punitive to the client, and an unreasonable clause is one clients refuse to sign — or quietly ignore. The market has rough norms you can anchor to.
The standard percentages
For project-based work, these bands are widely used:
- 25% of the project total if the client cancels before work begins. This covers scheduling and opportunity cost.
- Payment for completed work plus 25 to 50% of the remaining value if the client cancels mid-project.
- 100% of the remaining value for short projects cancelled late, or work that is complete but unused.
For longer engagements, lean toward the lower end. On a six-month contract, 25% of the remaining value is far easier to collect than 50%, and a clause the client actually signs beats an aggressive one that kills the deal. On very short projects, full payment on cancellation is often accepted, especially when you have already incurred costs like travel.
Use a tiered scale for clarity
A sliding scale tied to timing removes argument about what "mid-project" means. Here is a template you can adapt:
Cancellation before the start date:
- More than 30 days before kickoff: 20% of the estimated project total
- 30 days or fewer before kickoff: 40% of the project total
Cancellation after work begins:
- Before the halfway point of the timeline: payment for work completed, plus 20% of the remaining total
- After the halfway point: payment for work completed, plus 40% of the remaining total
For fixed-fee projects, pro-rate by time worked — two months into an anticipated six is one-third of the project total earned. For long projects of six to twelve months, consider waiving the fee entirely if cancellation lands in the final month or two; generosity at the tail end makes the whole clause easier to sell.
If your project has no time frame, divide it into phases or milestones and attach the fee to each phase. A kill fee can feel unworkable for open-ended work, but phasing almost always fixes that.
Don't forget expenses
Non-recoverable costs belong in the clause alongside the percentage: flights, hotels, software licenses bought for the engagement, subcontractors you already engaged. Spell out that the client reimburses documented out-of-pocket expenses in addition to the fee. For short projects with heavy travel, the expense reimbursement alone can be the most valuable part of the clause.
How to Negotiate It Without Losing the Client
Many freelancers fear that raising cancellation terms signals distrust. In practice, the opposite is true: professionals expect professionals to have standard terms. Three techniques make the conversation easy.
Lead with the logic of commitment. If a client pushes back, point out that a fully committed client will never trigger the clause. The fee only activates if they walk away — so objecting to it is, politely framed, an admission of uncertainty. That reframe alone closes most negotiations.
Separate cancellation from non-performance. This distinction eases most client anxiety. Write into the contract — and say out loud — that the kill fee covers the client's voluntary cancellation only. If you fail to perform or breach the agreement, the client can terminate for cause and owes nothing beyond work already accepted. Conversely, if the client fails to meet its obligations (feedback deadlines, access, payment of prior milestones), you can terminate and bill in full for services performed. Symmetrical termination rights make the one-sided-looking fee feel fair.
Trade, don't cave. If the client balks at the percentage, lower it slightly rather than deleting the clause — or trade the fee for a larger upfront deposit. A client who refuses any cancellation term under any circumstances is telling you something important about how certain this project is. Dig into why before you sign.
Some contractors skip percentages and take a harder line: cancel after the start date through no fault of mine, and you owe the full amount. That is simple and occasionally appropriate for short bookings, but most clients will not sign it on anything substantial. The tiered approach collects more money in practice because it exists in the contract at all.
Deposits and Kill Fees Work as a Team
A kill fee is stronger when paired with an upfront deposit. They protect different moments: the deposit proves the client is serious before you reserve time, and the kill fee prices the cancellation if one happens. A common structure is 25 to 50% deposit to book the engagement, milestone payments as work progresses, and the kill-fee scale above covering whatever remains.
Two drafting cautions. First, label the deposit correctly. A true nonrefundable deposit — payment to reserve your availability — is yours to keep on cancellation. A refundable retainer held against future invoices generally must be returned to the extent it exceeds work performed. If you mean nonrefundable, say so explicitly and describe what it buys: reserved calendar time, not just future work.
Second, avoid double-dipping language. If the client paid a 30% deposit and then cancels before kickoff under a 20% tier, the contract should state clearly whether the deposit is credited against the kill fee or kept in addition to it. Crediting the deposit against the fee (keeping the greater of the two) reads as fair and is the easier clause to defend.
The Bookkeeping: Killed-Project Income Is Still Income
Here is the part freelancers get wrong most often: kill fees and retained deposits are taxable business income, not windfalls that fall outside the tax system.
Report everything on Schedule C. Kill fees, cancellation payments, and forfeited nonrefundable deposits are ordinary income from your freelance business. They go on Schedule C as gross receipts alongside your regular project fees, and they are subject to self-employment tax just like any other freelance dollar. There is no special "cancellation income" line and no exclusion for money earned without finishing the work.
Cash-basis timing is simple — and mostly unavoidable. Most freelancers use the cash method, which means advance payments are taxable in the year you receive them, not the year you earn them. A December deposit for January work is December income. Accrual-basis businesses can elect limited deferral of advance payments, but if you are a solo freelancer on the cash method, plan for the tax bill in the receipt year.
Track kill fees as their own line items. When a project dies, issue a separate invoice labeled as a cancellation or kill fee referencing the contract clause, rather than burying the amount in a vague final invoice. Keep the signed contract and the client's written cancellation notice with your records. Clean paper trails matter twice: they support the income on your return, and they are your evidence if the client disputes the charge.
Expect a 1099-NEC only sometimes — but report regardless. Clients report payments to contractors on Form 1099-NEC once total payments for the year cross the reporting threshold ($2,000 for 2026 under current law). A small kill fee from a client who paid you little else may never generate a form. That changes nothing about your obligation: all freelance income is reportable whether or not anyone sends you paperwork. Reconcile every 1099-NEC against your own invoices at tax time, because clients do make errors — especially on unusual payments like cancellation fees.
Refunded deposits are not income. Only money you keep counts. If you return a deposit, it never belonged on your return; if you keep part and refund part, only the retained portion is gross receipts. This is another reason to keep deposits, kill fees, and regular invoices in distinct ledger accounts instead of one undifferentiated income pile.
Separating these streams takes seconds per transaction if your books are organized — one income account per type, one folder per client. If you want that structure without spreadsheet sprawl, the docs walk through setting up a plain-text ledger where every client's deposits, milestone payments, and cancellation fees stay individually traceable.
Mistakes That Leave You Unpaid
- No written contract at all. An oral agreement makes every cancellation a story contest. In New York City and New York State, the Freelance Isn't Free Act already requires written contracts for freelance engagements over $800 and payment within 30 days of completion, with double damages for violations — but even where no such law applies, a signed contract is what turns your kill fee from a hope into an enforceable term.
- A vague cancellation sentence. "Cancellation fees may apply" applies nothing. Name the trigger, the percentages, the measurement dates, and how deposits interact with the fee.
- Forgetting expenses and subcontractors. If you engaged help or booked travel, the clause should say the client covers documented costs on top of the fee.
- Treating retained deposits as tax-free. The IRS treats money you keep for reserving your time as payment for your services. Budget for income and self-employment tax on every retained dollar.
- Invoicing kills late. Send the cancellation invoice immediately, while the client's budget owner still remembers the project. A kill fee invoiced three months later competes with everyone's fading memory.
A Sample Clause to Adapt
Short clauses get signed. Here is a starting point — adjust the numbers to your practice, and have a local attorney review anything you use regularly:
Cancellation. If Client cancels the project for any reason other than Freelancer's material breach, Client shall pay (a) all fees for work completed through the cancellation date, (b) documented non-recoverable expenses, and (c) a cancellation fee of 25% of the remaining project value if cancelled before the start date, or 25% of the remaining value plus completed work if cancelled after work begins. Any deposit paid shall be credited against amounts due under this section. Either party may terminate for the other party's material breach with 10 days' written notice and opportunity to cure.
Pair it with a clear scope of work, a payment schedule, and a definition of what counts as "completed work" (accepted deliverables? hours logged? milestones passed?), and you have covered the vast majority of cancellation disputes before they start.
Keep Your Freelance Finances Organized From Day One
As you tighten up your contracts, give the same attention to the money flowing through them — deposits received, milestones billed, kill fees collected, and the tax each dollar carries. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
