Earned Fee

What is an earned fee?

An earned fee is compensation that belongs to the service provider because the triggering work has been completed or conditions have been met. Before fees are earned, prepayments typically remain client property in trust. Once earned, fees can be transferred to operating accounts and recognized as revenue. The moment of earning depends on engagement terms, whether billing hourly, at milestones, or upon completion.

When fees become earned

Hourly fees are earned as time is worked. Fixed fees may be earned upon completion, at milestones, or immediately upon engagement depending on the agreement. Retainer structures specify when portions of the retainer convert to earned fees. Your engagement letter should clearly define earning triggers. Ambiguity about when fees are earned creates accounting uncertainty and potential disputes.

Earned fee implications

Earned fees can be deposited in operating accounts and used for firm expenses. They are taxable income when earned under your accounting method. Unearned fees held in trust create obligations you must track. If you withdraw unearned fees from trust, you have committed an ethical violation and possibly stolen client funds. Understanding the earned/unearned distinction is fundamental to proper trust accounting.