Payable in arrears means an amount falls due after the period, the work or the goods it pays for, rather than in advance. The bare word arrears carries a second and separate meaning: an amount still unpaid once its due date has gone by, which is what a mortgage in arrears or child support arrears describes. The first is a schedule agreed at the outset, the second is a default, and only the document the words sit in tells you which is meant.
Arrears as a Timing Convention
In this sense the word says only that the money moves at the back end of the period. One standard federal clause, used for regulated communication services bought from common carriers, writes the convention in: the Government shall pay the Contractor, in arrears, upon submission of invoices for services and facilities furnished (FAR 52.232-6). The service comes first, then the invoice, then the payment.
Loan interest, utilities, service contracts and payroll commonly run this way, and nothing about the arrangement is late. Paying in advance is the alternative, and there the money moves before the work does.
Arrears as an Amount Past Due
Here the word means the payment did not arrive on time and the shortfall is still outstanding. Mortgage servicing uses it exactly that way, and the single family mortgage insurance rules let the mortgage provide for the mortgagee to collect a late charge, capped at four per cent of the amount of each payment more than 15 days in arrears (eCFR, section 203.25).
Child support carries the same sense under its own label. Where a state imposes a late payment fee on overdue support, that fee accrues as arrearages accumulate and is not reduced upon partial payment of arrears (eCFR, section 302.75).
Where Billing in Arrears Lands in the Close
A supplier that bills a month in arrears is the ordinary reason a cost sits in one period and its invoice in the next, and that gap is one of the ordinary reasons the close carries an accrual. The entry, the balance it leaves and the reversal that clears it are set out in accruals. When the invoice finally lands, the accrued balance is replaced by a payable and trued up to the invoice, because a payable is keyed from a document the supplier sent while an accrued liability is the business’s own estimate (accounts payable).
The invoice date does not set the deduction year either. For an accrual-method taxpayer the year turns on the all events test, which asks when the fact of the liability was established and its amount became determinable, and on economic performance, rather than on the date the bill arrived (26 CFR 1.461-1(a)(2)(i)), and both tests are worked through in incurred. A December cost billed in January can still be a December deduction, because the invoice is evidence rather than the trigger.
Payroll Paid in Arrears
Payroll paid in arrears means the pay date sits after the end of the pay period it covers, so hours are worked, then counted, then paid. Federal overtime rules assume that sequence, and the general rule is that overtime compensation earned in a particular workweek must be paid on the regular pay day for the period in which such workweek ends (eCFR, section 778.106).
Payday frequency is set by state law rather than by a federal payday statute, and each state’s requirement is listed by the Department of Labor (U.S. Department of Labor, State Payday Requirements), and what a given frequency then does to a payroll bill is set out in payroll outsourcing cost. Until the run settles, the wages sitting between the period end and the pay date are a liability on the books, and how that balance is stated is set out in net payable.
What Payable in Arrears Is Not
It is not delinquency. An invoice payable in arrears is on schedule right up until its own due date passes, which is the point at which the second sense of the word takes over.
It is not the payable period, which is a days count measuring what actually happened under the arrangement. A business can buy on terms billed in arrears and still pay early.
It is not an accrual. Arrears describes when cash is due, and an accrual is the entry that puts a cost in its own period before the cash moves at all.
Common Questions
Your pay date falls after the period you are being paid for, so the check covers work already done. That is why the first payment at a new job comes after the first pay period has closed rather than at the start of it.
The supplier delivered first and invoiced afterward, so the bill covers a period that has already ended. On the buyer’s books the cost belongs to the period the work happened in, not the period the invoice showed up in.
California writes an example into statute. Labor performed between the 1st and 15th days of a calendar month shall be paid for between the 16th and the 26th day of that month (California Labor Code section 204). Under that semimonthly schedule, work done on the 1st is not paid until the 16th at the earliest, and that stretch is the arrears.
The payment at the end of a period covers interest that built up during that period, so the borrower is paying for time already used rather than time still to come. How that build-up is measured and posted before the payment date arrives is set out in accrued interest.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own payables and period-end cutoff work through a trial task before anything client facing depends on it.
