Tax and managerial implications surrounding professional service retainers

Question

I am a software engineer that has several clients that need me to do simple ad hoc tasks throughout the year for various projects. I have began considering setting up a retainer-based service for them where they would pay money into a retainer account for a specific project, and if I don't bill enough time to earn all of the retainer, then I would refund the unearned portion.
My concerns:

do retainers typically go through a 3rd party the same way escrow does? or would I just manage the retainer myself in one of my own business accounts?
can retainers be used for purchasing supplies, renting servers, purchasing licenses, "business expenses" related to the project, etc. or are they only allowed for use w.r.t. billable time?
from a tax perspective, are there different tax rates, terms, forms, etc. that I would need to submit each year at "tax time" for operating this way (using retainers)?
any other caveats or pitfalls I should be aware of before going down this route?

Orange Coast- reinstate Monica · Answer

You aren't regulated like an attorney. You and your client can set up whatever arrangement is mutually convenient.
E.g., a $5000 up-front payment is required to start. You then invoice your hours and expenses to the client until it dips below $1000, at which point you notify them to pay another $5000. You agree to return unused deposited money whenever the client asks, of course stopping work at that point until a new $5,000 is deposited with you.

Tax and managerial implications surrounding professional service retainers

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