Apply the discount first, then calculate tax on the reduced amount. That's the standard order on invoices in virtually every tax system: a discount agreed at the time of sale reduces the price of the sale, and tax is charged on what the customer actually pays — the taxable base — not on the sticker price. Get the order wrong and your tax line is computed on money you never billed, which overstates the tax and hands your client's bookkeeper a reconciliation puzzle.
The standard order of operations
On a well-formed invoice, the bottom section runs:
- Subtotal — the sum of all line items at full rate.
- Discount — a percentage of the subtotal or a flat amount, shown as its own labeled row (e.g. "Discount (10%)"), subtracted from the subtotal.
- Tax — calculated on the discounted subtotal, shown with label and rate.
- Shipping or other charges — added where applicable (whether shipping itself is taxable varies by jurisdiction and what you're shipping; when it is, it belongs above the tax line instead).
- Total — what the client pays.
The principle behind step 2-before-step-3: tax authorities generally tax the consideration — the amount actually charged for the supply. A discount shown on the face of the invoice reduces that consideration, so it reduces the tax with it.
The math, worked once
Say you bill 2,000.00 of services, agreed a 10% discount, charge tax at 20%, and add 15.00 shipping:
| Step | Calculation | Amount |
|---|---|---|
| Subtotal | 2 × 1,000.00 | 2,000.00 |
| Discount (10%) | 2,000.00 × 0.10 | −200.00 |
| Taxable base | 2,000.00 − 200.00 | 1,800.00 |
| Tax (20%) | 1,800.00 × 0.20 | 360.00 |
| Shipping | flat | 15.00 |
| Total | 1,800.00 + 360.00 + 15.00 | 2,175.00 |
Compare the wrong order: tax on the full 2,000.00 would be 400.00 — you'd be showing 40.00 of tax on revenue you discounted away. Over a year of invoices, that's a systematically inflated tax line and a client-side accounting mismatch on every single document.
How InvoiceKo computes it
InvoiceKo applies exactly this order automatically: discount first (percent or flat, your choice), then tax on the discounted subtotal at whatever rate and label you set (GST, VAT, Sales Tax, or plain Tax), then shipping added after tax. You enter the line items, the discount, the rate, and the shipping amount — the arithmetic above happens for you, and the PDF shows each row separately so the client's finance team can verify it at a glance.
Example: discounted invoice with tax on the reduced base
A video editor giving a returning client 10% off. The discount reduces the subtotal first, VAT is calculated on the discounted amount, and shipping is added after tax.
When a "post-tax discount" is really a credit
Sometimes money comes off after the invoice is already issued — a goodwill gesture for a missed deadline, a negotiated settlement of a disputed bill, a volume rebate at quarter end. Resist the urge to knock it off the total of the next invoice or scribble a reduced amount on the old one. An after-the-fact reduction isn't an invoice discount; it's an adjustment to a document that already exists in both parties' books, and the tax shown on that document has to be corrected too.
The clean instrument for that is a credit note: a separate document referencing the original invoice number, showing the reduction and the corresponding tax reduction at the same rate. The client posts it against the original invoice, both sides' tax figures stay accurate, and the audit trail explains itself. Rule of thumb: if the reduction was agreed before you issued the invoice, it's a discount line on the invoice; if it was agreed after, it's a credit note.
Set the discount, tax, and shipping fields once in InvoiceKo's free invoice generator and the order of operations is handled for you — free, no signup, no watermark on the PDF. For how the tax line itself should be labeled and presented, see how to show tax on an invoice.
Tax rules vary and change — confirm the specifics with your accountant or local tax authority.