diff --git a/backend/models/Rental.js b/backend/models/Rental.js
index 9008330..fc4bb9b 100644
--- a/backend/models/Rental.js
+++ b/backend/models/Rental.js
@@ -64,15 +64,15 @@ const Rental = sequelize.define("Rental", {
       "damaged",
       "lost"
     ),
-    defaultValue: "pending",
+    allowNull: false,
   },
   paymentStatus: {
     type: DataTypes.ENUM("pending", "paid", "refunded", "not_required"),
-    defaultValue: "pending",
+    allowNull: false,
   },
   payoutStatus: {
-    type: DataTypes.ENUM("pending", "processing", "completed", "failed"),
-    defaultValue: "pending",
+    type: DataTypes.ENUM("pending", "completed", "failed"),
+    allowNull: true,
   },
   payoutProcessedAt: {
     type: DataTypes.DATE,
diff --git a/backend/routes/rentals.js b/backend/routes/rentals.js
index eac230b..a25d3f2 100644
--- a/backend/routes/rentals.js
+++ b/backend/routes/rentals.js
@@ -823,7 +823,7 @@ router.post("/:id/mark-completed", authenticateToken, async (req, res) => {
       });
     }
 
-    await rental.update({ status: "completed" });
+    await rental.update({ status: "completed", payoutStatus: "pending" });
 
     const updatedRental = await Rental.findByPk(rental.id, {
       include: [
@@ -1131,6 +1131,7 @@ router.post("/:id/mark-return", authenticateToken, async (req, res) => {
         // Item returned on time
         updatedRental = await rental.update({
           status: "completed",
+          payoutStatus: "pending",
           actualReturnDateTime: actualReturnDateTime || rental.endDateTime,
           notes: notes || null,
         });
@@ -1174,6 +1175,7 @@ router.post("/:id/mark-return", authenticateToken, async (req, res) => {
         // Item returned damaged
         const damageUpdates = {
           status: "damaged",
+          payoutStatus: "pending",
           actualReturnDateTime: actualReturnDateTime || rental.endDateTime,
           notes: notes || null,
         };
@@ -1217,6 +1219,7 @@ router.post("/:id/mark-return", authenticateToken, async (req, res) => {
         // Item reported as lost
         updatedRental = await rental.update({
           status: "lost",
+          payoutStatus: "pending",
           itemLostReportedAt: new Date(),
           notes: notes || null,
         });
diff --git a/backend/services/lateReturnService.js b/backend/services/lateReturnService.js
index d9a63e4..078305a 100644
--- a/backend/services/lateReturnService.js
+++ b/backend/services/lateReturnService.js
@@ -81,6 +81,7 @@ class LateReturnService {
     const updates = {
       actualReturnDateTime: new Date(actualReturnDateTime),
       status: lateCalculation.isLate ? "returned_late" : "completed",
+      payoutStatus: "pending",
     };
 
     if (notes) {
diff --git a/backend/services/payoutService.js b/backend/services/payoutService.js
index 64e49a3..6a703ed 100644
--- a/backend/services/payoutService.js
+++ b/backend/services/payoutService.js
@@ -50,11 +50,6 @@ class PayoutService {
         throw new Error("Invalid payout amount");
       }
 
-      // Update status to processing
-      await rental.update({
-        payoutStatus: "processing",
-      });
-
       // Create Stripe transfer
       const transfer = await StripeService.createTransfer({
         amount: rental.payoutAmount,
diff --git a/backend/tests/unit/services/payoutService.test.js b/backend/tests/unit/services/payoutService.test.js
index f8a2fc9..934ecb6 100644
--- a/backend/tests/unit/services/payoutService.test.js
+++ b/backend/tests/unit/services/payoutService.test.js
@@ -186,11 +186,6 @@ describe('PayoutService', () => {
       it('should successfully process a rental payout', async () => {
         const result = await PayoutService.processRentalPayout(mockRental);
 
-        // Verify status update to processing
-        expect(mockRental.update).toHaveBeenNthCalledWith(1, {
-          payoutStatus: 'processing'
-        });
-
         // Verify Stripe transfer creation
         expect(mockCreateTransfer).toHaveBeenCalledWith({
           amount: 9500,
@@ -206,7 +201,7 @@ describe('PayoutService', () => {
         });
 
         // Verify status update to completed
-        expect(mockRental.update).toHaveBeenNthCalledWith(2, {
+        expect(mockRental.update).toHaveBeenCalledWith({
           payoutStatus: 'completed',
           payoutProcessedAt: expect.any(Date),
           stripeTransferId: 'tr_123456789'
@@ -260,13 +255,8 @@ describe('PayoutService', () => {
         await expect(PayoutService.processRentalPayout(mockRental))
           .rejects.toThrow('Stripe transfer failed');
 
-        // Verify processing status was set
-        expect(mockRental.update).toHaveBeenNthCalledWith(1, {
-          payoutStatus: 'processing'
-        });
-
         // Verify failure status was set
-        expect(mockRental.update).toHaveBeenNthCalledWith(2, {
+        expect(mockRental.update).toHaveBeenCalledWith({
           payoutStatus: 'failed'
         });
 
@@ -296,9 +286,7 @@ describe('PayoutService', () => {
         });
 
         const dbError = new Error('Database completion update failed');
-        mockRental.update
-          .mockResolvedValueOnce(true) // processing update succeeds
-          .mockRejectedValueOnce(dbError); // completion update fails
+        mockRental.update.mockRejectedValueOnce(dbError);
 
         await expect(PayoutService.processRentalPayout(mockRental))
           .rejects.toThrow('Database completion update failed');
@@ -315,16 +303,14 @@ describe('PayoutService', () => {
         const updateError = new Error('Update failed status failed');
 
         mockCreateTransfer.mockRejectedValue(stripeError);
-        mockRental.update
-          .mockResolvedValueOnce(true) // processing update succeeds
-          .mockRejectedValueOnce(updateError); // failed status update fails
+        mockRental.update.mockRejectedValueOnce(updateError);
 
         // The service will throw the update error since it happens in the catch block
         await expect(PayoutService.processRentalPayout(mockRental))
           .rejects.toThrow('Update failed status failed');
 
         // Should still attempt to update to failed status
-        expect(mockRental.update).toHaveBeenNthCalledWith(2, {
+        expect(mockRental.update).toHaveBeenCalledWith({
           payoutStatus: 'failed'
         });
       });
diff --git a/frontend/src/pages/EarningsDashboard.tsx b/frontend/src/pages/EarningsDashboard.tsx
index a961a97..9ea612b 100644
--- a/frontend/src/pages/EarningsDashboard.tsx
+++ b/frontend/src/pages/EarningsDashboard.tsx
@@ -211,15 +211,15 @@ const EarningsDashboard: React.FC = () => {
                               className={`badge ${
                                 rental.payoutStatus === "completed"
                                   ? "bg-success"
-                                  : rental.payoutStatus === "processing"
-                                  ? "bg-warning"
+                                  : rental.payoutStatus === "failed"
+                                  ? "bg-danger"
                                   : "bg-secondary"
                               }`}
                             >
                               {rental.payoutStatus === "completed"
                                 ? "Paid"
-                                : rental.payoutStatus === "processing"
-                                ? "Processing"
+                                : rental.payoutStatus === "failed"
+                                ? "Failed"
                                 : "Pending"}
                             </span>
                           </td>
diff --git a/frontend/src/types/index.ts b/frontend/src/types/index.ts
index 7c2cc20..63fe50c 100644
--- a/frontend/src/types/index.ts
+++ b/frontend/src/types/index.ts
@@ -147,7 +147,7 @@ export interface Rental {
   stripePaymentIntentId?: string;
   stripePaymentMethodId?: string;
   // Payout status tracking
-  payoutStatus?: "pending" | "processing" | "completed" | "failed";
+  payoutStatus?: "pending" | "completed" | "failed" | null;
   payoutProcessedAt?: string;
   stripeTransferId?: string;
   deliveryMethod: "pickup" | "delivery";