Law Firms and 1099 Requirements
We are almost to the 1099 season. How did that happen? Recently, in our Facebook group, QB Community Live! We had a lively discussion on the 1099's and the new/old 1099 NEC form.
When working with law firms, how do you prepare for this? How is it different from when working with other industries? Well, I am here to break that down for you.
Let's start with the definition of what a 1099 form is used for and precisely how it applies to the legal industry:
This year, we will use the 1099 NEC form to report to the IRS any nonemployee compensation. The law firm will send the form to any person who engaged in business with the law firm, and the firm paid $600 or more for services.
Examples of law firms issuing a 1099 to their contractors paid over $600 in the calendar year are:
2. Expert witnesses
3. Referral fees paid to an outside law firm or person that provided the referral*
4. Jury consultants
For most industries, you do not have to issue a 1099 form to a corporation. For example, my company is Artesani Management Services, Inc. If I work for you and I am paid over the $600 threshold you do not have to issue my firm a 1099.
If you pay me by credit card and my firm is an LLC or sole proprietorship, you don't have to send that 1099 either; the credit card company handles that. Are you confused yet?
The difference between other industries, like my accounting firm, is you issue the 1099 form to a law firm regardless of the law firm's corporate status. Yes, that means you still give one to a law firm that is an S or C corporation.
On the flip side of this, the attorneys’ 'clients paying a law firm more than $600 in a year as part of the client's business must issue a Form 1099 to the law firm.
Back to the law firm. When does a law firm issue a 1099 to a client? Let's explain that by examples:
Scenario 1: Settlement
Lawyer Annie files a lawsuit for client Mary against a gym for breach of contract. Annie wins the case and is awarded $2,000 from the gym. Annie keeps 40% or $800 for her legal fees and issues Mary $1,200. The gym pays Annie the full amount and gives Annie a 1099 for $2,000. Annie deposits the settlement to the trust and pays Mary out of the trust bank account.
Does Annie send Mary a 1099 for the $1,200? No
Should the gum have sent one to Mary? No, they would have no way to know the agreed split between Annie and Mary.
If the gym is aware of the split and makes two payments, Annie and one to Mary would issue two separate 1099s, one to Annie and one to Mary. Mary will have to let her tax professional know about the legal fees in this matter.
Scenario 2: Joint Check
We have a few firms that work on contingency. They sue for car accidents or medical malpractice on behalf of their clients. These can involve large pay-outs. Often, the pay-out will be a joint check in the name of the law firm and the client. The insurance company will issue a 1099 to the law firm for the entire check and no 1099 form is issued to the law firm's client.
Other Questions to Ponder
If the law firm returns a retainer to the client for over $600, does the law firm have to send a 1099 to the client? No, remember that the attorney is just holding the client's money until earned—keyword here: client's money.
But the rule of thumb is that if you think you should send a 1099 from the law firm, do it. The fine for not issuing one is small ($270), but if you don't send one to a co-counsel (which is your nonemployee compensation), the penalty can be 10% of the contractor's paid amount.
For information specific to attorneys and law practices, this article, titled "Ten Rules Every Lawyer—and Client—Should Know about Taxes on Legal Settlements" by Robert Wood for more details on settlements and the tax ramifications on them.
I hope this article gives you some clarification on these tricky situations that can happen when working with attorneys and law firms when it comes to whether you should issue a 1099 form or not.
If you are an attorney and need assistance with your 1099 filings, reach out.
If you’re an accountant or bookkeeper and need more direction or education, please join our Facebook group QB Community Live! It’s a safe place to ask any question. I co-admin group, and I’m here to help. Our motto is, Together We All Succeed! #TWA$
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