Tax season doesn’t have to be a time of stress and last-minute scrambling for law firms and attorneys. With the right preparation (and tools), you can turn this often-dreaded period into a smooth, manageable process.
Whether you’re flying solo or are part of a large legal practice, there are straightforward steps you can take to get your financial house in order well before you need to file taxes for the year.
Let’s review some essential tips to ensure your law firm is ready to meet tax season head-on.
Make tax preparation a year-long process
Tax prep is inevitable. If you chip away at the main tasks and stay organized during the year, you’ll barely register the stress of this notoriously challenging season.
Prepare for tax season throughout the year with efficient record-keeping and billing practices. Keeping documents organized prevents the end-of-year or last-minute scramble to balance accounts and locate information to complete tax forms.
For example, use the advanced reporting features in your legal billing software to keep track of your accounts receivable, expenses, write-offs, and other financial information each month.
Additionally, check in on your general ledger processes early to stay on top of your bank account balances and reconciliation status, and correct coding errors when necessary.
What else can you do to stay on top of your tax-related tasks? Here are five more tips.
1. Manage IRS Form 1099 year-round
Many law firms struggle with IRS Form 1099-MISC and Form 1099-NEC each year, and each form has different requirements to follow. For example, the IRS requires Form 1099-NEC when your law firm pays over $600 in compensation for services to individuals who are non-employees, such as court reporters, expert witnesses, co-counsels, jury consultants, etc.
Who issues Form 1099s?
Typically, the payor of a taxable settlement or judgment payment issues Form 1099-MISC to the payee. However, some law firms might be required to issue a form 1099-MISC if they play a significant role in overseeing and managing the client’s settlement or trust funds.
When do law firms receive 1099s?
In addition to issuing numerous 1099s, your law firm should receive 1099s from clients who pay you $600 or more during the year for legal services or nonlegal services. The 1099s you receive must be included with your law firm’s business tax return.
When should 1099s be issued?
The deadlines range from January 31st to the end of February, depending on the type of form 1099 being issued.
You can avoid headaches with 1099s by tracking payment activity throughout the year. Law firm accounting software helps you record payments and receipts that require 1099s, prepare tax forms, mail recipient copies, and file the forms electronically with taxing authorities.
2. Track deductions and expenses
Many expenses your law firm incurs can be deducted on tax returns. Examples of typical law firm deductions include, but are not limited to:
- Credit card transaction fees
- Travel and mileage
- Office expenses
- Continuing Legal Education (CLE)
- Advertising and marketing
- Insurance premiums
- Professional dues
- Research materials
- Retirement plan contributions for employees
- Fees for professionals
Your tax professional should advise you about the business expenses you can deduct.
However, you need to provide your tax professional with accurate and complete information about law firm expenses for them to determine which expenses can be used as law firm deductions for tax purposes.
Tracking expenses throughout the year and posting the amounts to the correct categories is essential. Legal accounting software can help, especially when it’s time to print a detailed report of the law firm’s expenses for the year.
3. Invest in legal accounting software
If your law firm is manually entering and preparing financial reports or using software not specifically designed for law firms, switching to a law firm accounting software may be the best way to prepare for tax season.
Legal accounting software streamlines your law firm’s accounting process and provides enhanced financial information about your law firm, which decreases the risk of costly errors and mistakes.
When choosing legal accounting software, search for a provider that integrates with your practice management software. Many systems also integrate with other products a law firm might use, such as document management platforms, secure file sharing, payroll services, and tax form preparation and filing.
4. Complete your year-end financial analysis
Attorneys and law firms need to perform a year-end financial analysis for many reasons, including preparing for tax time.
Because you may need to take care of outstanding issues before the end of the year, you benefit from performing these year-end accounting and financial steps in November:
- Identify and collect outstanding accounts receivable. Ensure all billing and time entries are current, prepare an accounts receivable report, and take steps to collect outstanding balances.
- Review the law firm’s accounts payable report to ensure all payments due before the end of the year are paid.
- Ensure all client ledgers are up-to-date and balanced. Reconcile all trust accounts before December 31st.
- Review your Owner’s Draw account to ensure attorneys are paid all amounts owed to date. If you have unpaid receipts or travel expenses, pay those now before the end of the year.
- Make year-end charitable donations and retirement contributions to reduce taxable income.
Finally, prepare and review the law firm’s financial statements. Financial statements include income statements, balance sheets, and cash flow statements. Your law firm’s financial statements give you an overview of the practice to ensure everything is recorded and reconciled.
5. Know your tax filing deadlines
Various tax filings have different deadlines. Check with your tax professional to verify tax deadlines now so you are not in the position of rushing to complete financial reporting and tax forms at the last minute.
You should also know tax deadlines for filing payroll taxes, quarterly taxes, and other tax obligations for the law firm.
Tabs3 Software simplifies tax season for law firms
Tabs3 provides reliable and trusted service to lawyers and law firms. Our legal accounting software has effective tools to manage all aspects of your law firm’s finances, from trust accounting and billing clients to tracking expenses and preparing for tax season.
To learn more about how Tabs3 can help make tax season less stressful by managing your daily law firm finances, schedule a free demo today!
Every detail matters when you’re running a legal practice. And while generic accounting software may get the job done, it lacks specialized features that have the potential to make or break a law firm’s financial compliance and efficiency.
So, what are you sacrificing by not opting for a legal-specific accounting solution?
Let’s explore the distinct advantages of legal-specific accounting software and why making the switch is necessary for law firms that want to stay at the top in a highly competitive industry.
Understanding the legal industry’s unique accounting needs
The legal industry has specific accounting needs that differ significantly from those of other industries. These requirements stem from the industry’s regulatory environment, trust and IOLTA account management, client expense tracking, and the need for meticulous time tracking and billing.
Regulatory environment
Law firms operate within a strict regulatory framework, with in-depth financial reporting and compliance requirements. Failing to comply with bar association rules can result in sanctions or reputational damage—even disbarment.
Legal-specific billing and accounting software is designed to adhere to these regulations, with baked-in safeguards that reduce the risk of non-compliance.
Trust and IOLTA account management
Trust accounts, also known as IOLTA accounts (Interest on Lawyer Trust Accounts), hold client funds for various transactions.
Because the money in trust is the client’s property until services are performed, billed for, and approved (or disbursed, in the case of settlement awards), lawyers have a fiduciary responsibility to keep it safe.
IOLTA accounts come with complex rules, and failure to comply can lead to severe penalties. Legal-specific accounting software offers features to manage these accounts accurately and efficiently, minimizing the risk of errors.
Client expense tracking
Law firms often incur expenses on behalf of their clients that need to be accurately tracked and billed for. Improper expense tracking can lead to financial losses for a firm or overcharging clients.
Time tracking and billing
Accurate and timely billing is crucial for law firms. Lawyers that bill based on hours accrued put their reputation (and ability to practice) in jeopardy if they pad their hours or overcharge their clients, even unintentionally.
The limitations of general accounting software
While general accounting software, like QuickBooks, is widely used across many industries, it lacks the specialized features needed to handle the unique accounting needs of law firms. Consider the following limitations of general accounting software.
Lack of legal-specific features
General accounting software does not cater to the specific needs of law firms, such as trust accounting, client expense tracking, and legal-specific reporting. Without these features, your law firm may experience inefficiencies and potential errors in your accounting processes.
Inefficiency
Customizing general accounting software to meet the unique needs of a law firm can be a complex and time-consuming process. Even if your generic software offers some level of customization, it may result in less-than-optimal solutions that do not fully meet your firm’s needs.
Risk of errors
Using multiple software solutions for accounting and billing can lead to communication gaps and discrepancies, increasing the risk of errors. Errors at your firm can result in financial losses and erode client trust.
Six benefits of legal-specific accounting software
Legal-specific accounting software is designed to meet the unique accounting needs of law firms. It offers several advantages to enhance your firm’s productivity and accuracy in managing your accounting needs.
1. Reduced compliance risks
Legal-specific accounting software is designed in compliance with the strict regulations of the legal industry. It includes features like trust account management and detailed financial reporting, reducing the risk of non-compliance.
2. Customizable workflows
The best law firm accounting software enables you to tailor the software to meet your firm’s operational needs. This flexibility can significantly improve your firm’s productivity and efficiency, which allows you to focus on higher-level tasks.
3. Effective management of trust funds
The management of trust funds presents a unique set of challenges that require specialized solutions. Legal-specific accounting software is engineered to facilitate the meticulous administration of trust funds, streamlining the process lawyers must use to track, manage, and reconcile accounts.
By incorporating built-in safeguards, the software prevents common errors like overdrawing accounts, ensuring accuracy and compliance in managing trust funds.
4. Efficient routine accounting
Handling routine accounting tasks can be a time-consuming process. Legal-specific accounting software streamlines these tasks, allowing you to focus on client service.
5. Integration with practice management software
Ideally, your law firm accounting software will integrate seamlessly with practice management software, providing a comprehensive solution for your firm’s accounting and operational needs.
Integration offers several benefits, including:
- Cost savings when separate software tools aren’t needed
- Improved efficiency, resulting in time savings
- Reduced risk of errors
Seamless integration between practice management and legal accounting software eliminates the need for duplicate data entry, thereby enhancing operational efficiency and data integrity.
6. Detailed reporting and account management
Legal-specific accounting software enables you to generate detailed financial reports that provide instant insights into your firm’s financial health. It also allows you to manage your chart of accounts efficiently, catering to your firm’s specific needs.
Elevate your firm’s accounting practices with Tabs3 Financials
Choosing a legal-specific accounting software is critical for any law firm committed to operational excellence. Tabs3 Financials offer a comprehensive array of features meticulously designed to meet the distinct requirements of the legal sector.
With Tabs3 Financials, law firms enhance operational efficiency, minimize the likelihood of errors, and ensure steadfast adherence to regulatory mandates.
Unlike generic accounting software, Tabs3 Financials is designed specifically for law firms, offering seamless integration with Tabs3 Billing. From within a single platform, you can manage:
- Law firm operations and workflows
- Trust Accounting
- Accounts Payable
- Chart of accounts
- General Ledger
- Billing and payments
- Tax filing for 1099s
Ready to transform your law firm’s accounting processes with Tabs3 Financials? Get in touch with us today for a free demo.
The early bird gets the worm, but what about the proactive attorney? A less stressful tax season awaits. If you haven’t already, now’s the time to get a head start on the upcoming tax season.
Getting started
Your law firms’ exact tax obligations and procedures can differ depending on:
- Entity type (Partnership, Limited Liability Company, S-Corp, etc.)
- Number of owners
- Financing
- Location
No matter what, though, one thing stays (mostly) the same: Form 1099. If you’re wondering whether your law firm should be sending or receiving 1099s, the answer is likely both. Law firms of all sizes and business structures are required to generate and report them.
It sounds simple enough, but the Internal Revenue Service (IRS) has hundreds of pages of regulations regarding 1099 forms. What’s more, the IRS recently reintroduced Form 1099-NEC, creating an additional layer of confusion about tax obligations for law firms.
Why law firms should pay special attention to Form 1099
Failing to properly report income and payments can lead to serious consequences for any business, but law firms, in particular, tend to receive extra scrutiny from tax authorities.
Litigation settlements, judgments, and attorneys’ fees are of particular interest to the IRS, and precise record-keeping is a must. Since law firms manage large sums of client funds, they make for easy audit targets.
In fact, certain tax laws specifically target law firms. Among these are laws that make attorneys responsible for a flood of incoming and outgoing 1099 forms.
Keeping track of all the requisite information and forms can seem daunting while managing your caseload. However, accuracy is crucial to avoid a notice or, worse, a penalty from the IRS.
Strategies for managing 1099s successfully
Having a concrete plan for the season can alleviate the overwhelming feeling that accompanies seemingly constant changes to tax laws and forms.
1. Track tax forms year-round.
Most people, and even businesses, pay the most attention to tax forms when they arrive at the end of the year. However, this strategy doesn’t work well for law firms, thanks to the sheer volume of 1099 forms to be sent and reported.
Tracking and providing forms at the time of payment, year-round, is the best way to prepare for tax time.
2. Make sure you’re using the right form for the right application.
It’s easy to get confused. To prepare for the season ahead, it helps to have a basic understanding of each tax form’s purpose.
By no means is the information below comprehensive, but it may help you better understand each form’s purpose and applications.
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Form 1099-NEC |
Form 1099-MISC |
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Important notes
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The IRS reintroduced these forms in 2020 after noticing an uptick in freelance and gig work. | Form 1099-MISC serves as a catch-all for payments not covered by Form 1099-NEC. |
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For law firms
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NEC stands for nonemployee compensation. Your firm needs to issue a 1099-NEC form to jury consultants, co-counsel, investigators, expert witnesses, and other professionals who were paid over $600 to assist in a case. | Clients should typically receive a Form 1099-MISC from the payor, not your firm, for all taxable settlement payments, such as punitive damages, back pay, and payments for emotional distress.
Many law firms choose to issue their own Form 1099-MISC for all settlements, because the IRS regulations sometimes consider an attorney a “payor” if they play a significant role in the management and oversight of clients’ settlement money. Your law firm also needs to issue a Form 1099-MISC to any client who receives a refund from the firm’s direct income, rather than the trust account. |
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For clients |
Any clients who paid $600 or more for your legal services in the course of running their business should provide you with a Form 1099-NEC. Include each 1099-NEC form you receive with your law firm’s business tax return. | Any clients who paid you $600 or more for nonlegal services while running their business should provide your firm with a Form 1099-MISC. |
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Due date |
1099-NEC forms must be provided to both recipients and the IRS by January 31, 2023. | The deadline for furnishing Form 1099-MISC statements to recipients (if amounts are reported in boxes 8 or 10) is February 15, 2023.
Meanwhile, Form 1099-MISC must be filed with the IRS by February 28, 2023. |
For either form, the due date is the next business day if any of these dates fall on Saturday, Sunday, or a legal holiday.
3. Be proactive about recipient data.
For a complete filing, you will need each 1099 recipient’s legal name and taxpayer identification (or social security) number. Make sure you have these details handy well before the filing deadlines. You’ll also need to confirm whether the recipient of the form is a U.S. taxpayer.
Throughout the year, ensure any professional contracted by your firm fills out a Form W-9 to assist you in tracking and verifying this information.
4. Call in the experts.
In addition to using the reporting features built into your legal-specific accounting software, we recommend consulting with a tax professional about your firm’s specific obligations to report and send 1099 forms.
This is the best way to double-check that all incoming and outgoing payments are recorded on the proper form and in the correct blank.
Tabs3 Trust Accounting and Accounts Payable Software Make Tax Season Simple
With Tabs3 Software, 1099s can be prepared easily online by either your firm or your client (the trust account holder), depending on the payor.
When your firm is the payor, 1099 information can be combined with your accounts payable information to create a combined 1099 form or electronic file for even more convenience. Tabs3 Software has partnered with Nelco to provide Tabs3 E-file, a complete solution to filing your 1099-MISC, 1099-NEC, and 1096 forms. In just a few clicks, you can meet all federal, state, and recipient requirements. Nelco will even print and mail recipient copies for you.
To learn more about how you can enjoy a more straightforward and less stressful tax season with Tabs3’s robust reporting and compliance features, schedule your free demo today.
Disclaimer: You should always consult a professional accountant or CPA for any tax questions regarding your legal fees or law services at the end of each tax year.