One of the biggest challenges trust funds pose, though, is that they have very specific parameters. Law firms must be diligent in how they interact with and manage each trust account. There is a myriad of regulations and compliance requirements for trust accounts, and firms often find themselves with a clunky, inefficient, and frustrating trust accounting system.
It doesn’t have to be this way, though. There are numerous strategies to help your firm improve and streamline its trust accounting process, so everyone can breathe a bit easier.
Here are six ways to improve your firm’s trust accounting today:
1. Review your state’s requirements for trust accounting
Each state bar has rules and guidelines for trust accounting. Take some time to review your own state’s trust account requirements against your practices to find out if your law firm is doing what the state requires. This step is critical to lowering risk and liability for your firm. Any law practice found to mismanage trust accounts is at risk of disbarment, as well as legal action from your clients.
While trust account policies vary state by state, there are some commonalities. For example, every state bar association requires monthly or quarterly reconciliation for trust accounts. Many firms fulfill this requirement through three-way reconciliation, which compares your client ledgers, trust ledgers, and trust bank statements. The required reconciliation frequency will dictate your accounting schedule.
2. Keep trust funds separate from operating funds
Here is the golden rule of trust accounting: do not commingle your firm’s business and client accounts.
The American Bar Association requires that law firms keep any trust accounts separate from other client or corporate accounts. The money in a trust account is a form of prepayment for services rendered, but those funds still belong to your clients until you fulfill the payment terms. As such, funds in a trust account should not be reported as income.
Once your firm has completed your service agreement, any remaining funds in the trust account will be returned to the client. If there is any dispute about trust accounts, the state bar may require you to hold a certain amount of funds in your account until the issue is resolved.
3. Communicate your billing practices to clients clearly
Your clients come to you to protect their assets and interests. Transparent policies and clear communication support good long-term relationships with your clients and can assuage any confusion or misconceptions regarding trust accounting practices.
When you first start working with a client, prepare a list of frequently asked questions and billing procedures such as:
- Your firm’s billing practices, fees, and timeline
- How trust accounts work
- Why clients and law firms use trust accounts
- How trust accounts are secured at your firm, and the various protections in place for client funds
This is a great opportunity to educate clients, which will benefit your ongoing partnership in the long run. By providing user-friendly explanations of your billing practices and trust accounts to clients, all parties are on the same page about the processes in question. This establishes a foundation of trust for everyone.
4. Set up clear workflows and procedures for handling trust account funds
Practices for trust accounts need to be monitored for compliance purposes. Set clear workflows for handling trust accounts, such as when to withdraw funds and when to replenish retainers.
For example, it’s important to have proper agreements in place for the disbursement of trust funds. Without one, you could set up improper workflows. In turn, this could lead to you inadvertently withdrawing funds too early, causing you to breach your state bar’s regulations.
Trust accounting software can act as a safeguard against risky workflows. It can help law firms set up and track ongoing procedures and workflows for trust accounts. What’s more, it provides advanced reporting and easy-to-use dashboards that offer a bird’s eye view of your firm’s trust accounts.
5. Set up your trust accounting on a regular schedule
With so many moving parts, a regular trust accounting schedule will create a manageable system that your practice can follow throughout the year. Regularly scheduled reports and procedures ensure that your firm stays on top of any compliance regulations, no matter how busy your practice becomes.
For example, three-way reconciliations are required every month or quarter, depending on your state. Instead of running reconciliations ad-hoc whenever you remember to do so, firms can set up a regular schedule to review reports and run three-way reconciliations.
When you put a repeatable system in place, your firm can reduce the stress that may arise from last-minute accounting requirements. To further automate your trust accounting, consider using legal-specific trust accounting software for regular reporting and billing statements.
6. Use legal-specific tools that support workflows necessary for compliance
Manual reporting and tracking for trust accounts is an burdensome process for law firms that can take up too much time or fall victim to human error.
Accounting software tailored to legal practices can help law firms streamline their workflows and integrate their trust accounting practices into their law firm’s general accounting system. With the Tabs3 Trust Accounting Software, firms can:
- Track an unlimited number of trust accounts
- Execute three-way reconciliation for trust accounts
- Manage trust accounts from one system
- View dashboard summaries of account activity
- Engage in Positive Pay programs for your bank’s fraud prevention program
These system features take the guesswork out of trust accounts, so law firms can manage their clients’ funds easily and accurately.
Improve your trust accounting system with Tabs3 Software
Tabs3 Software offers a fully integrated suite of billing, accounting, and practice management tools designed to help law firms run more efficiently and profitably.
To see how Tabs3 Trust Accounting can help your law firm implement better billing and accounting practices, schedule a walkthrough demo or sign up for a free trial today.
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.
Many people choose trusts to manage their money because trust accounts offer privacy, control, and tax benefits beyond those provided by a traditional bank account. Trusts are more than just bank accounts, though.
A trust is a type of legal arrangement in which one person grants another the right to hold and manage property or funds in accordance with specific instructions. The person managing the property, called the fiduciary, has a legal obligation to manage the money and property in the best interest of the owner.
Various industries use trust accounts. In real estate, property managers keep trust accounts to have money on hand for any repairs and updates that property owners need them to carry out. In the legal profession, attorneys use trust accounts to hold and manage funds that clients intend to use to pay for legal services.
For example, a client may deposit $5,000 into a trust account as a retainer. The attorney then transfers money from the trust account into the law firm’s operating account as work is completed on the client’s case.
What Is Trust Accounting?
At its most basic, trust accounting is the bookkeeping of trust fund accounts. To protect legal clients’ best interests, the American Bar Association (ABA) and state bar associations maintain detailed guidelines and regulations about trust accounting. In addition, attorneys must follow state-mandated tax rules for managing trust accounts.
Among these rules is the ABA’s expectation that client funds and law firm operating funds should always be kept separate. Also worth considering? Law firm earnings and trust accounts are subject to different tax rules.
This is one reason why it’s so vital to monitor the fiscal movements of a trust account closely and track transactions across various categories. Proactive organization also helps attorneys apply the proper tax application to every expense and receipt.
To provide accurate reports about the status of trust accounts to clients and the ABA, attorneys should also keep detailed records and notes about all transactions.
The Basics: Trust Accounting Best Practices
Even with trust accounting software on our side, attorneys should remain in the habit of regularly reviewing their state’s trust accounting regulations to stay in compliance.
Records
When it comes to trust fund management, complete records and a reliable accounting process are crucial. The right trust accounting software will include built-in safeguards that prevent situations where necessary data isn’t readily accessible.
Keep trust accounting records separate from personal and business records, especially when you’re managing multiple trust funds at once. Listing trust funds on your law firm’s balance sheets is both confusing and unethical.
Security
Trusts are often the target of fraud and other forms of theft because they usually hold large sums of money. It is your law firm’s responsibility to protect clients’ funds from hackers and identity thieves.
Purpose
Every trust fund has a specific use in its rules. Trustees cannot withdraw money from it to cover other things. Typically, the purpose of legal clients’ trust funds is to cover the cost of legal services. Until those services are provided and the money is transferred to the law firm’s operating account, attorneys shouldn’t spend the money for any purpose.
Accessibility
Transparency is vital to successful trust accounting. Rigorous record keeping doesn’t mean that information should be buried away, hidden from view. Your trust accounting software should keep data readily accessible. Your firm should always be ready to provide each client access to their trust information.
Transactions
Trust accounting can be an area of potential malpractice issues if you aren’t careful with your process. Many attorneys choose to structure payment plans to make as few transactions as possible to minimize the risk of mistakes and getting into hot water with the bar.
Finding time to meticulously track trust accounts can be a challenge for busy attorneys. Fortunately, trust accounting software designed specifically for law firms offers a powerful solution. As part of our comprehensive range of legal software solutions, Tabs3 provides trust accounting software to help with the management and maintenance of client funds.
Tabs3: Your Versatile Trust Accounting Software Solution
Tabs3 Trust Accounting helps you organize and streamline your work, increasing productivity, billable hours, and profits.
With accounting and management features consolidated on one screen, you won’t have to worry about juggling multiple software at once. Instead, your team will enjoy a versatile platform that streamlines processes throughout your whole firm.
With legal software products designed for the way you work, Tabs3 Trust Accounting will be one less distraction from doing what you do best: serving your clients! Tabs3 Software supports thousands of legal professionals in their efforts to improve their trust accounting process and shield their work against common compliance pitfalls.
Tabs3 Software Integration
Our trust accounting software works seamlessly with other Tabs3 applications to reduce the time attorneys spend on administrative tasks. When used alongside our billing, accounts payable, and general ledger software for maximum benefit, Tabs3 offers you the most informative overview possible of your law firm’s financials.
Tabs3 Trust Accounting is simple to use because it features an easy-to-navigate user interface. Integrated with Tabs3 Billing, you can view Trust balances at a glance from various reports and the Matter Manager. For example, your trust balances can be included in the work-in-process reporting and on statements. You can review trust balances and transactions as needed from either application. With Tabs3Pay, you can also process client deposits via credit card.
Automation makes Tabs3 Software even more useful for trust accounting. Any payments made to or from a client trust account will automatically be recorded, improving the accuracy of your firm’s trust accounting records with minimal effort required.
Why Software Is Important for Trust Management
With the complex tax factors and transactions that happen within a trust, keeping track of everything can get complicated. Even an experienced attorney can easily feel overwhelmed by the sheer amount of work involved.
While a legal professional may have the training and knowledge for the job, mistakes can happen easily when managing trust accounts for multiple clients. Even minor mistakes can have major ramifications when tax laws and industry regulations are violated, even unintentionally.
Dedicated software designed to assist with all trust-related tasks can increase your firm’s accuracy. Tabs3 Software can help you avoid inconsistencies that may impact your trust accounting. Compared to manually managing the trust accounting process, Tabs3 Trust Accounting software streamlines workflows and minimizes errors, saving your firm time and money.
Your firm can become fully liable for any issues with trust accounting, and accounting software reduces errors and protects you in the event that there’s a problem. Tabs3 records all transactions and keeps them organized, so you’ll always have easy access to them and ensure that nothing falls through the cracks. The software warns you when an account goes below a minimum balance, and helps you easily reconcile your bank statements. In some states, multiple forms of proof that trust bank accounts are in balance may be required. TAS
provides this proof via the Three-Way Reconciliation Report.
Easily Manage Multiple Client Trust Accounts
With Tabs3 Trust Accounting, you’ll be able to process and track every transaction across multiple trusts with ease. With seamless integration between all Tabs3 Software applications, you can check ledgers while managing trust without the need to switch tabs. In addition, Tabs3 Trust Accounting complies with all major trust accounting regulations. Because our trust accounting is built specifically for law firms’ trust accounting needs, you’ll have no trouble keeping complete and accessible records with Tabs3.
You can also customize your software to adhere to additional in-house security protocols. Tabs3 offers an extra layer of security, which protects funds from anyone intent on stealing from your clients. The software tracks all transactions within the trusts connected to it to keep you informed.
Additional features
Dashboard
Being able to find your way around your trust accounting software is critical. With Tabs3 Trust Accounting, you can access a comprehensive overview of your firm’s trust accounts and their standing at a glance. Navigating the home page to complete a transaction or start a reconciliation is intuitive and fast. With just a few clicks, review additional account summaries and other detailed transaction information.
You’ll also be able to view recent transactions within any individual client trust, as well as a combined list of transaction information. Pin your most used actions in the dashboard to customize your process, so you can print, check, and record data all in one place.
Positive Pay
Tabs3 Trust Accounting includes a Positive Pay Export program, which offers greater security in a more streamlined workflow. Directly export approved checks and upload them to your financial institution to support the Positive Pay fraud prevention program.
Experience the difference that Tabs3 Trust Accounting software can make for your firm!
Schedule your free walkthrough demo today.
It turns out that not all trends are cyclical. Cash? Check? Like it or not, these forms of payment are going the way of the abacus and the typewriter.
Although there are good reasons to be cautious about adopting new technology, payment processing is one area where it pays to be ahead of the curve. After all, anything a firm can do to increase billable hours, reduce administrative work, and accelerate accounts receivable is good for the bottom line.
It isn’t only about improving internal workflows, either. Accepting credit cards also improves client satisfaction at the same time that it increases profit margins.
That’s why Tabs3 Software is excited to announce we’re now offering a built-in credit card processing feature, Tabs3Pay.
A valuable tool for law firms
Credit card processing, when implemented correctly, can add enough of a lift to key areas of a law firm’s success to create a competitive advantage.
Cash flow and processing time
Having an online payment option reduces the number of steps needed to make a payment, which increases the likelihood of clients paying quickly. In fact, the legal industry has become increasingly aware that accepting credit cards improves cash flow by 30 to 40%.
A few other benefits: credit card deposits often hit your bank account faster than a check, and you’ll save on the administrative time it takes to process other payment methods.
Client satisfaction and growing expectations
The legal industry is no exception to the growing customer expectation for convenience in making payments, including for business transactions. Providing the ability to make payments by credit card helps meet that demand while also creating a simple payment experience that can be completed from any device.
Overall, accepting credit cards offers greater predictability and stability, opening up opportunities to proactively plan for your firm’s future based on more accurate financial projections.
Getting legal-specific
When selecting a credit card processing service, it’s important to select a software specifically designed for legal clients.
Running your payments through a certain processor puts the pressure on them to make sure the transactions are secure, but you still have an ethical responsibility to verify what that process is. Check if the processor is certified as PCI compliant. Your firm should also vet how information is being stored to ensure privacy compliance.
Don’t forget to ask about how trust accounting is handled. Most credit card processors deposit funds into the same account from which they withdraw the transaction fee, which can land a law firm in serious trouble.
Although this practice isn’t a big deal for non-legal companies, if the account in question is a legal client’s trust account, then the transaction fee has just been paid by the client, not the lawyer. Even if you act quickly to transfer the amount from your operating account, you’ve technically already accessed client funds.
To avoid these issues, legal-specific processors like Tabs3Pay are set up to deposit charge funds into the trust account and withdraw transaction fees from the operating account. We also protect you from similar issues with voids and chargebacks.
Likewise, we can handle your firm having more than one client trust account. After all, we’ve designed our software specifically for lawyers!
Craft your own approach
Tabs3Pay is part of Tabs3 Software, which means that if you want to sidestep double data entry by having your accounting seamlessly update with new payments, you can. With flat rate options and more, you can find an approach that works for your firm.
Visit our site to learn more about the benefits of Tabs3Pay.