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!