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Prepping for Tax Season: Form 1099 Basics for Law Firms

by Bruce Policky / January 12, 2023

Prepping for Tax Season: Form 1099 Basics for Law Firms

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.  

 

Form 1099-NEC  

Form 1099-MISC 

Important notes 

 

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. 

For law firms 

 

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. 

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.   

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.