1099s and law firms

Navigating the intricacies of 1099 forms and collaborating with attorneys can be quite the brain teaser. It's a complex task filled with multiple scenarios that demand attention. When dealing with law firms and the 1099 season, it often feels like handling a hot potato that no one wants to touch. The question lingers: Who should tackle it, the tax professional or the bookkeeping firm? 

We do provide this service, but it does come at a price. There's a significant setup fee and a charge for each form we generate. The setup fee can vary, ranging from $102 to $150, and each form's cost can be anywhere between $10 and $25, depending on the client's needs.

The key is not to wait until January to start thinking about the 1099 season. Doing so will leave you scrambling to gather all the necessary client information. This is where Keeper software shines; it's a year-round solution. As new vendors come into play, you can proactively collect their W9s throughout the year, ensuring you have all the required information at your fingertips. Keeper software handles this securely and electronically, making it a breeze to fetch W9s or exempt vendors with just a few clicks.

But let's dive into the mind-boggling world of 1099s for attorneys. Who should receive one? Let's start with the basics:

There are two primary forms in use: 1099 NEC and 1099 Miscellaneous.

An NEC form is sent to individuals (sole proprietorships, LLCs, and partnerships) for amounts paid over $600 in a calendar year.

The NEC form is for individuals in contracted or non-employee compensation scenarios. Examples for a law firm include hiring an investigator, a court reporter, or even another attorney for co-counsel. However, when it comes to attorneys, there's a caveat – if the subcontractor is another law firm, the incorporation status is irrelevant.

To simplify matters, I've outlined a decision tree to help you determine who requires a 1099 and who doesn't. Remember that the complexity arises from various situations when working with attorneys.

Personal Injury Attorneys

But what about personal injury attorneys? Do they have additional reasons to issue 1099s?

Indeed, they do. Personal injury firms often use operating funds to hire outside contractors for client matters (advanced client costs). Depending on their jurisdiction, attorneys may also pay for these contractors using monies from the IOTA bank account. They all still warrant a 1099 NEC.

However, if the services involve medical work, like a physical therapist, the situation may fall under box six on the 1099 form, as specified in the form's instructions:

Payments from Health Insurance Companies

Any payments made by insurance companies to medical service providers are reportable in box 6. This includes payments made under health and sickness insurance programs. It's important to note that insurance premium payments for fully insured health coverage don't fall under box six reporting as they aren't considered payments for services rendered.

Payments to Corporations for Medical Services

If the business makes payments for medical and healthcare services to a corporation, you must report this in box 6 of the 1099-MISC form.

When reporting these medical expenses, you'll list the corporation's name rather than the individual providing the service. This means you won't need to use a taxpayer identification number when reporting these expenses for tax filing.

The Law firm’s attorney

Imagine your attorney-client encountered a legal issue and had to hire another attorney to represent them – this would go in the 1099 miscellaneous form under the attorney's box. As you can see, things can get intricate and nuanced.

Using QuickBooks for 1099s

Thankfully, there's software available to assist in aggregating this data. QuickBooks is an excellent starting point, allowing you to use tags to differentiate between vendors who need a 1099 miscellaneous and those requiring an NEC form. Intuit recently revamped its 1099 workflow, offering significant improvements. While it's not perfect, especially for those in states requiring local 1099 filings, it's a valuable tool.

If you're using Intuit Payroll, the 1099 feature is included at no extra cost. Educate your clients about using Contractor Payments to track 1099 contractors effortlessly throughout the year. There are other software options available, like Track1099 and 1099Pro.

At our firm, we use Track1099 to process 1099s for our clients.

What about paying contractors via Credit Cards, Debit Cards, and 3rd Party Vendors?

One important note regarding payments and whether you need to issue a 1099: If your client paid their vendor via credit card, there's no need for a 1099; the credit card processor handles it.

What if the client paid a contractor with ACH or a check?

However, if your client paid a contractor through cash, checks, wires, ACH, or personal services like Zelle and Venmo, then a 1099 is indeed required.

LLCs taxed as an S corporation

If a company is a corporation or an LLC taxed as an S Corp, you generally don't need to issue a 1099 – unless they're an attorney; special rules apply there.

Below are a few of the questions we were asked when we did 1099’s as a topic in the Accountants Law Lab:

1. Do you need to issue 1099s if you paid attorney fees to the opposing party? Yes, even if they are a corporation.
2. The law firm’s vendor (contractor) is a mediator and was paid out of the IOLTA account, do I still issue a 1099? Yes, on sending the 1099. Mediators and other experts – you'll need to send them a 1099, even if the firm paid from client funds.
3. What about a 1099 for rent expenses? That should trigger a 1099 to the law firm's landlord. However, you do not have to report these payments on Form 1099-MISC if you paid them to a real estate agent or property manager.
4. Do Healthcare-related payments to doctors, chiropractors, imaging and surgery centers, and other healthcare providers paid by the law firm need a 1099? Yes, they also require a 1099. Enter payments of $600 or more made to each physician or other supplier or provider of medical or health care services.
5. Does an attorney ever send a client a 1099? You won't need to give 1099 forms to the law firms’ clients most of the time. Lawyers sometimes receive money on behalf of their clients and then pass it along to them. However, you typically don't have to provide a 1099 form. Instead, the responsibility usually falls on the party that paid the money, not the lawyer.
6. What if the client received substantial money for a personal injury matter? There's an essential exception regarding Form 1099, which involves personal physical injury payments. Consider situations like legal settlements for car accidents or slip-and-fall injuries. These payments are typically tax-free for the injured person, so you don't need to issue a Form 1099 in such cases. However, if the person is compensated for lost wages, there is a requirement for that to be placed on a W2.
7. What if the law firm client gets a refund from IOLTA for their retainer? Do they get a 1099 for that?  No, there is no requirement for a 1099 in this situation.
8. Do we send one for charitable contributions? No

While 1099s may cause headaches, tools are available to streamline the process. Consider using software that offers TIN matching before issuing 1099s to ensure accuracy and compliance.