Top 1099 Tips for Law Firms
- Donna Bergeron
Dec 12, 2022
All attorneys must be aware of the tax rules that apply to them and their practices, whether they practice solo or as part of a larger firm. Now is the time to get a head start on the upcoming reporting season by reviewing your firm's 2022 payments and recipient data.
Ensuring your firm's Form 1099s are adequately prepared will go a long way toward client satisfaction. As such, the following tips will help prepare your firm for the upcoming filing season:
- Ensure payments are reported on the correct form and in the right box:
- Any attorneys' fees of $600 or more must be applied to Box 1 of Form 1099-NEC. This is for the attorney’s services, including any fees a business pays its attorney to draft corporate documents or even to defend lawsuits.
- Box 10 (gross proceeds paid to attorneys) of Form 1099-MISC is used to report payments to opposing counsel, including attorneys' fees that are part of a settlement.
- Box 3 (other income) is used to report the settlement payout to the client. However, this 1099 is generally issued by the defendant and not by the attorney.
- All payments to attorneys require Form 1099 reporting, regardless of entity type.
- Review your firm's 2022 payments and recipient data early to ensure that you have the recipient's proper name and taxpayer identification number. These are both key components of an accurate filing. Additionally, you'll want to confirm that the recipient of the 1099 is a U.S. taxpayer. It falls on the payer to verify this information. To do so, request that the recipient complete Form W-9 and maintain the necessary documentation to protect your firm. If the recipient is a non-U.S. taxpayer, withholding tax may be required, however, there are withholding exceptions that may apply.
- Issue a W-2, not a 1099, for a recovery properly characterized as wages or any other employee compensation, with the appropriate payroll taxes withheld. This includes when a litigant recovers wages, including back pay, front pay, or severance pay. This may also be issued by the defendant and not the attorney at times. Should the payment be reported on a Form 1099 and the IRS determines it should have been characterized as wages, both the employee and employer could be subject to potential payroll tax liability, interest, and penalties.
- When filing 1099s using Box 3, the prevailing party should receive a Form 1099-MISC for 100% of the proceeds, including amounts paid to counsel as attorneys' fees—even in a situation where the fees were paid directly to the law firm instead of directly from the client. Legal fees are gross income to the plaintiff, who should report the entire amount on their individual tax return unless the award or settlement itself is excluded from gross income. In an instance where the attorneys' fees are not included in Form 1099, the claimant will likely not realize that they are taxable and, subsequently, underreport the taxable recovery on their income tax return. Attorney's fees may be deductible from the plaintiff's adjusted gross income if the claims upon which they ultimately prevailed meet specific statutory criteria, such as a case where a litigant prevails on certain employment discrimination claims. In this case, they may be able to deduct these legal fees paid and should consult with their tax advisor.
- Be sure and file by the appropriate deadline:
- The due date for furnishing statements to recipients for Form 1099-MISC (if amounts are reported in boxes 8 or 10) is February 15, 2023.
- For 1099-NEC, the deadline is January 31, 2023, for both recipients and the IRS. Form 1099-MISC must be filed with the IRS before the deadline of February 28, 2023.
- If any of these dates fall on a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed, the due date is the next business day.
Simply asking the right questions and confirming essential information can help position your firm to be best prepared for the upcoming tax season. Have questions that may impact your firm? Consult with your CRI tax advisor to discuss any specific situations that could affect your firm's future tax filings.