1099s and law firms

This week we're going to really navigate the complexities of the 1099 season, especially if you work with law firms and attorneys and you're trying to figure out who gets what form. Because don't forget, we've got the 1099 miscellaneous form that's got a box for attorneys. So that logically would think, well, is that where anybody that I pay as an attorney would get their figure put on that box? Well, not necessarily so. So when dealing with 1099s in the 1099 season with a law firm, it feels like you're handling a hot potato. Nobody wants to touch it. The client may come to you and assume it's part of the duties of bookkeeping, and then you might turn and say, well, it's a tax return, the tax person should be doing it. And in reality, none of us want to do it because it takes a lot more time than the client really wants to pay for. And I think it comes down to value and expressing the value to the client. I've had clients flat out tell me, I don't even want to bother doing that. Why do I have to do that? And really, you have to. It's part of compliance. But sometimes we've had that happen where a client will say, no, I'm not sending a 1099. I'm not doing that. I don't send 1099s. And you know, get that in writing. That's the best advice I'd have for you. So we do provide this service at our firm. And we charge a significant fee. So you can— the fee can range anywhere from $100 setup fee to $250 or more if you want to try that to get them to pay for the service. Because the setup fee isn't really about just the setup. A lot of the aggregating of the data of 1099s starts at the beginning of the year. You're chasing people for W-9s. Anytime the client spends money on a subcontractor or an outside contractor, it's up to us to kind of go proactively and get that data, get that W-9, hopefully before the person is paid. Although we don't run into this too much. I used to run into it when I worked with contractors where the person would get paid and then poof, disappear. We don't seem to have that happen much. These are professionals and professional services. So the people are around and for the most part they will answer the information and give us a W-9. It's not a big deal. I hand them out all the time. Sarah and my firm, Proper Trust, is an LLC. So we have to send out a 1099, a W-9, to our clients. So, and then you would charge per fee, per, per form. So you can charge me $10, $25, whatever. I've heard people charging even $50 a form. That fee is for each 1099 that you have to produce for the client, depending on the law firm. Practice area. Some of them have maybe 5 or 10, and depending on the size of the firm, some of them have a lot, like 200 and 300. So you're looking at a significant, significant amount of work to get these 1099s produced and done, and they're due on January 31st. So you have to remember that when you're looking for these details, that you might find it on their website that they may be doing business as one name, but they actually are a corporation if you go on the details of the website. The best way is to get that W-9, keep it on file. Even if they're corporation, they can fill it out and then you keep it on file. This is where we use Keeper. So Keeper software that we use for multiple reasons, but this is one of the primary ones because it allows us to actively ask the client's vendor for the W-9. It gives them a fillable form, they fill it out, it's securely stored in Keeper, and then it gets shifted right into QuickBooks so that The whole process is done securely, really important. And then the information ends up in QuickBooks. So then we start to gather the details of the data, which will go back to the data set, your accounting ledger. You're gonna be able to pull those numbers and, and all the figures that you need out of the system. Now, Intuit's recently updated that process. It's always had the 1099 processing, but it wasn't really very good. And they have improved that process. There's a couple more reports in there now, better than we had. I always kind of lean towards the transaction by vendor list and then grouping it by the vendor, so that way you can look to see who you've paid over $600. But then remember that if the client's paying them with a credit card sometimes and a check sometimes, you have to only look at what the check or the ACH or the wire piece is. The credit card company handles the credit card piece. So a good process, maybe working with your client, is telling them to use credit cards when they're paying these outside contractors so they don't have to be bothered with the 1099s. Another thing you can do is use the contractor feature. QuickBooks has a contractor feature. It's in the payroll module, and it's a place that you can pay contractors out of the system. There's a fee involved, but you can pay it. And if you have payroll with Intuit, a lot of this is included, and you can pay a contractor right out of QuickBooks, and then it's already tracked for 1099 purposes inside the system, which is a great feature. Gusto has the same thing. You can teach your clients to start paying their clients, their contractors out of Gusto using that same feature, and they create the list for you and they'll produce the 1099s. All the data's there when you do it that way. So there's actually 2 forms of 1099. There's an NEC, which is the one I wanted to talk about more today, but there's also 1099 miscellaneous. And for the most part, a lot of law firms, we had to send out both forms. So with the 1099-NEC, non-employee compensation, anybody that you hire that is a sole proprietor, maybe an LLC or a partnership, we have to send out a 1099 to that client, which is reporting it to the government because it's a 1096 that gives all the details to the government of how much money we've paid to a vendor. Mm-hmm. This is where you want your W-9 to see if they are actually a corporation. You don't have to send it. And again, payment method makes a difference. So if your client is paying by credit card, we don't have to worry about sending the 1099. The, the credit card company actually sends a 1099-K. The NEC form is for individuals in a contracted or non-employee common employee compensation scenarios. So examples of this for our purposes would be if the law firm maybe hired an investigator. Maybe they're a personal injury firm. They hire an investigator, or maybe they hired a court reporter. A lot of mediation services. They all kind of fall in that bucket of an NEC. They may also hire co-counsel to help with a matter or a case, and in that case that would be an NEC. So you're hiring them the same way you would hire a mediator, for example. So the caveat with attorneys is that apparently the government doesn't trust them, and any attorney, no matter whether they're a corporation or not, gets, gets a 1099, whether it's an NEC or they get a 1099 miscellaneous. For a law firm to get a 1099 miscellaneous form, it would be more of the law firm having to hire another law firm to represent them. So they were hiring attorney services. And in that case, that would fall in the miscellaneous box. That's what that box is for. But for most part, we see the NEC is the form that's going out. So remember that the rules don't apply when it comes to corporate entity type when you're dealing with another law firm working as co-counsel or anything like that. No matter what, they have to get the 1099, even if they're incorporated, a corporation, C-Corp, S-Corp, doesn't matter. So I've created a decision tree in the article that you might want to refer to. I think that will really help when it comes to that. So with personal injury attorneys, this is where you're gonna see a higher volume of 1099s. And a lot of times there are some states where money could come in and they're paying out the fees to these outside people, these outside contractors, and they're using trust funds to pay for it because they got a settlement in and they're paying it out. Even though they're paying out with trust funds, we still have to do the 1099. We are paying them, we are the payor, and we still have to send it out Even if we used trust or IOLTA money. So remember that it's a little bit confusing. But because when you think of trust funds or money in the IOLTA, it belongs to the client. So wouldn't the client have to do that? But no, actually, that's not true. Rent expenses. So here's another one. We have to send out a 1099 again. We're on the miscellaneous now for rent. Any rent that's been paid out from the law firm to pay for rent for their office space. So that rent is usually— if it's— you don't have to send a 1099. If you paid a real estate agent or a property manager the rent, they can't make it more difficult, right? Just say all rent has to be put on a box, but they don't. So that's the rule on 1099 rent. But if you're paying a landlord and the landlord is not a corporation, you still have to send out a 1099 to the landlord or the owner of the building, but they're really trying to track the owners and not when it's a real estate company or a property manager. So any healthcare-related payments that are to doctors or chiropractors— again, I'm thinking personal injury attorneys, any imaging and surgery centers, any other healthcare providers— the law firm still has to provide a 1099. So know that if it's over $600, you do have to still pay that. You have still to produce that 1099 for that, for that particular service, even if it's for the client, but it was paid out of the law firm funds or the IOLTA. Personal injury. Let's just say that the money came in from the insurance company. Law firm gets a 1099 from the insurance company, and the client gets paid their portion. Does the law firm have to send out a 1099 to the client for the settlement? Answer is depends. Depends on what the funds were for. If it's a straight out, the jury awarded damages for that, no, they don't have to. Damages are not reportable. If the jury awarded some money to the person for lost wages, then you gotta send them a W-2. See how crazy this can get for us on our side of it? It's very, very complicated. So know that if you see this scenario, really pay attention to what the damages or what the funds to the client are for. You might have to ask the attorney, because most of the times we're just busy cutting the check, and we don't know all the details of this, of the matter, unless you're in a product like Clio where you can kind of dig in and see. Sometimes it's on the settlement report. If you have a client that doesn't use any software, you can kind of look at the settlement sheet. And then, if a client is returning a retainer to— if the attorney is returning a retainer to a client, do you have to pay Do you have to put that on a 1099? And that would be no. A retainer is the money that they provided to you originally, and if it was unused and the funds are returned, or the client doesn't hire the law firm that you work with, you just send that back. That's not a 1099 moment. So 1099s cause us headaches mostly because of the deadline. Make sure you use the tools. So look into Keeper. It's worth the money even if you're just starting out and you're new to working with attorneys and law firms. Look at Keeper. It's a great tool. If for no other reason, you're, you're gathering the data for your client securely. It's very painless to send it out. Sending out a PDF and having a client have to fill out a PDF and then they have to send it back, it's very difficult. So you've got a lot of friction in that whole process. But using the 1099 service in Keeper is wonderful. Intuit also allows you to send out and request the 1099, but it also makes the client client have to sign up. I mean, the vendor have to sign up for QuickBooks Self-Employed, which I find that to be a barrier, and I wish they would do away with that. If you're thinking about using the 1099 service with Intuit, worked great. I live in Florida. We don't have that state 1099, so I don't have to worry about it. But if you're in a state like Rhode Island, where I'm from, where you have also the— have to produce documents like that for the state at the state level, you can't really use Intuit because they don't have that part. You can use it for the federal side, but you'll still have to find a way to get those state tax returns out as well, those state 1099s. Well, I hope that helped clarify 1099 season. If you have any questions or comments, feel free to reach out. We'd love to have you in the Law Lab, and we'll help you learn more about these kind of things and, and then some. Anything to do with lawyers, we're here to help. Take care now. Bye. Bye.