Accounting for Personal Injury Law Firms

Welcome to Accountants Law Pod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhardt.

Welcome back to the podcast, everyone. And today we're going to talk about personal injury law firms and the differences of doing the work for them and things we should look out for, things that we're going to see, maybe some language we're going to see that's a little bit different than working with other law firms. Starting off with the word contingency. That is probably one. If you've never heard that word, you're going to hear that one floating around a little bit. And some best practices. So Sarah, what would you say if someone said to you, tell me one thing about a personal injury law firm that you really need to know as a bookkeeper starting to work with that style of account, doing that kind of accounting for that type of firm?

Just one?

Just one. I want to leave some for Steve.

Well, I was watching a show the other day and literally it was interesting 'cause the individual that was in the legal office, the law firm's office said, "I don't understand, how much do I owe you?" And they're like, "No, when you get paid, we get paid.

There's no risk." Was that a commercial? Was that a commercial?

No, it was in an actual series, a TV series.

Oh.

And I sat there and I looked and I was like, I thought, oh, that's interesting how it was worded. And I'm sure it's kind of similar language that you hear, 'cause contingency is based on a contingent moment.

Mm-hmm.

But there are some pieces in there that can get tricky, and there are some standardizations. And then I think the part that can get tricky is all the little types of cases, what's allowable for— because there's a percentage of how much an attorney is going to receive, like 33.33%. However, that can be negotiated down, or if there's a sub other matter underneath of it, that has a different— so it's knowing the styles and knowing how to ask the right questions, I feel like, is one of the hardest things about a contingency firm. that when you first walk in the door, it's like, oh, okay, it's just a 33.3% of whatever. No, it's not. Not always. So, Steve, what do you think?

Steve, what do you, what do you think?

I'm curious what you think.

What would you give for advice to a bookkeeper just starting out that's never worked with a contingency type law firm?

So first things that come to my mind are cash flow, because these cases These cases can take, they can take many years to reach settlement, the settlement stage, and the firm is fronting a lot of costs. And so you need more guardrails around keeping track of client advanced costs.

Yeah.

On the balance sheet and tying those all back to the settlement that Sarah was talking about. So making sure that you, they don't all know how to do their settlement sheets. Correct. I find a lot of errors in those. And so I train the clients on my personal injury firms to give me the settlement sheet before they do anything with the client.

And I think you just hit on it though, Steve. It's a settlement sheet. So meaning, i.e., it's outside of a software.

Correct.

It's probably an Excel sheet. Probably.

Sometimes it's a Word doc, Sarah. So sometimes that doesn't work. You know, it's some old type thing from, what is that word processing thing that they used to use years ago in law firms? Remember, what was it called?

WordPerfect.

WordPerfect, thank you. It sometimes looks like it came up of a WordPerfect document with the type of letter style. But yeah, it doesn't always add up and you really need to make sure. So most importantly, you're tracking the client advance costs or any costs involved in that case or matter. They should be tagged to the matter because when the case does settle, if the law firm doesn't recoup all those expenses, guess where those expenses land? They land in the law firm's expense category. Ends up being a billable expense unrecovered if it doesn't get billed back at the time of winning the matter. Because if they lose the matter too, I mean, then it all becomes their expense. So you want to talk to the lawyer. If you got this— if you got— just got this client, you want to talk to the lawyer and say, hey, Mr. or Ms. Attorney, I need to see what's the paperwork that you give your clients so I understand exactly what you're agreeing to. Because sometimes A lot of them we've worked with, the percentages are different. It's not just always standard 33.33%. It's not. Sometimes 40%, sometimes it's less. You might be looking at class action suits.

More times it's less, I'll be honest with you. And there are other— Steve, I don't know if you've experienced this. Lynda and I don't experience this too much, but we've seen it. Sometimes it's a contingency matter, but there are funds in trust that need to be paid prior to settlement.

Yes.

Correct. For costs incurred. And that can be kind of—

That goes into the whole equation of it. And what you really have to be careful with in working these settlements is that you, as you know, the client wants their money right away. Settlement happens, they're like, "Where's my check?" Within seconds. The attorney quite often wants to give them the money right away and you've got to slow it all down and put it all in perspective for them and say, "Hey, you've been working this for a year or two, let's just make sure the math is right and keep you in line with this. And also if there's Medicare involved and Medicaid and those sorts of things.

Or any liens, any liens.

Or liens. A lot of those get negotiated out.

And you wanna make sure that check clears. So that check coming in, even if it comes from GEICO, it could get pulled back. It's not good. Right, you have to make sure the funds are there. And a lot of jurisdictions, you actually have to look at the bar rules 'cause there might be rules about how fast they have to turn that around. California, I think, is one, right, Sarah, that they make them release the funds within a certain— you can't just hang on to it either. Like, the attorney can't hang on to it and—

Oh, they—

Going back, they have rules. So you need to make sure that you follow the guidelines of the bar there as well. But then the trust, I think this type of law is a good one to start off with if you start to learn about client advance costs and you're getting a trust after the fact. So there's not a lot of in and out, in and out trusts. So if you're just starting to learn trust accounting, it's in and then divvied out. Expenses come off the total first, and then they divvy out the, the rest to the attorney gets their percentage, and the client usually gets the balance. But if you are looking at that type of learning trust accounting, that's probably the easiest style to, to learn. But it also can be so critical if it's not booked in right. And usually we get these clients that come to us, and they might still have residual money in a trust account that never got divvied out. For there might be a reason. The attorney will know the reason why that's still sitting in there, but you want to make sure that you find out why, because normally the money comes in, it gets disbursed, and it's not hanging in there.

Well, the keywords— and I think Steve was saying this— is a time of final settlement. Prior to that, though, you may have things— and we've seen this often— you may have things where the firm isn't really contingent but the case style is contingent. So you might have things come through where the individual is getting a course of payments made to them and they're not cashing those checks, for one, because they, in their minds, they want to cash it all in the one bucket.

Yeah.

Or, and Steve, I think Lynda and I have seen this, I know we've seen this ourselves, but Steve, in your experience, when when you have a situation where the firm may not be a contingent firm, but the case might be, do you find that there's often more high probability of mathematical errors because they've kind of done the math? They're doing it in a traditional model and they need to figure it out in the—

Exactly. And I like to teach the attorneys to put us in the loop. They know that sadly. They know that settlement's coming. Give us the heads up. Yeah. And we can start looking at things. To your point, there's all these little weird math things that have gone on and transactions that have gone on and get a copy of the actual client agreement and look at it and look at the settlement that when it comes in and just get everybody to slow down. No, the attorney cannot loan money to the client until the funds are dispersed and get paid back and all, 'cause they tried to do that.

Yeah, they do that. You'll see Cash App.

Lynda knows that.

Cash App. Cash App. I'm like, what is this Cash App? Oh, they really need the money and the case—

Right.

You did what? Yeah, you have to really— and then it could be a loan situation because it's so heavy in the client expense side. They could get a loan from Advocate Capital. There was another one out there too that was a different style of loan.

There's a few lenders that are specific to this.

That do this. But then you have to track the loan by the matter because that's how the loan is divvied out. And when it gets paid off by—

Well, it's like case-specific.

Yeah.

Case cost. It's, yeah, it's definitely— And then I think, Lynda, you brought this up, when there's a lien moment, so contingency, and then it depends on if they, if the case went somewhere else, there's a lien from that firm to the other firm on behalf, on the client side, or referral fees and/or—

Doctor.

Yeah.

Doctor, yeah, doctor bills, physical therapy, you think car accident or something like that, those are, and you could get those class action suits which require a separate bank account. So they've got so much money coming in that they have to put it all in because it's more than one person that's underneath the suit. And then they have to— it's required to do that. And then sometimes the states, because the interest is so good right now, the judges are making the attorneys put this money into a bank account that's bearing interest until— so that they all get that little piece of interest while it's happening, which we haven't seen too much in the past, but now the interest rate's like 4 or 5%. You're starting to see that this, the judges are mandating that, that, that money goes there until it's ready to be disbursed. And so everybody gets a little piece of that. So just add that to the pile of bucket of soup that you're making, that you have to make sure this all works out. So attorneys do need you on this. A lot of times when we switch this conversation to software, a lot of times you'll get these attorneys and they don't have any software. What do I need software for? Mm-hmm. There's no real trust. I can hear it. You know, have we not heard that? I don't need the software, do I? Yeah, you kind of do. You want all these expenses, which now Clio has personal injury as a module that you can purchase, which is really cool because they know—

Brilliant.

They know the importance of tracking the expense side, and for the law firm, it's critical. So there's a good reason why you want to track that there, and it's new.

So Not just that software, but there are times where you have multiple payouts.

Yes.

Right? So you, you're, uh, the, you have to break the, the fee up into multiple, uh, and maybe it's a split fee type of contingency and there's multiple.

You have the W-9s and 1099s.

I was just gonna say, but yeah, so 1099s adds a whole nother layer of complexity to it because some of those 1099s might have to go into the medical box that you better send it out.

So that's So consider right up front, train your paralegals, train your office people, train your attorney. You do not pay out one advanced cost to anybody until you have a signed W-9 in hand, whether you'll ever use it or not.

Right.

Whether they'll ever qualify for a 1099 or meet that $600 threshold or whatever. Get in the practice of getting those W-9s right away because you might hire that expert witness for 10 cases in the future. You don't know it today, but it might happen this year. You don't know. You've got to— you've got to set them up to think that way about their business or they can get into trouble so easy.

Well, your physicians and all of these little nuances that go on for that too. It— to your point, it depends. You have to read through the 1099.

Oh my God.

Rules to understand. And I tell the firm owners out there, the attorneys, it's better suited to get it up front than deal with the back end.

Ease it later, yeah.

It's expensive for us to do the work.

What do we call that?

No, no, what? No, you say no ticky, no tacky.

You don't give me the paperwork, you're not going to get the money.

And she's like—

I learned that from construction days because a lot of times the subcontractors will come in, do the job, and then they flat out disappear. And if you hadn't have filled that paperwork out—

Mechanically, yeah.

Yep. You're not going to get them, then you got to do zero. Yeah, it's, you know, zero social or whatever. But you really have to make sure that you track that stuff for them to keep them on it. You want to keep them in compliance, which is a big part of our job. So those are the—

Well, it depends too, just to be fair. Not every accounting person that's offering accounting services has to do this, and nor do they. A lot of tax people are backing away from it because it doesn't it's just too complex, it's too laborsome.

You don't make any money on it either, right?

Yeah, it's a loss leader. But to Steve's point, as a law firm owner, it is in your best interest to get it trained right. Consult with people if you have questions. Pay a consult fee and we'll tell you. But it does not behoove you to be on the other end of it because it's not cheap.

But it's a big part of the body of work that we do for personal injury attorneys.

And the personal injury attorney will come back to us and say, Dr. Jones says, why do I have to fill out a W-9? And I'm exempt and I'm just not going to fill it out. And you just— you hold your ground with them. You just say, well, fine. You shouldn't be afraid to fill this out. Then we just need it as a record in case we're ever audited and we'll take a look at it. And lo and behold, you get the W-9 and find out he should get one or not. Or, you know, so you're just protecting the client and you're saving everybody, including yourself, tons of headaches at year end. With these personal injury cases. So if you train them that way upfront, I love it when they finally get it and the paralegal calls and says, I want to send this check out, I don't have a W-9. And I tell them, you know what my answer is? No, don't send that money until you get it. And lo and behold, the next week I get a copy of the W-9. So—

So ideally, in my, in my perfect world, this whole 1099 crap would be not something we have to deal with. And that there'd be another means of— because there's so many exemptions, right? So not— it's so confusing. The IRS, this is something that just needs to be overhauled, in my opinion. But it is what it is.

In the meantime, you do have a lot of exposure in personal injury on these.

Certainly do.

And we've had people in the Law Lab tell us that their client just said, I don't want to do those.

Get that writing.

What do we do?

Yep. Get that in writing.

Get it in writing. If they're telling you that they absolutely don't want to go through the—

It's on the phone, send an email back, confirm it.

Get it in writing from the client, because that protects you, because it's really part of, and it shouldn't really be part of our work. You should have it in your contract too, that you are going to do it.

It is a separate body.

It should be spelled right out. Like there's a setup fee of $500 and it's $25 or $50 per form. You know, that way they've got it. There is sometimes where we sit there scratching our heads going, this person, should they get it or shouldn't they get it? I mean, it's just, you read the directions. I mean, I told you, I tried to write, I gave it some, I gave ChatGPT a very hard task of writing a blog post for me using the language on the 1099 specific to an attorney. And I gave this big long directions and I wrote an article and I'm looking at it, I'm going, no, that's wrong. And this is the exact reason if ChatGPT can't understand how that's written in the, language in the IRS's own guidelines that tells you how foggy that area is. It's very murky when you're trying to understand it. And sometimes I'm reading it out loud, Sarah's reading it back to me. We're trying to like, do you think this would fall underneath this? You know, because it's complicated.

All right, so let's look at this. I'm an expert witness and you've hired me on your personal injury case, Mr. Attorney, Ms. Attorney, and I'm billing you $5,000 for my expert witness fees and you also have to pay for lunch and parking.

Okay?

You know where I'm going, Sarah. Let's talk about, I wanna ask a couple questions. First one, and then I'm gonna ask the second one. How are you posting this on the books?

Well, you're making me pay you lunch and parking, so I don't care. You're, that's your fee to me and I'm gonna charge, I'm gonna put that all on there that you, you are gonna track the lunch and parking on your end 'cause you're the one spending the money on the lunch and parking, not me. Some people though, I know some people break it out.

Well, no, some recipients want it broken out. Yeah. So what that, what that means is, um, sure, we're going to pay you this, but on your side, you— it is not a deduction to you. You've incurred it and you've passed those fees on to us. That is not on your business.

But then you don't have a receipt, Sarah. You have no receipt to prove you paid the parking or the lunch.

You can— you— it doesn't I'd have to have that. You would want a copy of it. It would be like reimbursing an employee.

I would separate the payments.

The recipient needs to have it broken up accordingly on their set of books. That's their problem. If that's how you wanna do it, it's no different in legal than it is in any other type of profession.

The construction where they told me, they would tell you, well, I had to buy paint and I shouldn't have the paint included in what I charged you for doing the painting. Well, I didn't buy the paint. You bought the paint. You have a company or income, you know what I mean? But if you're charging me as the painter for the paint and you're deducting the paint, see, they want to deduct it 2 times. No, you don't get to deduct it twice. If you're paying—

That may not be everyone's situation, but in that regard—

I've had that happen.

I've had that happen.

I know you have.

From our experience, it's actually— yeah.. But to what Steve's getting at, this expert witness and those expenses. Now, that's not too often I see that, Steve, to be honest with you.

Hey, question number 2.

Oh, here he comes. He's got something up on the internet. I can tell. See the reflection in his glasses?

I didn't wear my glasses today. No, I'm kidding.

Anna the attorney.

Personal injury case. Personal injury case. I am a contract paralegal. I'm going to charge you $5,000 for my services. But then on your behalf, I go out and file a motion and there's an expense there. And then there's all these, these, these different expenses that are going on. How are you booking it on the books? What am I responsible for on 1099 in that scenario?

Are you referring to case costs associated directly with the Yes, ma'am. That the paralegals on behalf of.

And they're buying it on for the firm.

That's very interesting. Yeah.

That's very interesting.

I mean, that's a client expense pass-through. So at the end of the day, the firm has now spent with me $5,200. $200 are case-related expenses and $5,000 is my fee for contract labor.

I would pay you separately. One is a reimbursement and I want the receipts because I need them for the case. And then I would pay you the $5,000 as your contracted fee, but I would want to pay the expenses.

And that's what goes on the 1099, right?

Mm-hmm.

The $5,000 does.

Yes. Because I'm getting the expense.

I'm just bringing this up. I'm being devil's advocate here for people to learn. 'Cause I've seen this happen on a few occasions with firms where you have somebody in the firm doing their own books.

Okay?

Mm-hmm. And they're following up. Right, right, following. Yeah, they posted the whole expense, $5,200 to contract labor, and that's what's going to go out on the 1099 because—

In that case, because you know, you can't—

And I want to caution everybody on that to be careful in training your law firms about keeping documents and attaching them in QuickBooks to the transactions and all that so that on January 3rd, on a Sunday afternoon at 5:00 when you're going, why am I doing these damn 1099s and you're trying to break it up and figure out—

Or January 3rd. Did you mean the 31st?

It's not that you can't or you can. I think that what happens here in that scenario is it's the person receiving that 1099. You have to validate it back. If you see that it's inclusive of expenses, you can request a change. To actively reflect it and/or you're picking it up on your side with the active reflection of exactly what was happening. The confusing thing is, is though, it's that kind of like you're being— your income is being validated back to this document, which all the more reason goes back to the whole thing of why, like the practice that you brought up, Lynda Artesani, you'd want to do these separate, no matter what, whether you're paying for meals or not, no matter what, you'd want some sort of separation or delineation of those details and backup copies of the receipt. So I, if any contractor was to say to me, hey, you're going to pay for my meal. Well, okay, well, first off, where is it in the contract that says that I pay for that? I pay for services. I don't pay for your time, meal. Parking is understandable. That can be passed through as a cost.

Mm-hmm.

But things like that, to your point, or client costs.. So those subcontractor agreements or those contractor agreements that are from the law firm to the individual who's providing the service also needs to be clear. And I think that's the best time to have the mandate of a W-9 on file because no payment will be served until that. It needs to flip a bit, but it's also— it's the ownership on the other side. If you're receiving a 1099 from an individual and it's the wrong amount, I've seen it before. I've had people come back and say, hey, that's not the right amount. I find out somebody put a double payment in. Okay. Or something went awry. I mean, we've seen it all in that regard. So you have to be really, really careful. And then on top of—

I'm sorry, go ahead.

Oh no, I was gonna say on top of that—

I'm passionate about this.

Yeah, so I'm with you. We've had this in other types of firms too, not just contingency.

Sure, sure.

Where other types of services. You have a house cleaner that has to go in because the assets need to be— because something happened and that particular asset needs to be sold and it goes back to the trust account. Okay, so what happens there? Other types of services outside of expert witnesses. And almost you have to put a very big lens on— it's like a micro business that you're going to do this on, this body of work on. And I often, I will go to a tax, somebody who has taken the required CPEs for the year and specifically on the 1099, and I'll ask these questions. And sometimes it's just a deer in headlights of understanding because to Lynda's point, this is not an easy space to play in. This is a hard field to play in.

Yes.

So if you're going to intimately know how to help service law firms, you have to also allow yourself the opportunity to say, I'm either going to know this or I'm not. And if I don't know this, how do I want to get here? Or I'm going to be in the in-between, but I'm going to learn. And you're going to put that caveat. This is you and I together. The ownership, the onus is on the firm owner no matter what.

Correct, correct. Yeah. And so with that said, you go through that exercise of, of training them on getting the W-9s ahead, irregardless of what dist on everything. Then number 2, sporadically throughout the year, taking a look, just pulling out your vendor reports and looking and see how much has been spent per vendor and seeing, you know, double, just do a spot inventory of is, are the W-9s there? You know, get the client back in the loop again. And then at year end, very important. And this ties into what you were just talking about, Sarah.

Mm-hmm.

The final step is because the buck stops with the owner of the firm, the attorney. They've got to sign off on it. Yes, I am sending a W-9 to Sarah Prevost for $3,210.48.

Mm-hmm. Done.

And you get their signature on that because later on, to your point, when they challenge the W-9 and there's an error and they threaten you with the IRS or you have to do a correction or whatever, You've got the trail. You've got the trail.

That's the most important for sure. Yeah, I know it's not easy. And I know we're talking about contingency law firms, but it sounds crazy—

This is huge with them.

—focused on a 1099-C, but it is. Yeah, I fully agree with both of you. So Lynda Artesani, I'm curious, prior to our deep dive together and having gone through this, I remember you were like, no, I don't really handle this. You had other people assist you. But now that you've gone down this road with me and watched me through agony every January.

Every January, yes.

What do you feel from your perception? Because I don't think you had that as deep of a dive with until I—

That's a really good one. I'm glad you brought that up.

Talking about the—

Just the process. On the 1099s? Yeah, from the standpoint of now knowing what you know, having us work together, what is your thought on it?

It is so freaking complicated. And every year I really think we have to make sure that we, and I know this isn't a show on 1099s and I'm sure we have one of those coming up, but it's a process. And every year when we do it, I think that you have to kind of do it throughout the year to get it done right. And like we were talking before we started to record, getting the right language and getting it all in place so that every year I say to myself, we can't let this happen to Sarah again because she does it all on that track 1099 thing. And, you know, I do, I do a handful of my own clients, but I do them on QuickBooks payroll and I just do them into it. But they're nothing like the ones that we have together, these bigger firms that are super complex and the process is just terrible. And to stay on top of it during the year. And that was what I love about Keeper is that whole process of 1099 collection.

Mm-hmm.

A lot of times you just get your head down, you get working, the admins get working, and then nobody really thinks about the 1099s until January. And then it's the mad rush to get them where we've got everybody calling and people get snippy. They don't wanna bother with you. They're like, ah, like that's last year, I don't wanna talk about it. And every year I think we gotta make this better because it always lands on your lap where you're up till 11, 11:30 at night finalizing some of these. And that's the thing I don't like about this system. And I don't— the process. Yeah, I'm hoping that we have a better process this year. I hope this every year. And so far, what are we, 5 years running now? We haven't really perfected a process. Um, last year, because we don't change the rules at the end of the year too, they were gonna— well, and one thing, and then they pulled that out, so that didn't help.

And then the rules are different here too, Lynda Artesani.

Everybody about it, because every year I have to be reminded of it. I have to remember like which things go on what form. Now they've separated the foreign, so they get the NEC, then you've got the miscellaneous and there's different reasons for different forms. And I think that that's part of it. And because we only do this annually.

Yeah.

And if we're not looking at it during the year, it just becomes a big project and then it becomes a pain in the neck project because not only are we dealing with that in January, we're dealing with Well, it's January. Let's get our books done. And that's the other problem that we run into with clients is that January last year, especially after the pandemic, everybody wanted their books done on time. Everybody was pushing.

When did they get filed?

When did they get filed on time? None of the tax people, they all put them on extension, but the clients pushed us to get that done in February and we got them all done. Sweat equity, weekends, killing ourselves only to find out in August or September, it was like, well, I need this or that. What do you mean you need this or that? And you do your tax return? No, that's why they never answered the question about we need the tax return to tie the books to tax. That's why you never answer that question because you hadn't filed them. It was, I guess it was okay that the tax person didn't file them on time, but it was us that had to get them ready to get them ready in case, which never happened. And that was super annoying last year that every one of them got pushed out.

The other thing on the changes, there's been some more changes, so I'd encourage everyone to— More changes. And they make changes, they'll make changes late. They made changes late last year.

Really?

There is a big change on electronic filing versus paper filing. No more are the days that you can send in—

No more signing.

Well, you know, 2,000 papers of 1099s and all those, you can't do that. Or not 2,000, but you know, you get my point. Yes. The bulk amount. It has to be electronically sent if it's over, I think, 10, and that includes W-2s.

So who still does it that way though? Seriously. Well, law firms, you know, unfortunately a lot of law firms.

I'm gonna keep my mouth shut because we know a few, but you are not permitted to send in the paper form is the way that— that's— they want the electronic form. And that includes your W-2. So if you're a firm of 3 and you have more than 7 1099s to send in, yep, then you have to be accepted. You have to do the electronic—

I want to do them electronically anyway because it's—

Oh, there's— correct, because they think the cost is cheaper to print them, but it— here's the, here's the misnomer of the entire thing. Yeah, you could push a button to push them in, right? But are you the person on the back end doing all the extra prep work to get it there to the finish line?

It's not just pushing the button. No way. And, you know, Intuit's payroll, it's included. But if you don't have it and you want to do it through them, the pricing, like up to the 7th of the month is way cheaper per form than it is at the end of the month or past the end of the month.

You file the most— Most are like that. Any software. So The fact that we're producing them for you, there is a fee that's incurred to any firm. It doesn't matter what software you use. Yeah, regardless of software, there is a cost for that unless you're using— and I don't know if it's—

Which goes back to—

To the IRS system.

Which goes back to— sorry, you have to have it in your contract. If you're working with these attorneys, no matter what practice area, not just this personal injury, which is even harder to do. You really have to have that as a separated item.

Do you know, isn't the IRS going to do a platform for the 1099s at some point?

That you'd be able to type it in like they used to do with the W-2s? They had it there.

No, not typing them in, a portal on their site for submission. I don't know, I I thought I read that. I don't know if that's available yet or if that will be available. Anyways, I digress, but that's something I'm interested in.

Oh, I want to grab the two of you and bring us back over to contingency personal injury.

Okay.

The attorney receives a 1099 for the client's settlement. Go, go.

Oh, Steve, this is really mean. This is not, we're not talking 1099s. He's talking about the big settlement. So the whole settlement goes to, the client, the client gets a 1099 from, let's just say Geico again, sends that 1099 to the client for the whole thing. And he actually, he or she actually took their piece, paid their expenses and took their piece. And then part of it went to the law firm's client. So they still have to send a 1099 to the law firm client for their piece, right?

Mm-hmm. I'm talking about the attorney receives a 1099 for the entire settlement because that's where it went. —be disbursed.

But then the attorney has to give one out for the other, the part that they gave out.

Yeah. And that's always, that's always—

Not, not always. A tricky situation.

Well, if it happens at the end of the year, it could not be.

No, it's not always that a 1099 goes out. Type of settlement does not deem— not every settlement.

I'm just saying that they got one. They got it. What do you do?

Yeah. What have you done?

Have you not had that happen where they, they have one and they're really pissed off because they got this gigantic thing and I didn't get to keep all this money. Have you had that conversation, Steve?

Right. So, so sometimes there's unraveling there that has to be done.

Yeah, we've had it.

Uh, and then you get the joint check situation too, where they send it out with a joint check.

So these are all things with personal injury and contingency cases that if you're doing your homework up upfront and setting the stage for success early in the year and throughout the year, you can minimize the year-end nightmares tremendously.

And the old theory, when in doubt, send it out.

Yeah, but I'm curious on the receiving side of that, in your experience, Steve, what have you— how have you handled that receiving 1099 if it's inaccurate because it's for the full settlement? You have to go back to the—

If the full settlement landed in that bank account though, if they did get all that money but then they divvied it out, does it make a difference if part of that money went out and you've now sent out a 1099 for the piece that you didn't get?

Well, no, Lynda, think about it. Not every settlement for your client is a 1099 moment.

True, true.

So how do you justify what—

I don't have the answer here. This is why I asked this out.

Reimbursed wages would be on a W-2.

That's a portion. That's a small portion. Think about it.

But the IRS isn't reading 1099s on a business, are they? I mean, I guess they are, but they're— that would be included in—

I am not even gonna even—

Would be including your revenue.

They're really looking at your numbers that you file on a tax return as your—

How are we explaining this to our contingency lawyer?

That's the question. It's not so much to me And we've had this come up in a conversation.

We have had this conversation.

So just because the insurance is providing that 1099 in full, now it just needs validation back to what was earned and the difference. And I think there has to be an explanation. The other interesting thing too is I have seen, right or wrong, a 1099-K on a trust account. Yep. You have to explain that because that's not earned money, that's other people's money. So are we—

and it's just a loaded question— are we kicking the can down the road to the tax preparer? Are we training our client? Are we—

they're not going to handle— they're not going to do anything with that, right?

Right. Yeah, I think it's a joint thing, Steve, because it kicking it down the road, we still need That do they? The tax individuals, ultimately, to Lynda's point, regardless of you receiving a 1099 or not, money earned is money earned. That should be on your financial statement. You might have discrepancies of when it was earned, cash versus accrual, but money earned, money earned. The thing that I think is really important is we need some guidance on How do you handle that when you've got too much in 1099 funds technically that are not your funds? Those are not your funds. You only earned a portion, a 33.3% portion, let's say, on those.

So in that case, is it appropriate to go ahead and file the tax return based on the real numbers out of your books? Have your copy of the 1099, the IRS gets their copy of the 1099, and you handle it if the red flag comes up.

That's a tax thing. That I— the whole last—

These are all valid things that happen to our contingency clients.

Yes, these are. Yeah, yeah. No, it's squeamish feeling.

They're going to ask us.

Now you just scared every listener away from working with a personal injury attorney. Now they're like, they started out, oh, this sounds good. And then all of a sudden you just kind of rip the rug out from underneath them, Steve.

Yeah, but this is real. This is real. And it's something you have to think about. And it's all in setting up your systems and processes throughout the year.

Mm-hmm.

Mm-hmm. I mean, I'll beat this one to death, but—

We can do that on a 1099 show. Yeah. Probably the most, most listened to show ever, cuz it's the most popular one that we do multiple times during the year with the Law Lab, because it's, everybody's like, oh, this 1099 stuff.

Let's tie all this together now then. So if you're going to work with contingency or, personal injury attorneys, and you're going to know that you're going to work with more cash flow issues, the client cost issues, the cashing the checks too early.

Mm-hmm.

They're real— the funds are really good, you know, making sure the settlement math is done correct, being aware of items that are going to be negotiated down like Medicare, Medicaid, all those sorts of things. If you're going to do this kind of work for attorneys, it can be very rewarding. And monetarily for you and your business as an accounting person, don't undercharge your services here.

No.

Know that, know that you really are worth all of this extra work and this extra set of eyes and these guardrails that you're putting up for safety on and protecting your client.

And I'm staying quiet because I want to run away.

The cash flow, the cash flow part of this, Steve, is very hard to calculate as opposed to any other type of practice area because you look for patterns and things like that. There's No patterns. And you really have to have a clear channel of communication with the attorneys. They know when these things are starting to settle. And quite frankly, if it's insurance, a lot of these settle. Like, the more— more of them settle, not— a good PI firm will have systems in place to try to settle them quick with a fast negotiation with an insurance company if they see that something that can be settled fast.

Good points.

When the economy goes down, you might see more injuries. So they actually— their work goes up Yeah, you really need to talk to the attorney to understand the cash flow. And if they do see them coming into a windfall, jump all over that because prior to that you might be robbing Peter to pay Paul to do the payroll. And then now you're going to be sitting there going, hey, let's have a chat about you just got all this money in. Let's not wipe it out as a distribution. Let's put some money in a rainy day fund for, say, 6 months so that you're not doing this, you know, taxable income. But yet you do, you want to like hold our breath that we can pay the employees? No. So let's start to put some things in place. It's really great opportunity to have cash flow conversation, but yeah, to have— you need to have that full understanding of how the firm works and what they've got outstanding, which the attorneys will know what's out there. They'll know when they're aging out and when things are going to probably settle, and they have a good feeling if they've been doing it for a while. They have really good grasp on when these cases are going to come, but they also might have to put their own funds in, which is another thing you have to deal with if they end up having to put money in. To keep the firm operating.

For those attorneys that are listening out there and for those bookkeepers and accountants that are listening out there, if you have a scenario where you have a brand new personal injury law firm, that first settlement that comes in, really coach them to your point, Lynda.

Yes.

Set aside $500,000 out of this settlement. Set aside $200,000 out of the next one. Build up that cash so that you've got it there for the rainy day.

Well, the hard costs, the hard costs, you advancing so much. You invest so much money and you have to track that so meticulously and it's not easy and things get missed.

Yep. If you're looking at a new file like that, you wanna make sure you take a look at how that's set up from the past bookkeeper when you're doing the pricing on a cleanup. 'Cause that is one of those areas that you'd be like, did this get expensed already in the books? We've seen that.

And number two, along with the cash flow, subject, Steve's favorite subject of KPIs. When you're working, when you're working with that type of firm, you've got a lot of moving targets.

Yes.

And so, you know, one year their labor costs might be this, the next year it might be that. It's, it's, there's a lot more variables involved in working with this type of firm. But if you can hone in on the cash flow, that solves a lot of those problems and a lot of the other things fall into place.

What do you think, Chester?

Chester, do you have an opinion? You can look at them. Hi, Chester. This is a good conversation.

This is a good one.

Yeah, it was. Thank you. This was great.

Thank you.

Well, we're obviously passionate about this topic. We are.

No.

All right, Tiara.

Take us away.

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I think Chester's gonna take a nap because he's getting a belly rub.

So I know he can hear Tiara's voice. You can hear her.

Yes. Yeah. Thank you, Tiara. So, oh, he's so cute. So on that note, we all hope you have a wonderful week and we'll see you all next week.

Thank you. Bye. Bye-bye.