In this instructional video, Linda Artesani of Artesani Bookkeeping explains how law firms and attorneys must handle 1099 reporting for contractors and outside service providers. She begins by noting that, like any other business, law firms hire contractors such as expert witnesses, co‑counsel, or other professionals, and any payments over the $600 threshold generally require a 1099‑NEC. The key exception is that all payments to a law firm must be reported on a 1099‑NEC regardless of the firm’s entity type (C‑corp, S‑corp, LLC, etc.). She outlines several common scenarios that generate 1099s, including expert‑witness fees, co‑counsel fees, joint‑check payments from insurance companies, and gross proceeds paid to attorneys. The video walks through the 1099‑NEC form, emphasizing the need for the recipient’s Tax Identification Number (TIN) via a W‑9, proper name and address fields, and the fact that no federal or state tax is typically withheld. Linda highlights the 2020 change eliminating the automatic extension for filing (previously Jan 31 → Feb 28), stressing the importance of gathering vendor information early to avoid penalties that can reach 10 % of the payment amount. She then demonstrates how to set up contractors and track 1099‑eligible vendors in QuickBooks Online Advanced: locating the Contractors tab, adding vendors, assigning the “track 1099” flag, mapping expense categories (e.g., Expert Witness Fees, Commission, Rent), and using the QuickBooks 1099 platform to generate the forms. She compares QuickBooks’ built‑in 1099 service with third‑party solutions, noting cost, flexibility, and timing considerations. Finally, she mentions an upcoming video on budgeting for attorney clients. The overall message is to be proactive, collect W‑9s before paying, correctly configure QuickBooks, and file 1099‑NEC forms on time to avoid costly penalties.
Chapters
Hi there, Linda Artesani, Artesani Bookkeeping. This week we're going to talk about 1099s and processing them if you work with an attorney or a law firm and what the differences are. And there's also similarities, so we'll start with the similarities. For similarities, it's the same as any other business. If you work for a general contractor or a home remodeler or someone like that, they hire maybe a roofer to do the roofing part of the business. And they hire an electrician, maybe do the electrical kind of work. For law firms, it's the same thing. We may have a matter or a case that we need an expert witness, and we'll hire co-counsel to come in and help us with the case. They may be an expert in that one particular thing. We may hire an expert witness who has nothing to do with this, but it might be just somebody on the outside that we know. Maybe it's a case that's medical, we need to bring a doctor in to do, uh, be paid to To help our client to win the case. So that's another example of just—they're just a contractor, nothing more than that. They're professional services you're hiring, you're spending money on. Yes, those would be services that you have to—that could be client advanced cost as well. But we need to address those because those are fees paid to some outside person to help you with the job, the matter, the case. So those are just a few examples that you may have of. paying somebody on the outside as a contractor. So we would definitely— if they hit over the $600 threshold, we would have to provide them with a 1099 unless they are a corporate corporation or something like that. You don't have to unless they're a law firm. So there's the catch. If you hire an outside law firm, regardless of their entity, whether it's C corp, S corp, doesn't matter, you still have to provide them with a 1099. That's the one little catch. It's almost like they don't trust the attorneys, but we do have to still send the 1099. So be aware of that. That fact. I always say when it comes to working with law firms and attorneys, just cover your bets and, and send one out no matter what. If you're unsure, send it anyway. It's better to send it than not send it because there's penalties and there's fees, and some of the fees can be significant if you're fined on— if you're fined for the 10% of what you paid out. So remember that as part of it. Also going to get a little bit into some of what types of scenarios would prompt maybe a client to send us a 1099, send the law firm a 1099. It would also be a matter of maybe an insurance company sending a 1099 to the law firm. There's different scenarios where these things might happen. One of the ways, and I'll talk about this a little bit in the blog post in more detail, is sometimes you win a case and the insurance company, for example, sends the law firm a joint check. And it might send a check to one— send the entire check to the law firm where the law firm would then deposit it into trust and then send the payment out to the client for their piece, and they keep their piece for their legal fees. You got the 1099, you don't then issue one to the client. You've gotten the 1099 for the full amount. You're not going to then, you know, be kind of like double recording it with the IRS. You just— you just take that 1099 for the full amount, even though you didn't get to receive that money. you will take that in, it will be offset by your records. So it's a couple of ways that you start to look into the details of how this works with attorneys and law firms. Now let me take you into the screen where I'm going to actually show you an example of a 1099. We have a new form, which is actually an old form, the 1099-NEC form, non-employee compensation. And this is the one we're typically using for the most part with attorneys and law firms. And in fact, processing those out for our clients. So I'm going to show you the new form, which used to be back in the '80s, and they resurrected it. So they've kind of divvied out the basic miscellaneous form that we have been using for years. So in case you're not familiar with it, it's the same form. It's just a little bit less confusing, I think. So let me share my screen. I'll show it to you. Here we are on a 1099. This is just an example. And you can see here, you'd put the name of the company. They used to build their company, the name of the person that would be the recipient of the 1099. And this is the non-employment— non-employee compensation. So the NEC form. 1099-NEC, which you can see down here in the bottom of the form. So you would just fill in the name of the employee, name of the person getting the funds that received the funds from you during the year for that. It could be expert witness fees, it could be a co-counsel that you hired, it could be for— there's quite a variety of things that it could be for, and I've listed a few inside the blog, but there's quite a few scenarios where you might be paying somebody money as paying an outside firm to do the work that was part of your matter or case. You want the taxpayer's TIN or their identification number. If they are a corporation, you put the FEIN. They could be an LLC, an LLP. Those are more common when working with law firms. That would be the number they would have, like your FEIN number. So it's a tax identification number. It's the TIN here. You can see that when we get into this piece right here. It could just be this number and not. So you're gonna send a W-9 to your person, hopefully before you pay them. And then, um, you're You want to make sure that the person's received it before they're paid, and then you want to make sure that they fill it out so you have this information at year end. You can, you can, if you use Track 99 or Track 1099 or one of those outside services, still send them with no number if you can't locate them. But try to get this done when you— before you pay them. If it's a sole proprietor or maybe just a person acting as an LLC, See that doesn't have a TIN, you might want to grab their Social Security number. So it's important to make sure that you have that in place. If they're a sole proprietor, it's the number— it's their Social Security, is their identification number for the government. The rest is pretty easy, right? So you didn't take any federal tax out typically, or state or income tax. So basically it's just filling out the recipient's address and name here. And, and I will put a link to this back inside the blog as well, so you can see that. One thing I noticed when I was reading the changes for 2020 is that they used to have an automatic extension if you didn't get these returns in for the 1099. If you didn't get the forms processed by January 31st, they usually had a rollover kind of an extension automatic to February 28th. They've done away with that this year. So it's really crucially important to start to pull your list now out of QuickBooks, look at your reporting to see how many of these people that you have in here that would be required to hit that 1099 threshold, which I'll show you in a second when we get into the QuickBooks file. And then start to gather this information now before you're up against the clock. That's the most important piece of information I wanted to share with you. So let's hop over to QuickBooks now and let's see how we can handle taking care of that when, when working with setting this up inside the system. So you're really ready to go and rock and roll on January 1st. Here we are inside of QuickBooks. So the first place I would go to try to set up my 1099s would be to go to payroll. And you'll see there's a place up here— let me annotate this so you can see— is contractors. So you'd want to be able to see that the tab here is contractors. And if I go here, I can see I've got add your first contractor. That's not— it means I've not set anybody up the right way. If you find this when you own your file, then you're going to want to perhaps go to the other pages and see where you need to be. So to set up your contractors, let's go find out if we had any contractors in this file. So my next stopping point would be to go to Profit and Loss and look and see if I've got any of those categories set up in my file, like Expert Witness Fee or Contractors. So I do have a contractor. And I've paid some contractors $4,000. So let's just take a peek. Oh, it's commission. So I paid this contractor commission. Let's take a peek at the check and I'll see who I need to set up as a vendor. So it's Lionel Hutz. So I need to go into Lionel Hutz's account and set him up as a 1099 vendor because he's not been properly set up. If you see that, you can see that I can come over here and then I can set him up, track 1099s, and then I'll give his business ID as I think that should be enough. Save. Maybe 8. There we go. So I'm just gonna have a fake number in there. So now he's set up. Now I should be able to go in. So you're going to look here, you're going to look into your other maybe expert witness fees or maybe co-counsel if you've got that expense where you've got a co-counsel expense, which could be a subcategory under your advanced client cost account. So remember that that might be a place where you're still obligated to do the 1099. So let's go— because the firm paid that person some money. So let's go to payroll now and see if we can set up prepare 1099s. So see how this is available now? So I'm going to click prepare 1099s and just click let's get started. So this is using QuickBooks 1099 platform, but if you don't want to use it, you can go ahead and just use a different form, but use their ability to get there because a lot of these, a lot of these other programs are actually a little bit better than QuickBooks depending on how many 1099s you need to process. There's a little bit more flexibility. QuickBooks 1099s, I use it for my own firm. It's very simple. I have a couple of people that work for me that I've paid over that $600 threshold. So I'm able to just do a couple clicks because I've got them preset in there. But then there's also some limitations, like if a client you're working with says, oh, I forgot I paid XYZ company or Mary Beth whoever, and they should have been included and they weren't, it's easier, more flexible to go in and do an modified version of the one that you filed it there. They handle it all by the— the process is handled because that's all that they do. So sometimes it's easier and better to get that outside app than to actually use the functionality within QuickBooks. And then in this case, if you have big lists, I highly recommend it. Actually, my outsourcing team Analytics does this for me on some of my clients that do want me to process it. A lot of times too, the client coming to you may have this already set up with their their tax professional doing it. If they want to do it, this is not something that's fun to do. It's a little bit time consuming. So if your client's like, no, my tax guy's been doing it for years, or my tax gal's been doing it for years, you know, I don't argue that. Let them have that part of the job. So I just have to put in a number here for the law firm. So it will be— take the dash here. Let's see, tax ID. I think that's too many numbers. There we go. So I'm just gonna put a fake ID in here for me. Hit Next. So that's because my firm didn't have an ID in here. And I'm just going to do non-employee compensation. Rent is another common one as well. And I'm going to tell them it's the contractor account, right? So I want to make sure that they know where to go. And then the rent could be the rent, rent and lease. And, you know, you can look through here to see if there's anything else in here that may apply. Gross proceeds paid to an attorney might be one, and then you can pick, you know, professional fees or whatever. If you're paying— if you paid an outside attorney, you might want to have that in there too. So that just might be some of them. And then if the federal taxes are withheld, you want to put that there. Most of the times they're not. And then hit Next. And now I can see that I don't have any details in on my fake vendor, but it's telling me right now that the vendor is missing this information. The address is missing. They can't process this, this 1099 form without it. So knowing that ahead of time, I'm going to have to go back. This is why you want to do this now at this time of the year. I'm going to go back to my vendor and say, hey, I need this. And then you can just add it in from the vendor list or save and finish later. We can come back to it. So this is how easy it is to actually process it inside of QuickBooks Online Advanced. I, I recommend it if you want to use the platform. It's simple. If you do it really early in the month, the fee is less. After like the 12th or the 13th, the price goes up a bit. But, you know, working with attorneys is not so much of a factor, but it's something to consider. That is it on 1099s. Next week, we're going to dive into budgets and really dive in looking at how to create a budget for a client. How to process a budget, and then the things you might want to think about when working with attorneys and budgeting. So on that note, I hope you all have a wonderful week, and we'll see you next week. Bye now.
