Written by: Saundra Uy CPA, CVA, CGMA
For most businesses, 1099 rules are the same across the board. In general, business payments made for services of $600 or more in a calendar year to a non-incorporated vendor require that the business issue a Form 1099 to that vendor. However, 1099s rules for attorneys are unique in many ways – on both the giving and receiving ends.
Attorneys Receiving 1099s
If any business pays legal fees to an attorney, the IRS has special rules for if and how they are reported to that attorney on Form 1099.
Rules of thumb:
- Your business will report payments to an attorney on Form 1099-NEC if your business was their client. Examples: If your business used an attorney to write up a contract or to help you with your business formation documents, those fees are reportable.
- You (an individual who is not a business) will not have any 1099 reporting requirement payments to an attorney of a personal nature. Examples: If you used a lawyer for personal reasons, like estate planning or divorce, those fees aren’t reportable.
- Your business will report payments to an attorney on a Form 1099-MISC if you’re paying someone else’s lawyer. Example of when that might happen: Usually, it involves a legal dispute that have you paying damages or settlement proceeds. Settlement payments may go to the lawyer of the injured party, who in turn is in charge of distributing the funds to their client.
- Please note that you will issue a 1099 in all of the above circumstances, even if the law firm is incorporated. The general rule limiting 1099 recipients to only non-incorporated businesses does not apply to attorneys.
Attorneys Issuing 1099s
Form 1099 reporting to and by attorneys can be complicated, including determining which of the three possible 1099 forms applies in a given situation (1099-MISC, 1099-NEC, or 1099-S), as outlined below.
Other complicating factors (not addressed in this article) include determining the reportable amount and which box on the 1099 form to report the payments.
Rules of thumb:
If a law firm pays vendors for services, the IRS has rules for how they are reported:
- A law firm that shares cases with attorneys from other firms under a fee-splitting arrangement will report payments to the other attorneys on Form 1099-NEC.
- A law firm that pays Rent will report payments to its landlord on Form 1099-MISC.
- A law firm that pays for various other services will report payments to its (unincorporated) vendors on Form 1099-NEC. Examples: landscapers, cleaning services, consultants, and contract labor.
If a law firm receives proceeds into its Trust Account before paying them out to the recipient, in some cases, IRS reporting requirements could apply:
- A law firm will, in some cases, issue Form 1099-S to report gross proceeds from the sale of real estate.
- A law firm will, in some cases, issue Form 1099-MISC to report gross settlements.
- A law firm that pays for various services related to a case will report payments to vendors on Form 1099-NEC. (Examples: private investigators, experts, consultants)
1099s Arising from Legal Settlements
Legal settlements have many nuances to consider, including how to determine when the settlement is taxable, whether the attorney fees in a lawsuit are deductible, if/how the claimant reports the settlement on their tax return, and how much the attorney reports as taxable income on their tax return.
Rules of thumb:
- The party that pays a taxable settlement or judgment to the injured party and/or their attorney will issue a Form 1099-MISC, Form 1099-NEC, or W-2 to report the settlement. In some cases, the claimant and attorney are issued separate 1099s reporting the same settlement dollars.
- The party that pays a non-taxable settlement or judgment to the injured party will not have to report the settlement to the claimant but may need to issue a Form 1099-MISC to the attorney to report gross proceeds.
IRS penalties apply for failing to properly and timely issue required 1099s and for failing to properly report taxable income.
Suttle & Stalnaker, PLLC is ready to help you. If you would like more information on how this applies to you, contact Saundra Uy, CPA, CVA, CGMA in our Charleston office by email at suy@suttlecpas.com or by phone at (304) 343-4126.