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.
FAQs
To law firms: Issue Form 1099-NEC to all law firms, regardless of their tax filing status. To landlords: Issue Form 1099-MISC to landlords, regardless of their entity type.
Should I give my CPA a 1099? ›
If in the course of your business you have paid for independent contractor services (including parts and materials) or have paid rents (such as for office space or equipment) a Form 1099 must be issued. Fees paid to accountants and lawyers must be reported.
Should attorney fees go on 1099-NEC or 1099-MISC? ›
Therefore, you must report attorneys' fees (in box 1 of Form 1099-NEC) or gross proceeds (in box 10 of Form 1099-MISC), as described earlier, to corporations that provide legal services. Taxpayer identification numbers (TINs). To report payments to an attorney on Form 1099-MISC, you must obtain the attorney's TIN.
How to make the most of a 1099? ›
Six Tips to Avoid Paying Taxes on your 1099
- Set Up an Automatic Savings Plan for Taxes.
- Use a 1099 Tax Calculator to Estimate Taxes.
- Make Your Money Work for You with Micro-Investing.
- Create an Emergency Fund.
- Itemize Your Deductions.
- Employ a Tax Professional.
1099-NEC (non-employment compensation) is the form to report payments of $600 or more to: Freelance creative service providers (graphic designers, web developers, writers, etc.) Professional service providers (accountants, consultants, etc.) An attorney (for usual services), even if the firm is a corporation.
What is not reportable on a 1099? ›
Payments made to corporations, except those made for medical or health care services and attorney fees, are not required to be reported on Form 1099 MISC. Non-Employee payments – Non-employee payments are reported in Box 7 of Form 1099 MISC.
Who should I issue a 1099-NEC to? ›
So who gets a 1099-NEC? Typically, this form is issued to independent contractors, janitorial services, third-party accounts and any other worker paid for services who is not on the payroll.
Should I use 1099-MISC or 1099-NEC? ›
Difference between 1099-MISC vs.
Form 1099-MISC is for reporting payments like rent or prizes that are not subject to self-employment tax, while Form 1099-NEC is for reporting nonemployee compensation that is most likely subject to self-employment tax.
Do I need to send a 1099 for professional services? ›
The IRS provides the following examples of who should receive 1099s: Anyone who provided professional services, like accountants, engineers, or architects. Non-employee salespersons earning commissions. Independent contractors who get paid for services, goods, or travel or received benefits.
How much can you make on a 1099 before you have to claim it? ›
How does an independent contractor pay taxes? If you earned $600 or more during the year (regardless of whether you received 1099s for that work), you'll need to file an income tax return when tax time rolls around.
Form 1099-MISC Box 10 shows gross proceeds paid to an attorney in connection with legal services. These amounts are generally reported on Schedule C (Form 1040). Enter only the taxable portion as income on your return.
How much do you have to make on a 1099-NEC to pay taxes? ›
Nonemployee compensation and Form 1099-NEC
The 1099-NEC only needs to be filed if the business has paid you $600 or more for the year.
Can I write-off expenses if I get a 1099? ›
Can I write off expenses if I get a 1099? Yes, all self-employed individuals can write off business expenses. Self-employment includes 1099 contractors, freelancers, gig workers, and small business owners. You do not need to be incorporated as an LLC or corporation to file tax write-offs for business expenses.
Can a 1099 employee write-off car payments? ›
It's natural for freelancers who use their cars to expect to claim a car tax write-off on their 1099 tax. But if you bought a car and are making monthly payments, or you're leasing a car, the payments are not actually tax-deductible.
Why are my proceeds so high on my 1099? ›
Your sales proceeds and cost basis on your 1099-B may be much higher than your portfolio's earnings or balance was at any given time, because these proceeds represent the total amount of cash proceeds from the sale of securities, even if said proceeds were then used to buy securities again.
Do legal entities get a 1099? ›
Corporations and S corporations are not usually required to receive 1099 Forms for services provided. This is because they are considered separate legal entities.
Do I file 1099-MISC or 1099-NEC for lawsuit settlement? ›
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)
What is the difference between a 1099 K and a 1099-NEC? ›
1099-K, 1099-NEC, and 1099-MISC are forms sent to you (and to the IRS) reporting income you earned as a freelancer. 1099-K forms are usually sent out from a payment-processing entity such as PayPal. 1099-NEC or 1099-MISC forms are sent out from people/companies who made payments to you.
