Articles & Alerts
Law Firms: How to Navigate Form 1099 Reporting Challenges
As Seen in Anchin’s Law Firm Year-End Planning Guide
The legal industry has its own set of unique challenges when it comes to 1099 reporting for both issuers and recipients alike. The IRS has recognized these challenges and provided guidance in the form of audit technique guides to help navigate those issues unique to the legal industry. Unfortunately, the unique 1099 reporting issues for legal services have still left much confusion. It is important to understand the issues for successful management of 1099 reporting. Following below are the basics on 1099 reporting:
Why is 1099 reporting important?
1099 reporting is a critical component of the U.S. tax system. 1099 reporting serves a crucial role in income reporting and documents deductions among other tax compliance functions. These forms serve as a major source of information for the IRS and state tax authorities. Lawyers and law firms receive and send more 1099s than most taxpayers due to the extensive reporting requirements specific to the legal industry. The handling of client funds by firms sometimes involving significant amounts also attracts closer scrutiny.
1099-MISC versus 1099-NEC
In 2020, the 1099-NEC was introduced in an attempt to clear up confusion surrounding the 1099-MISC and self-employment income reporting. The general use of each form is outlined below as it applies to legal services:
- 1099-MISC – Use this form if the business is paying another lawyer or law firm for items such as taxable damages (box 3) or settlement proceeds (box 10) in a legal dispute. Note: The amount reported in either box should not be reduced by attorney’s fees. The deductibility of attorney fees is a separate discussion beyond the scope of this article. Additionally, while box 3 indicates taxable income, box 10 is more informational as it represents gross proceeds, not necessarily taxable income.
- 1099-NEC – Use this form if the business is paying an attorney or law firm for legal services provided to the business. This includes co-counsel arrangements, fee splitting, or expert witness fees.
Who is responsible for reporting?
A key reason for the overreporting of Forms 1099 is that the IRS is unlikely to penalize anyone for issuing more 1099s than required. Generally, the defendant (whether person or entity) or its insurer, not the plaintiff’s attorney, is responsible for determining whether payments are taxable and need to be reported on a 1099.
All payments are presumed reportable on a 1099 unless a specific taxability exemption applies, such as physical injuries. Given that law firms are often intermediaries of legal settlement payments, some possibility of being considered the payor exists and may not always be clear in either the guidelines or regulations. The tax regulations are not incredibly clear in defining the oversight and management functions that would make the law firm the payor. Thus, many tax advisors look to be conservative and advise that a 1099 be issued when in doubt, especially in cases where it is uncertain to the defendant if, and to whom, the 1099 will be issued and unless there is a clear exemption from taxability. If duplication does occur, it can always be corrected via subtraction on the recipient’s return rather than the issuance of a corrected 1099.
| 1099-NEC | 1099-MISC | |
|---|---|---|
| General Notes | The IRS reintroduced these forms in 2020 to better manage self-employment income reporting. | This form serves as a catch-all for payments not covered by the 1099-NEC. |
| Law Firms | NEC stands for nonemployee compensation. Firms need to issue this form to jury consultants, co-counsel, investigators, expert witnesses, and other professionals who were paid over $600 to assist in a case. These forms help substantiate the deductions on the firm’s business tax return. | Clients should typically receive this form from the payor, not the firm, for all taxable settlement payments reported in Box 3. The firm should also typically receive this form from the payor for the gross settlement proceeds from the case reported in Box 10.
Many law firms choose to issue their own 1099-MISC for all settlements, because the IRS regulations sometimes consider an attorney a “payor” if they play a significant role in the management and oversight of clients’ settlement money. Law firms also need to issue this form to any client who receives a refund from the firm’s direct income, rather than the trust account. |
| Clients | Any clients who paid $600 or more for a firm’s legal services while running their business should provide the firm with this form. This income is included on the firm’s business tax return. | Any clients who paid a firm $600 or more for nonlegal services while running their business should provide the firm with this form. |
| Due Date | 1099-NEC forms must be provided to recipients and filed with the IRS by January 31, 2025. | The deadline for furnishing 1099-MISC forms to recipients (if amounts are reported in boxes 8 or 10) is February 17, 2025. Meanwhile, 1099-MISC forms must be filed with the IRS by February 28, 2025, if paper filed. The due date is March 31, 2025, if filed electronically. |
E-filing requirements: The IRS requires businesses to e-file if they submit 10 or more information returns of any type. This includes forms like W-2, 1099, and 1042-S, and applies to any entity required to file multiple types of information returns—even if no individual type reaches 10. For example, a business filing 6 1099-NEC forms and 4 W-2 forms meets the e-file requirement, as the combined total equals 10. The count only includes forms filed directly and would not include forms filed by a PEO on a business’s behalf. This shift aims to streamline reporting and improve accuracy, and penalties may apply for failure to comply. Go to https:// www.irs.gov/filing/e-file-information-returns for e-file options.
For more information, please contact Steven Lando, Tax Partner and Co-Leader of the Law Firm Group, or Deborah de Vries, Partner and Co-Leader of the Law Firm Group.