Understanding 1099 Tax Reporting for Attorneys

Updated on January 22, 2024 - 10:30 AM by Admin, TaxBandits

Running a business involves making various types of payments throughout the tax year. While you might have extensive experience in paying and reporting non-employee compensation to independent contractors on Form 1099, there are many other payment types that can become more intricate.

One such complex payment type is attorney fees. Navigating the reporting process for payments made to an attorney throughout the year can be challenging and may vary depending on specific scenarios.

Here is an overview of the essential information needed to maintain accurate records for your business and report this information to the IRS successfully at the end of the year. It is also important to note that it is best practice to contact a tax preparer or CPA with specific questions pertaining to your business.

1. Understanding Attorney Fees

There are different types of payments that are made to an attorney. When you hire a lawyer, they will request payment or fees for their services. For example, if you open a business and hire a lawyer to assist you in drawing up documents and incorporating, they will charge legal fees for their service.

There are also some circumstances where you may pay someone else’s lawyer, this is likely in the case of a settlement. The Legal Information Institute defines a settlement as an agreement between two parties that ends a dispute and results in the voluntary dismissal of any related litigation.


2. IRS Guidelines for Reporting 1099 for Legal Fees & Settlements

The IRS requires different reporting procedures for when you are reporting legal fees vs. when you are making a settlement payment to someone else’s lawyer. The IRS requires that you report payments to your attorney for legal fees on Form 1099-NEC if the payment(s) total $600 or more.

When you pay someone else’s lawyer in regard to a settlement, this payment should be reported on 1099-MISC if it totals $600 or more. When it comes to hiring an attorney for personal matters, this is not typically reported on 1099, as it happens apart from the business operations.


3. Navigating 1099-MISC vs. 1099-NEC for Attorney payments

With that said, it is not always that cut and dried. See the table below for some examples of when you should choose Form 1099-NEC vs. 1099-MISC for attorney payments.

Scenario Who should file? (Payer) Who is the recipient? (Payee) Which 1099 is used? (NEC or MISC) What is the deadline?

A business hires an attorney or law firm and pays them $600+ in legal fees.

The business should file to report the payments.

The attorney is the recipient and should receive a copy.

Form 1099-NEC for non-employee compensation should be filed.

The deadline to file and furnish copies of 1099-NEC is January 31st.

A law firm pays another attorney a fee for co-counseling a case.

The law firm should file to report the payments.

The attorney who is the co-council should receive a copy.

Form 1099-NEC for non-employee compensation should be filed.

The deadline to file and furnish copies of 1099-NEC is January 31st.

A law firm receives settlement proceeds on behalf of a client.

The taxpayer who is making the payment to the law firm’s client should file.

The law firm should receive a copy.

Form 1099-MISC for miscellaneous payments should be filed.

The deadline to furnish a copy of Form 1099-MISC is January 31st. The deadline to e-file is March 31st.

A business hires a law firm to represent them in a legal dispute. The lawyers of both parties come to a settlement. The business is in turn required to pay the other parties’ legal fees in addition to their own.

The business should file a 1099-NEC to report the payments made to their attorney. They should file a 1099-MISC to report payments made to the opposing counsel for their client’s legal fees.

The business’s attorney should receive a copy and the opposing counsel (law firm or attorney) should receive a copy.

Form 1099-NEC for non-employee compensation should be filed. Form 1099-MISC for miscellaneous payments should be filed.

The deadline to file and furnish copies of 1099-NEC is January 31st. The deadline to furnish a copy of Form 1099-MISC is January 31st. The deadline to e-file is March 31st.


4. When to Issue 1099s for Attorney Fees?

The amount of the payment made to the attorney will indicate whether or not a 1099 should be issued. Issuing a 1099 for attorney payments is only required if the business paid a lawyer $600 or more. Again, if the attorney was hired for personal matters and the legal fees paid were in regard to personal matters such as divorce proceedings and personal estate dealings fall under non-taxable income, they do not need to be reported to the IRS.

When the attorney payment is directly related to your business, you will likely
File 1099-NEC. While payments made to corporations do not typically require a 1099, attorney payments are unique. Any payment of $600 or more made to a single attorney or law firm is required, whether they are classified as a sole proprietorship, partnership, LLC, or corporation.

If you've paid $600 or more legal fees to an attorney who is not directly serving your business, you should likely use Form 1099-MISC instead. For example, settlement payments made to an opposing party’s attorney or law firm.


5. Steps to Prepare and File 1099s

The first step to preparing accurate 1099s for attorney payments is to properly document them. Throughout the course of the year, all payments made to an attorney or law firm whether they were directly or indirectly your business’s law firm or attorney should be recorded. This way, at the end of the year you will be able to clearly see the total amount of the payment(s) and the purpose behind them. This will help you to know whether a 1099 needs to be issued, and which 1099 form to use.

  • When preparing Form 1099-NEC to report a payment to your attorney, you can enter this amount in Box 1: Nonemployee compensation.

    Form Nec Box 1
  • When preparing Form 1099-MISC to report a payment to an attorney that you are not directly a client of, this should most likely be reported in Box 10: Gross proceeds paid to an attorney.

    Form Misc Box 10
  • When paying legal damages to a claimant (not their attorney), this is generally reported in Box 3: Other Income.

    Box 3

6. Common Mistakes to Avoid

When preparing 1099 Forms, it is important to be detail-oriented and double-check the amounts you are reporting. Additionally, there are a few common mistakes that your business should be conscious of avoiding.

Filing the wrong 1099 Form for the payment

Remember, as a general rule, if a payment of $600 or more is made to your attorney, Form 1099-NEC is likely the required form. On the other hand, when you're making payments for damages from a settlement or compensating a lawyer representing the opposing party in a legal proceeding, you typically need to
file 1099-MISC online.

Missing the 1099 filing deadline

It's important to note that although both 1099-NEC and 1099-MISC are part of the same IRS series of forms, they have different deadlines. The 1099-NEC due is earlier, on January 31st, allowing taxpayers ample time to receive their copy and accurately report the nonemployee compensation they received on their personal income tax returns. It is also important to complete and distribute 1099-MISC and 1099-NEC in time for the recipient copy deadline on January 31st, regardless of the filing deadlines.

Not having correct TIN Information

It is critical that you have the taxpayer identification number associated with the attorney or law firm that you’ve made payments to. If your business doesn’t have this information available at the time of filing, it is impossible to file an accurate 1099 Form.

The solution for this is to request a Form W-9 from all contractors, vendors, and attorneys that you do business with well in advance of the year-end filing deadlines. TaxBandits offers both a complete W-9 Manager, and a fillable W-9 option to help payers and their payees avoid this complication.


7. Potential Consequences of Non-Compliance

Not adhering to the IRS guidelines for reporting attorney payments, or any other reportable payments can create a series of issues for your business. This can range from unwanted IRS penalties to legal ramifications. Here are the IRS penalties associated with late filing and failure to file 1099 Forms. As you can see, they range in severity depending on how late the forms are filed.

  • Filing 30 days late from the deadline: A penalty of $60 per return, up to a maximum of $630,500 per year ($220,500 for small businesses).
  • Filing more than 30 days after the due date but by August 1: A penalty of $120 per return, with a maximum penalty of $1,891,500 per year ($630,500 for small businesses).
  • Filing after August 1, or not filing at all: A penalty of $310 per return, with a maximum penalty of $3,783,000 per year ($1,261,000 for small businesses).
  • Intentional disregard of failing to file 1099: A penalty of $630 per return, with no maximum limits.

8. Tips for Avoiding IRS Penalties for Form 1099

Always have correct TIN Information

It is critical that you have the taxpayer identification number associated with the attorney or law firm that you’ve made payments to. If your business doesn’t have this information available at the time of filing, it is impossible to file an accurate 1099 Form.

The solution for this is to request a Form W-9 from all contractors, vendors, and attorneys that you do business with well in advance of the year-end filing deadlines. The IRS doesn't require businesses to file Form W-9, instead this form acts as a secure method for requesting another business or taxpayers TIN. TaxBandits offers both a complete W-9 Manager, and a fillable W-9 option to help payers and their payees avoid this complication.

In addition to requesting a W-9 for every vendor, TIN Matching is another way that businesses can ensure they have collected accurate TIN information. TaxBandits offers a TIN Matching feature that verifies the TINs your vendors provide using the IRS database.


Conclusion

The IRS has specific guidelines for reporting attorney payments on Form 1099. Failure to adhere to these requirements may result in penalties and unwanted hassles for your business. However, by leveraging the information needed to file properly and helpful tools like TaxBandits you can simplify the process and enhance the accuracy and efficiency with which you file.

Here are the Benefits of filing form 1099 with Taxbandits

  • Take care of both Federal and State filing
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Frequently Asked Questions on 1099 For Attorney Fees

What is 1099-MISC, BOX 10: Gross proceeds paid to an attorney?

This is a field on Form 1099-MISC, Miscellaneous Information. Payers can indicate the amount paid to another party’s attorney here. A common example of this is when a business is required to pay attorney fees for a claimant as the result of a settlement.


What information is needed for accurate reporting?

Regardless of whether you are filing Form 1099-MISC or 1099-NEC to report payments made to an attorney, you will need the gross amount of the payment to report in Box 1 (1099-NEC) or Box 10 (1099-MISC). In addition to this you will need their basic information, including legal name, address, and Taxpayer Identification Number (TIN).


Do attorneys get a 1099?

Typically, any business-related payment made to a law firm or lawyer that exceeds $600 for services should be reported to the IRS using Form 1099. Regardless of whether the law firm is classified as a sole proprietorship, LLC, corporation, or general partnership, filing Form 1099 at the end of the year is mandatory.


Should a 1099 Form be issued for legal fees?

The answer to whether or not you should issue a 1099 is sometimes. When it pertains to legal fees paid to a law firm or attorney for personal matters unrelated to your business, the answer is no. However, when these legal fees are directly related to your business and the payment was $600 or more, the answer is yes. The IRS generally doesn't require businesses to file 1099s to report payments to corporations. However, in the case of attorney payments, a 1099 must be issued, whether the law firm or attorney is classified as a sole proprietor, partnership, LLC, or corporation.


Should you issue 1099-MISC or 1099-NEC for Attorney Fees?

As a general rule, if a payment of $600 or more is made to your attorney, Form 1099-NEC is likely the required form. On the other hand, when you're making payments for damages from a settlement or compensating a lawyer representing the opposing party in a legal proceeding, you typically need to
file Form 1099-MISC.


Who gets the 1099 in Legal Settlement?

A legal settlement typically arises from a legal dispute, and it requires both parties to agree to specific terms. If one of the parties is obligated to cover the other party's legal fees, in addition to making the payment, they must also issue a 1099-MISC to the attorney of the other party if the amount equals or exceeds $600. To clarify, in this scenario, the party responsible for the payment (the payer) is required to issue a 1099-MISC to the attorney of the other party (the payee).

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