When a business awards attorney fees as part of a settlement agreement, these payments must be reported to the IRS in a form appropriate to how they relate to its taxable income.
As a general rule, all payments for nonemployee compensation, including legal fees, must be reported on Form 1099-MISC or 1099-K.
Box 1
As a general rule, payments to attorneys or law firms totaling more than $600 must be reported to the IRS. You may also be subject to reporting requirements when paying them fees related to settlement agreements. Furthermore, these expenses may qualify as above-the-line deductions on your taxes; accurate documentation is key as discrepancies between what was actually paid out and declared can raise red flags with them.
One common oversight made by business owners when reporting attorney fees is using the incorrect 1099 form. Depending on your circumstances, either Form 1099-MISC or 1099-NEC might be applicable; generally payments related to your trade or business should be reported using Box 1 of Form 1099-MISC while payments made to corporations and limited liability companies that opt to be taxed as corporations should typically be reported using Box 10 of this form instead. Box 10 of 1099-MISC also is typically used to report gross proceeds such as settlements.
Box 2
Gross proceeds payments of $600 or more made directly to an attorney must be reported in Box 10 of Form 1099-MISC regardless of how they are dispersed; this rule also applies to referral fees and fund transfers to co-counsel. Furthermore, this regulation applies regardless of whether an attorney or law firm operates as a corporation.
Though businesses generally understand the rules for reporting non-employee compensation, more complex payment types like attorney fees can be tricky to handle. Prior to 2020, payers used Form 1099-MISC when filing nonemployee compensation; now they must use Form 1099-NEC instead as it specializes in professional service fees such as legal fees billed via professional services providers (which includes attorney legal fees). Usually attorney fees should be reported under Box 1 of Form 1099-NEC instead of Box 10. Read on to understand when using either form 1099 form when filing non-employee compensation payments!
Box 3
An often-committed error when filing 1099s by businesses is failing to report all gross proceeds paid directly or indirectly to attorneys, whether through direct payment or settlement funds that pass directly on. Failing to do this could trigger IRS notices of underreporting and result in audits by auditors.
In order to avoid these complications, it is vitally important that attorneys check their TIN and name information against IRS records using an authorized bulk TIN matching service. This allows for faster and more accurate processing when compiling 1099s – saving valuable time when doing so.
As it can be challenging for businesses to understand all of the payments that require 1099s, some payments may become complex very quickly. For instance, payments received by attorneys or law firms as non-employee compensation (i.e. gross proceeds) should be reported using Form 1099-MISC box 10. This applies to legal settlement payments or referral fees received.
Box 4
If a payment to an attorney was related to legal services work such as drafting contracts or giving advice, such as drafting or reviewing them, the total must be reported on Form 1099-MISC Box 10. This also includes payments made as part of settlement agreements or court awards; it does not cover referral fees paid directly to them or law firms.
Organised tax filings can help avoid costly mistakes when it comes to non-employee compensation. To get yourself on track, collect W-9 forms from all potential 1099 vendors throughout the year – this will keep track of transactions, ensure accurate reporting and help identify any foreign withholding taxes that might apply. It’s also prudent to retain bank statements and copies of checks in case an IRS audit requires additional documentation of records.