Top Form 1099 Filing Tips for Law Firms

Among the first filings of the new tax season are Forms 1099-NEC and 1099-MISC. Ensuring your firm’s Form 1099s are appropriately prepared and timely enhances client satisfaction. Filing these deceptively simple forms can be time-consuming for a busy litigation firm.  For this reason, legal service providers should start reviewing all 2024 payments and recipient data as soon as possible. Asking the right questions and confirming the essential information in advance will alleviate the necessity of last-minute corrections and amendments to these forms.

Consider whether any of the following points apply in 2024: 

Is the payment taxable? 

Form 1099-MISC (1099-MISC) aims to report the income that the IRS will match with the recipient’s returns. Therefore, the 1099-MISC should report only those payments that are reportable to the recipient. Payments not subject to income tax are exempt from 1099 reporting. For example, if a litigation recovery is 100% tax-exempt because it represents compensation for physical injuries, the payer is relieved from the 1099 filing. 

All payments are presumed to be taxable and reportable unless a specific exemption exists. A notable legal exemption is a plaintiff’s recovery for physical injuries and emotional distress emanating from those physical injuries. (See here for further general discussion on taxable litigation recoveries)  

Conceptually, the 1099-MISC is only required when payments are made in a trade or business context. Nevertheless, the Internal Revenue Code considers nonprofit organizations and certain other entities to be engaged in a trade or business for 1099 reporting purposes, notwithstanding the exemption from income tax. Personal payments are not reportable.  

Am I reporting the payment on the correct form and in the correct box? 

Depending on the facts and circumstances, payments to attorneys are reported on either the 1099-MISC or the Form 1099-NEC (1099-NEC). 

Attorneys’ fees of $600 or more paid in relation to a trade or business are reported in Box 1 of the 1099-NEC. This category includes fees that an entity pays an attorney to draft corporate documents or defend a lawsuit. Most often, these are fees that a client pays their own attorney for legal representation. 

In contrast, Box 10 of the 1099-MISC (“gross proceeds paid to attorneys”) is used to report payments to opposing counsel, such as when attorneys’ fees are required as part of a settlement. These are typically attorneys’ fees that are awarded to the opposing counsel.  

Suppose the payor makes separate payments to the attorney and the claimant. In that case, the payor should issue a 1099-MISC to the claimant reporting damages in Box 3 (“other income”) and a 1099-MISC to the claimant’s attorney reporting gross proceeds paid in Box 10. 

Payments to attorneys require Form 1099 reporting regardless of whether the law firm is an unincorporated entity—partnership, or sole proprietorship. The corporate exemption to Form 1099 filing does not apply to attorney payments.

Are we the entity that is required to issue the Form 1099? 

The 1099-MISC issuer is the person or entity that has a significant economic interest at stake. In tort cases, the defendant or insurer making the payment is responsible for Form 1099 or 1099-NEC.  

Where an attorney or law firm distributes proceeds to their client from an escrow account, that “ministerial act” does not trigger a Form 1099 reporting requirement.

Should we be issuing a Form W-2 where the court awards a claimant back pay or severance pay?  

The remedy of back wages, front or severance pay, or any other employee compensation should be reported on a Form W-2. The payer reports the compensation on Form W-2 and the withholding of the appropriate payroll taxes. If the payor reports compensation on a Form 1099 and the IRS subsequently determines that the wages were subject to W2 reporting, both the employee and employer may be subject to additional payroll tax liabilities, interest, and penalties.  Special rules apply to payments made to a deceased employee after the year of death; please refer to the Instructions for Forms 1099-MISC and 1099-NEC (Rev. January 2024).    

Is the 1099 Recipient a “U.S. Person”? How do I know, and what is the alternative? 

Prior to issuing a Form 1099, it is the payer’s responsibility to determine whether the payee is a U.S. person, i.e., an individual or entity subject to US taxation. The payor should insist that the recipient complete Form W-9 or the appropriate W-8 series Form – and maintain proper documentation to the payor’s firm. If the recipient is a non-U.S. person, also consider whether it is necessary to withhold tax and/or whether treaty exceptions affect the standard rate of tax withholding. 

Should attorneys’ fees be included in the claimant’s 1099-MISC? 

Suppose the prevailing party in a lawsuit is awarded payment for its attorney fees. In that case, the payor should issue a 1099-MISC for 100% of the proceeds -- including amounts paid for attorneys’ fees—even if the fees were paid directly to the law firm rather than directly from the client. Legal fees are gross income to the plaintiff. If the attorneys’ fees are not included in Form 1099, the claimant will likely underreport the taxable recovery.   

Attorneys’ fees may be deductible from an individual taxpayer-litigant’s adjusted gross income (AGI) if the claims upon which he or she ultimately prevailed meet specific statutory criteria. For example, a litigant who prevails on certain claims of employment discrimination may have a deduction to AGI for his or her attorneys’ fees. In that case, the net, rather than the gross recovery, will be taxable to the individual. 

Is our firm or our client required to issue a 1099-MISC to opposing counsel to report the payment of attorneys’ fees? 

Anyone making a payment to an attorney “in connection with legal services” must issue a Form 1099 regardless of who retained the firm. Fund transfers to co-counsel and referral fees are also subject to Form 1099 reporting. Even when recoveries are non-taxable to the plaintiff, professional fees paid to attorneys are always subject to income tax and Form 1099 reporting.    

As noted above, issuers must file Form 1099 even if the law firm is a corporation because the corporate reporting exemption does not apply to legal service providers. 

What is the 2025 filing deadline for 2024 1099s, and what are my filing options? 

The 1099-NEC must be filed electronically with the IRS before the deadline of January 31, 2025. The requirement to e-file these forms applies if the filer files at least 10 tax returns in a particular year. “tax returns” are defined broadly and include all Form 1099s and employee W-2s. 

The recipient’s copy of both forms, 1099-NEC and 1099-MISC, must be distributed by January 31, 2025.   

Payors must file 1099-MISC by March 1, 2025, (if filing on paper) or March 31, 2025 (if filing electronically).  

The diverse legal practices within a law firm may require specialized reporting on alternate 1099 forms, such as real estate transactions.  

To maintain accurate and timely 1099 reporting for your firm, contact EisnerAmper to help you navigate the complexities of 1099 reporting and minimize potential penalties.