Do Attorneys Send 1099s to Clients?

The question of whether attorneys send 1099s to clients often arises from a misunderstanding of tax reporting obligations. In most frequent scenarios involving legal services, the roles are reversed. It is the client who has the responsibility to issue a Form 1099 to their attorney. This occurs when a business pays for legal counsel. The attorney, as a service provider, receives the form from the client. The idea of an attorney issuing a 1099 to a client is less common and happens under specific circumstances, usually involving the payout of a settlement.

The Client’s Reporting Responsibility for Legal Fees

When a person or entity engaged in a trade or business pays for legal services, they are required to report these payments to the IRS if the total for the calendar year is $600 or more. The document used for this reporting is Form 1099-NEC, Nonemployee Compensation. This form details the amount paid to the attorney or law firm for the services they rendered.

This reporting duty is for payments made in a business context. For example, if a company hires a lawyer to draft corporate documents or represent it in a lawsuit, those fees are reportable. The requirement applies regardless of the law firm’s business structure; payments to incorporated law firms must be reported, which is an exception to the general rule that payments to corporations for services are often exempt from 1099 reporting.

If an individual pays an attorney for services unrelated to a business, such as for a divorce, estate planning, or defense in a personal legal issue, there is no requirement to issue a Form 1099. The IRS views these as personal expenses and they fall outside the scope of 1099-NEC reporting rules.

Information Needed to Issue a 1099 to an Attorney

Before a client can issue a Form 1099-NEC to their attorney, they must collect specific information from the law firm. The standard method for gathering these details is by requesting that the attorney complete and return an IRS Form W-9, Request for Taxpayer Identification Number and Certification. This form is a formal request for the payee’s correct name, address, and Taxpayer Identification Number (TIN).

The TIN can be either a Social Security Number (SSN) for a sole proprietor attorney or an Employer Identification Number (EIN) for a law firm structured as a partnership or corporation. The client will transfer the name, address, and TIN directly from the completed W-9 to the Form 1099-NEC. It is a best practice to request the W-9 at the beginning of the engagement to avoid delays when tax season arrives.

If an attorney fails or refuses to provide a completed Form W-9, the client has a specific responsibility. The IRS requires the payer to begin backup withholding. This means the client must withhold 24% of the payments made to the attorney and remit those funds to the IRS.

When an Attorney Issues a 1099 to a Client

While clients typically issue 1099s to attorneys, there are situations where the roles are reversed. This most commonly occurs when an attorney disburses funds to a client from a legal settlement or award. In these cases, the attorney receives a lump sum from a defendant, places it in a trust account, and then pays the client their portion after deducting legal fees and costs. The attorney’s responsibility to issue a 1099 depends on the nature of the settlement proceeds.

Portions of a settlement intended to compensate for personal physical injuries or sickness are not considered taxable income to the client. Therefore, if the entire amount paid to the client is for these non-taxable damages, the attorney would not issue a Form 1099.

If any part of the settlement represents taxable income, the attorney must report it. For example, payments for lost wages, emotional distress that does not originate from a physical injury, or punitive damages are taxable. In such cases, the attorney would issue a Form 1099-MISC, Miscellaneous Information, to the client, reporting the taxable amount in Box 3, “Other income.” The attorney only reports the taxable portion that is actually paid to the client.

The Special Reporting Rule for Gross Proceeds

A separate reporting rule often causes confusion in legal settlements. When a payer, such as a defendant in a lawsuit, makes a payment to an attorney in connection with legal services, they must report the entire amount to the IRS if it is $600 or more. This is done using Form 1099-MISC, with the total payment amount reported in Box 10, “Gross proceeds paid to an attorney.”

This rule applies even if the payment is made to the attorney on behalf of their client. For instance, if a defendant pays a $100,000 settlement with a check made payable to the attorney’s trust account, the defendant must issue a Form 1099-MISC to the attorney for the full $100,000.

The amount reported in Box 10 is not considered income to the attorney. The IRS understands that this figure represents the gross settlement, from which the attorney will take their fee and distribute the remainder to the client. The attorney reports only their fee as income on their own tax return. This rule explains why an attorney might receive a 1099 for a large sum that does not reflect their actual earnings from the case.