How to Report Attorney Fees on Form 1099
Understand the distinct tax reporting obligations for payments to attorneys, which follow different guidelines than typical business vendor payments.
The Internal Revenue Service (IRS) has specific reporting requirements for payments made to attorneys. These rules often create confusion for businesses because they differ from the standard procedures for other vendor payments. Understanding these distinct obligations is necessary for tax compliance, as missteps can lead to penalties.
Determining the Reporting Requirement for Attorney Payments
A business must issue a Form 1099 to any individual or entity to whom it has paid $600 or more for services during the calendar year. This rule applies to payments made in the course of a trade or business. For most vendors, if the entity is structured as a corporation, no 1099 is required. However, the regulations for attorneys present a notable exception.
Payments to attorneys for legal services are reportable regardless of the law firm’s business structure, including if the practice is an S or C Corporation. For example, if a business pays an incorporated marketing firm $5,000 for a campaign, a 1099 is not required. If that same business pays an incorporated law firm $5,000 for legal advice, a 1099 is mandatory.
Payments for purely personal legal services do not trigger a 1099 filing requirement. An individual paying an attorney for assistance with a personal matter, such as drafting a will or handling a divorce, does not need to issue a 1099. The obligation rests solely with businesses making payments for legal services related to their commercial activities.
Selecting the Correct Form for Attorney Payments
The nature of the payment dictates which form to use. Payments made directly to an attorney or law firm for legal services are classified as nonemployee compensation. These fees are reported in Box 1 of Form 1099-NEC, Nonemployee Compensation. This is the correct form for services like drafting corporate documents or providing legal representation.
Different rules apply when an attorney is paid gross proceeds. This arises in legal settlements, where a defendant pays a settlement amount to the plaintiff’s attorney rather than directly to the plaintiff. In this situation, the entire payment made to the attorney, including any portion that will be passed on to their client, must be reported. These gross proceeds are reported in Box 10 of Form 1099-MISC, Miscellaneous Information.
For example, if a defendant business pays a $100,000 settlement directly to the plaintiff’s law firm, it must report the full $100,000 in Box 10 of Form 1099-MISC. This is required even though the payment includes both the plaintiff’s award and the attorney’s fee. The law firm is then responsible for its own tax obligations on the fee it retains.
Information Needed to Issue a 1099
A business must collect specific information from the attorney before issuing a Form 1099. The standard tool for this is Form W-9, Request for Taxpayer Identification Number and Certification. Businesses should obtain a completed Form W-9 from the attorney or law firm before any payment is made to have the necessary details for year-end reporting.
The Form W-9 provides the data required to complete a 1099, including:
- The attorney’s or law firm’s legal name
- Business name, if different
- Full mailing address
- Taxpayer Identification Number (TIN), which is either a Social Security Number (SSN) or an Employer Identification Number (EIN)
The completed Form W-9 is for the payer’s internal records only and should not be sent to the IRS. Businesses can download a blank Form W-9 directly from the IRS website, irs.gov, to provide to their vendors.
The Filing Process for Attorney Fee 1099s
The final step is the filing process. The payer transcribes the attorney’s information from the W-9 onto the selected 1099 form. The total payment amount for the calendar year is entered in the appropriate box: Box 1 of Form 1099-NEC for legal services or Box 10 of Form 1099-MISC for gross proceeds.
The deadlines for submitting these forms vary. For payments reported on Form 1099-NEC, both the copy furnished to the attorney and the copy filed with the IRS are due by January 31 of the year following the payment.
For gross proceeds reported on Form 1099-MISC, the deadlines are split. The copy must be sent to the attorney by January 31. The deadline for filing with the IRS is February 28 for paper filers and March 31 for electronic filers. Some states also require a copy of the form to be filed with the state tax agency.
Businesses have two methods for filing with the IRS. They can file paper forms by mail, which requires including a Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Alternatively, businesses can file electronically through the IRS’s Information Returns Intake System (IRIS) portal or by using approved third-party tax software.