If you're a freelancer, small business owner, or self-employed person who outsources labor, your already complicated tax season process will have one extra step: filing 1099 forms for your contractors.
For most types of contractors, 1099 rules are fairly straightforward. Lawyers, on the other hand, are a special case. If you paid any legal fees, the IRS has special rules for how they're reported.
Here's what you need to know about reporting attorneys' fees on Form 1099.
Do you have to report attorney payments to the IRS?
Sometimes. If you paid a lawyer over the course of the tax year, you might have to report those payments using a tax form. This lets the IRS know the recipient of your payment earned some taxable income.
It’s important to note that not all attorney's fees need to be reported. You'll only have to flag them to the IRS if the payment:
- Was at least $600 for the year
- Had to do with your work
When you have to report lawyers' fees
Let's unpack these reporting requirements a little.
You paid at least $600 for the year
The $600 threshold is simple enough. If you paid a lawyer $599 to look over some paperwork for you, you wouldn't have to report that at all.
Keep in mind: The $600 limit is per lawyer — it's not a blanket threshold for all the legal fees you incurred over the course of the year. So if you engaged two attorneys, paying one of them $2,000 and another $500, you'd only need to report the $2,000.
Your payments were related to your work
Now, let's talk more about what it means for an attorney's fee to be connected to your work. If a lawyer or law firm was involved with your business — for example, by helping you incorporate — you'll have to report what you paid them.
If you used a lawyer for personal reasons, like estate planning or a divorce, those fees aren't reportable.
For sole proprietors, who often mix business and personal, this can lead to some complications.
Say you use the same attorney for your work and personal needs. Even if you spent at least $600 on their services for the year, you still might not have to report what you paid them. It all depends on how much you paid for specifically work-related services.
How do you report legal fees to the IRS?
If you're required to report legal fees, you'll do it using an IRS form known as Form 1099. These forms come in multiple copies, which you'll send to the payee, the IRS, and your state.
These forms report non-wage income. In a nutshell, they keep the IRS in the loop when you make taxable payments to someone who isn't your employee. (The equivalent form for wages and salaries is Form W-2.)
Multiple types of 1099s exist, because there are multiple reasons to pay someone non-wage income. To get a rundown of all these varieties, check out our comprehensive guide to Form 1099.
What type of 1099 form should you use for attorneys' fees?
If you paid an attorney, you might have to file either a 1099-NEC or a 1099-MISC, depending on the reason for your payment.
Here's a quick summary of how to choose the correct form:
If you’re still not clear on things, don’t worry. We’ll dive into the specifics for both forms, starting with the 1099-NEC.
Using a 1099-NEC for attorney payments
Form 1099-NEC is used to report nonemployee compensation, including fees and commissions.
In practice, "nonemployee compensation" means contractor payments. Construction contractor, editor, bookkeeper, you name it: if you hired them as an independent contractor, you'll file a 1099-NEC for them.
Paying a lawyer for their services is really no different.
When to report attorney payments on a 1099-NEC
Rule of thumb: Report payments to an attorney on Form 1099-NEC if you were their client.
Of course, the reporting requirements we went through above still apply: The payments need to be $600 or more and rendered for work-related services.
Report payments to your attorney even if they belong to a corporation
Generally, payments made to corporations don't have to be reported on a 1099-NEC. (That includes payments to LLCs taxed as S corps or C corps.)
Attorneys and law firms, though, are a notable exception to the rule.
It doesn't matter if the firm is a sole proprietorship, partnership, LLC, or corporation. It also doesn't matter whether they work for a big or small firm. If they provided you with at least $600's worth of legal services, you'll have to file a 1099 at tax time or face a potential penalty. (More on that later.)
How to report attorney payments on a 1099-NEC
Payments to lawyers count as professional service fees. They go in box 1 of the 1099-NEC.
For detailed guidance on filing the form, check out our walkthrough of the 1099-NEC vs. 1099-MISC.
The deadline for 1099-NECs
Make sure to file your 1099-NEC by January 31st, whether you're e-filing or paper filing.
Using a 1099-MISC for attorney payments
Form 1099-MISC is a catchall form for all sorts of payments — everything from royalties to prizes.
It also covers legal payments when you’re paying someone other than your lawyer.
When to report attorney payments on a 1099-MISC
Here's the general rule: You'll report attorney payments on a 1099-MISC if you're paying someone else's lawyer.
When might that happen? Usually, it involves a legal dispute that has you paying damages or settlement proceeds.
Settlement payments may go to the lawyer of the injured party, who’s in charge of distributing the funds to their client.
Don't report payments for physical injuries
Not all kinds of legal disputes will require you to issue a 1099. Damages or settlements for physical injury disputes don't need to be reported at all.
Why? It's because 1099 forms only report taxable payments. After all, the forms exist to tip the IRS off when someone earns taxable income.
Settlements and damages for physical injuries aren't taxable, so they don't need to be reported. (Those paid out for emotional distress, though, are taxable.) To learn more, take a look at our article on whether legal settlements are taxable.
How to report legal fees on a 1099-MISC
Depending on the exact type of payment you're making, you'll have to enter it in a different box on the form.
Report damages in box 3
Say you end up paying at least $600 in legal damages following a dispute involving your work. The amount you paid would get reported in box 3 of the form, for "Other income."
Note that damages may go directly to claimants — not to their attorneys. Because they still fall under the umbrella of legal fees, we're covering them here.
Report settlements in box 10
Form 1099-MISC also has a box specifically for "Gross proceeds to an attorney." Here's where you'll enter any settlement payments.
Settlement proceeds generally go to the claimant's attorney, who's in charge of taking their cut and then distributing the proceeds.
In other words, you give the attorney the gross proceeds, and they're responsible for handing over the net proceeds to their client.
Report other payments to lawyers in box 10
Settlements are the most common example of gross proceeds to an attorney. But you might use this box under other circumstances too.
Say you buy some commercial property. To close, you pay the seller’s attorney. In this case, they’re serving as a “closing attorney,” seeing the deal through. (In some states, closing attorneys are required for real estate deals.)
Even if 100% of what you pay ends up being passed onto the seller, you still report it as gross proceeds to an attorney.
As long as an attorney served as an intermediary for the payment, you’ll use box 10 on the 1099-MISC to report what you paid.
The deadline for 1099-MISCs
With 1099-MISCs, the deadlines vary depending on the copy — and how you're filing:
- January 31: Recipient copy (paper or e-file)
- February 28: Federal and state copies (paper)
- March 31: Federal and state copies (e-file)
For more detailed instructions, including a breakdown of the three copies, check out our comprehensive guide to 1099-NECs and 1099-MISCs.
Filing both 1099-NEC and 1099-MISC for legal fees
A single set of legal proceedings might require you to file both a 1099-NEC and a 1099-MISC. After all, a legal dispute will likely involve both your attorney or law firm and another attorney or firm.
Take a look at the following example. Pretend your business was involved in some litigation. For helping you navigate this legal maze, you pay your business attorney $25,000 for their services.
All parties involved in the dispute agree your business was at fault, causing damages in the amount of $85,000.
As part of a settlement agreement, you agree to pay out $100,000 instead of going to trial. You pay this to the other party’s attorney to distribute to their client.
How do you report all these amounts to the IRS? Let's take them one at a time:
- ✓ Your attorney's fees ($25,000) go on a 1099-NEC, in box 1
- ✓ The damages you pay ($85,000) go on a the 1099-MISC, in box 3
- ✓ The settlement proceeds ($100,000) go on a 1099-MISC, in box 10
How to deduct legal fees on your taxes
Your legal fees might be tax-deductible, whether they're going to your lawyer, someone else's lawyer, or a claimant in a legal dispute.
As long as you incurred these legal fees over the course of your work, you can write them off as business expenses. Examples that might qualify include fees for:
- Incorporating your business
- Drawing up contracts
- Settling most kinds of work-related disputes
- Resolving a tax issue for your business
Keeper can automatically find these tax-deductible legal fees among your transactions and write them off for you.
Keep in mind: Personal attorney fees are typically not deductible, just as they aren’t reportable on either the 1099-NEC or the 1099-MISC. For example, you can't deduct legal fees related to child custody, personal injury, estate planning, or divorce.
What happens if you don’t file a 1099-NEC for legal fees?
Most penalties for accidentally failing to file are small. Your liability is based on how many days late you are in filing the form. Filing 30 days late, for instance, gets you a $50 charge, while filing after August 1st gets you fined $280 for the 2022 and 2021 tax years.
Intentional violations are an entirely different animal. If you know that 1099-NEC is required and you intentionally fail to file one, the IRS may fine you $570 per form. That's per form, so the penalties can be hefty if you intentionally fail to file multiple 1099s.
The maximum penalty is $1,142,000 for small businesses. (By the IRS's definition, those are businesses with less than $5 million in gross receipts over the last three business years.)
Tax forms typically aren't at the top of most people's fun lists. However, they are a requirement for running a business and — let’s face it — making money.
Now that you know the rules, you'll have the tax confidence you need to stay on the straight and narrow.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.