1099 Filing for Law Firms: Mistakes That Cost More Than Just Penalties

Each January, law firms rush to compile vendor lists and request overdue W-9 forms from contractors. In this hectic environment, important filing requirements are often overlooked. For solo practitioners and small firms, the 1099 filing season can be stressful if you don’t spot and fix common mistakes.

Understanding the Stakes: Why 1099 Compliance Matters for Law Firms

Many attorneys see 1099 preparation as just another admin task—gather some vendor info, file a few forms, and move on. But for law firms, the risks are higher than they might think.

The Financial Cost of Non-Compliance

The IRS doesn’t take 1099 violations lightly. The penalty structure is designed to encourage timely and accurate filing:

• $60 per form if you file within 30 days of the deadline
• $130 per form if you file more than 30 days late but before August 1st
• $340 per form if you file after August 1st or don’t file at all
• $680 per form (no maximum) for intentional disregard

If your firm works with a dozen contractors, penalties can add up quickly. Missing ten 1099 deadlines could cost you $3,400 in fines, not counting any extra penalties for intentional disregard.

The Hidden Risk: IRS Scrutiny

The bigger risk is not just penalties but what incomplete reporting signals to the IRS. Any red flag draws scrutiny, and law firms handling trust funds risk facing extensive audits.

Law firms are already under close watch. State bars require careful trust accounting, including monthly IOLTA reconciliations and strict fund separation. If the IRS finds 1099 errors, it may question all your financial practices, which can lead to broader investigations.

Professional Reputation and Client Trust

Your reputation is also on the line. Clients expect you to be diligent and competent. If you miss basic tax tasks, it can make them doubt your legal skills.

The 5 Critical Mistakes Law Firms Make

Mistake #1: Treating W-9 Collection as an Afterthought

The most common mistake is hiring court reporters, contract attorneys, expert witnesses, or freelance paralegals without getting their W-9 forms at the start.

A typical situation goes like this: You need a deposition transcript quickly for a motion deadline. You find a court reporter, get their invoice, and pay right away. The W-9 form isn’t considered until January.

When filing season arrives, you end up chasing vendors for tax IDs, addresses, and entity types. Some never respond because they’ve moved, changed emails, or just ignore your requests. This leaves you filing incomplete forms or skipping vendors, which can lead to penalties.

Why This Happens

Law firms often work in crisis mode. In urgent situations, admin tasks like collecting W-9s seem less important. Getting the service done feels urgent, so tax forms are put off.

But this short-term approach leads to long-term problems. Any vendor you pay without a W-9 on file can become a compliance issue later on.

The Solution: Build W-9 Collection Into Your Workflow

Make W-9 collection part of your vendor onboarding process—not a suggestion, but a requirement. Before any contractor receives their first payment, their W-9 should be in your files.

Here’s how to implement this:

• Create a standard vendor setup procedure: When you identify a new contractor, send them a vendor packet that includes a W-9 form, payment terms, and any other necessary documentation. Make it clear that payment processing cannot begin until you receive the completed W-9.
• Assign responsibility: Your bookkeeper or office manager should own this process. They should have a checklist for onboarding new vendors and a system for tracking which vendors have submitted W-9s.
• Use technology: Many accounting platforms allow you to request W-9s electronically and store them in the vendor’s file. QuickBooks Online, for example, has built-in W-9 request features. Use them.
• Handle exceptions properly: If you absolutely must make a payment before receiving a W-9 (rare, but it happens), flag that vendor in your system and set a reminder to follow up within 48 hours. Don’t let it slide into January.

What If You Still Can’t Get a W-9?

If you’ve tried to collect a W-9 and the vendor hasn’t responded by filing time, file with available info. Key takeaway: It’s better to file an incomplete than not file at all.

If vendors refuse, you must start backup withholding: take 24% from each payment and send it to the IRS, giving contractors a strong reason to comply.

Mistake #2: Misclassifying Who Needs a 1099

This is where law firms get tripped up more than any other business: the rules for attorneys are different from the general rules, and the consequences of getting it wrong are significant.

The General Rule

Under normal circumstances, you don’t issue 1099s to corporations. If you hire a C-Corp or S-Corp for services, no 1099 is required. This exemption exists because corporations report their income through other means.

The Critical Exception for Law Firms

But there’s a critical exception that applies specifically to legal services: payments to attorneys must be reported on a 1099 regardless of their corporate structure.

Paying co-counsel, referral fees, or settlements to any law firm—even if they’re incorporated—means you must file a 1099-NEC. This rule is widely misunderstood.

Common Scenarios Where This Matters

• Referral fees: You refer a personal injury case to a specialist and receive a referral fee when it settles. That specialist’s firm is an S-Corp. You still need to issue them a 1099.
• Co-counsel arrangements: You bring in another attorney to help with a complex trial. You split the fees. Regardless of their entity structure, they get a 1099.
• Contract attorney services: You hire a contract attorney to handle document review or legal research. Even if they’ve incorporated their practice, you issue a 1099.
• Settlement proceeds: You’re holding settlement funds and need to distribute a portion to co-counsel. That distribution requires a 1099, even if co-counsel is incorporated.

Why Firms Get This Wrong?

We’ve seen firms skip this filing because someone looked at the W-9, saw “S-Corp” in the entity classification box, and assumed they were off the hook. That assumption can cost you $330 or more per missed form.

The confusion is understandable, as the attorney exception contradicts corporate exemptions. The IRS is firm on this—ignorance is no excuse for missing forms.

Other Important Classification Rules

LLC 1099 rules depend on tax classification. LLCs taxed as sole proprietorships or partnerships need 1099s. LLCs taxed as corporations usually do not—unless offering legal services, which triggers the attorney exception.

Don’t issue 1099s to foreign contractors who complete a W-8BEN and perform all work abroad. Different reporting rules may apply, such as Form 1042-S.

Payments under $600: You’re not required to file 1099s for contractors to whom you paid less than $600 during the tax year. However, it’s good practice to track these payments anyway in case you use the same contractor again.

Mistake #3: Disorganized Books Make Accurate Filing Impossible

Your chart of accounts is the foundation of accurate 1099 reporting. When it’s disorganized, even the best accounting software can’t produce reliable results.

The Problem: Scattered Expense Categories

If your contractor payments are scattered across multiple expense accounts—some under “Legal Fees,” others under “Contract Labor,” and a few buried in “Cost of Goods Sold” or “Consulting Fees”—your 1099 report will be incomplete.

Accounting software generates correct 1099s if contractor payments use the right accounts, mapped to proper 1099 boxes. If you use the wrong accounts, those payments won’t be reported.

Real-World Example

Consider a small firm that pays contractors throughout the year:

• Court reporter fees get coded to “Litigation Expenses.”
• Contract attorney fees are recorded under “Legal Fees – Outside Counsel.”
• Expert witness fees land in “Professional Services.”
• Freelance paralegal payments end up in “Temporary Help.”

When the office manager runs the 1099 report in January, only one of these accounts is mapped for 1099 reporting. The others are invisible to the system. The firm ends up filing incomplete 1099s, missing three out of four contractors entirely.

The Solution: Proper Account Structure and Mapping

Work with your bookkeeper to establish a clean chart of accounts structure for contractor payments:

• Create dedicated accounts: Set up specific expense accounts for different types of contractor payments: “Contract Legal Services – 1099,” “Expert Witnesses – 1099,” “Court Reporters – 1099.” The “1099” designation in the account name serves as a reminder that these are reportable expenses.
• Map accounts correctly: In your accounting software settings, ensure these accounts are mapped to Box 1 of the 1099-NEC form. Most platforms have a “1099 Preferences” or “Tax Form Mapping” section where you can do this.
• Train everyone who codes expenses: Your bookkeeper, office manager, and anyone else who categorizes transactions needs to understand which accounts to use for contractor payments. Create a simple reference guide if necessary.
• Review regularly: Don’t wait until January to check your 1099 setup. Run a test report quarterly to ensure contractor payments are being captured correctly.
• Use vendor-tracking features: Most accounting software allows you to designate vendors as “1099 eligible” in their vendor profiles. Enable this feature and use it consistently.

Mistake #4: Mid-Year Software Migrations Without a Transition Plan

This scenario is more common than you’d think, and it creates significant challenges for year-end reporting.

The Setup

A firm switched from QuickBooks Online to Xero (or vice versa) in June. The migration process moves over vendor information, open invoices, and basic accounting data. But the new system only contains detailed payment transaction data from the conversion date forward. January through May—six months of payment history—remains in the old system.

What Goes Wrong?

If no one manually calculates and carries over pre-migration contractor totals, your 1099s will only reflect partial-year payments. Your contract attorney received a total of $8,000 in payments: $3,500 before the migration and $4,500 after. But your new system only shows the $4,500 in post-migration payments.

You issue a 1099 showing $4,500. The contractor’s records show $8,000 in income from your firm. The IRS receives mismatched information. Red flags go up.

Why Does This Happen?

Software migrations are complex, time-consuming projects. Firms focus on getting daily operations running smoothly in the new system. Historical reporting often takes a back seat to immediate needs, such as invoicing clients and paying bills.

Additionally, migration specialists may not fully understand the nuances of 1099 reporting. They’ll move your chart of accounts and vendor list, but they may not consider year-to-date payment totals for tax reporting.

The Solution: Plan for 1099 Continuity Before You Migrate

If you’re planning a mid-year accounting system migration, add 1099 planning to your project checklist:

• Before migration: Run a year-to-date vendor payment report from your old system. Export it to Excel. This becomes your source of truth for pre-migration contractor payments.
• During migration: Work with your bookkeeper or migration specialist to determine how to handle partial-year totals. Some firms create adjustment entries in the new system. Others maintain a manual tracking spreadsheet.
• After migration: When the 1099 filing season arrives, combine pre-migration totals with post-migration totals to get accurate annual figures. If your accounting software allows manual overrides for 1099 amounts, use that feature. If not, maintain a spreadsheet showing the calculations.
• Document everything: Keep clear records of how you calculated each 1099 amount. If the IRS ever questions your filing, you’ll need to show your work.

If You’ve Already Migrated Without a Plan

If you’re reading this and realize you migrated systems six months ago without considering 1099 reporting, don’t panic. You can still fix it:

1. Access your old accounting system (hopefully you maintained a read-only login)
2. Run a vendor payment report for January 1 through your migration date.
3. Export to Excel and calculate totals for each 1099-eligible vendor.
4. Add those totals to the amounts shown in your current system.
5. File 1099s using the combined totals

It’s tedious work, but it’s non-negotiable for accurate reporting.

Mistake #5: Confusing 1099-NEC with 1099-K

If your firm accepts client payments through Stripe, LawPay, or another payment processor, you may receive a 1099-K from that processor. Some firm owners confuse this with the 1099-NEC forms they’re responsible for issuing, leading to reporting errors and unnecessary confusion.

Understanding the Difference

• 1099-K reports the gross payment volume your firm received through a payment processor. The processor issues this form to you—it’s their responsibility, not yours. It shows the total dollar amount that flowed through their system to your firm.
• 1099-NEC reports payments your firm made to contractors for services. This is your responsibility to file. It shows money leaving your firm to independent contractors.

These forms serve completely different purposes and report different types of transactions.

Why the Confusion Happens?

Both forms arrive around the same time of year. Both relate to payment processing. And both have “1099” in the name. For busy law firm owners who aren’t tax experts, it’s easy to conflate them.

Some firms also make the mistake of thinking that because they received a 1099-K for payment processing, they don’t need to issue 1099-NECs to their contractors. The logic seems to be “the IRS already knows about my income, so they must know about my expenses too.” This is incorrect.

How This Affects Your Reporting

Understanding the distinction matters because it affects how you record transactions and what you report to the IRS:

• For 1099-K: You don’t file this form—you receive it. You use it to reconcile your income records. If you collected $100,000 in client fees through LawPay, you should receive a 1099-K showing approximately that amount. Compare it to your revenue records to ensure accuracy.
• For 1099-NEC: You must file this form for every contractor to whom you paid $600 or more for services. This obligation exists regardless of whether you received a 1099-K for your own income.

Payment Processing and Trust Accounting Considerations

For law firms, there’s an additional layer of complexity: client trust accounts. Many firms use payment processors like LawPay specifically because they can handle trust accounting—client funds go to the trust account, earned fees go to the operating account.

Your 1099-K typically reflects only operating account deposits (your earned fees), not trust account activity. This is correct—trust funds aren’t your income, they’re client funds you’re holding temporarily.

When you issue 1099-NECs to contractors, however, you may be paying them from either your operating account or your trust account (for case-related expenses). Regardless of which account the payment comes from, if it’s a 1099-reportable expense, you need to file the form.

Building a Year-Round 1099 Compliance System

The firms that handle 1099 filing smoothly aren’t scrambling in January. They’ve built systems that work year-round, making compliance a routine part of their operations rather than an annual crisis.

January – February: Post-Filing Review

After you’ve filed your 1099s, take time to review the process:

• What went wrong this year?
• Which vendors were difficult to track down?
• Did your accounting software produce accurate reports?
• What will you do differently next year?

Document your findings and create an action plan for improvements.

March – December: Ongoing Compliance Activities

• Vendor onboarding: Collect W-9s before issuing first payments. No exceptions.
• Monthly bookkeeping: Ensure contractor payments are coded to the correct expense accounts. Run a quick vendor payment report monthly to verify accuracy.
• Quarterly reviews: Pull a preliminary 1099 report from your accounting software. Check for any missing W-9s or miscoded transactions. Fix problems while they’re still small.
• Software maintenance: If you’re planning a system migration, build 1099 continuity into the project plan. If you’re staying with your current software, ensure it’s up to date and properly configured.
• Vendor communication: If a contractor’s information changes (address, entity type, tax ID), update your records immediately. Don’t wait until January.

The Role of Professional Bookkeeping

Many solo and small firm attorneys try to handle their own bookkeeping to save money. For some firms, this works reasonably well. For others, it’s a false economy—the time spent on bookkeeping is time not spent on billable work, and mistakes can be costly.

Professional legal bookkeepers bring specialized knowledge of trust accounting rules, IOLTA compliance, and tax reporting requirements specific to law firms. They understand the attorney exception to corporate 1099 rules. They know how to handle retainer accounting and client cost reimbursements. They can navigate the complexities of mid-year software migrations.

If you’re consistently struggling with 1099 compliance—or if you’re spending hours each month on bookkeeping tasks that could be delegated—it may be time to bring in expert help.

Frequently Asked Questions About 1099 Filing for Law Firms

Getting It Right From the Start

1099 compliance isn’t complicated when the right systems are in place. The firms that struggle are those treating it as a once-a-year scramble rather than a year-round process.

If you’re recognizing your own situation in these mistakes—missing W-9s, disorganized books, or still recovering from a mid-year software migration—you’re not alone. These are common challenges, and they’re fixable.

The key is building systems that work throughout the year:

• Proper vendor onboarding that captures W-9s before first payments
• Organized accounting records with clearly defined expense accounts
• Regular reviews to catch problems before they become crises
• Clear processes for tracking contractor payments from day one

When these foundations are in place, January filing becomes routine instead of chaotic. You’ll spend less time scrambling for information and more time focusing on what you do best: practicing law.

Don’t wait until the next deadline is breathing down your neck. Set up your systems now, get professional help if you need it, and make next January stress-free. Your future self will thank you.