Rules of Thumb: 1099s for Legal Settlements and Attorneys - Suttle & Stalnaker CPAs (2024)

FAQs

Do I need to issue a 1099 for a lawsuit settlement? ›

Most lawyers receiving a joint settlement check to resolve a client lawsuit are not considered payors. In fact, the settling defendant is considered the payor, not the law firm. Thus, the defendant generally has the obligation to issue the Forms 1099, not the lawyer.

Any payment of $600 or more made to a single attorney or law firm is required, whether they are classified as a sole proprietorship, partnership, LLC, or corporation. If you've paid $600 or more legal fees to an attorney who is not directly serving your business, you should likely use Form 1099-MISC instead.

A Corporation Or A Partnership Or Self-Employed

If the accountant is part of a corporation, you do not need to file a 1099. However, if the accountant is not part of a corporation, you might need to file a 1099. This includes accountants that are classified as a partnership or are independent contractors.

Payments to attorneys may require both forms. Gross proceeds paid to an attorney, such as services related to a specific litigation matter should be reported on Form 1099-MISC whereas attorneys' fees, such as for general business matters, should be reported on Form 1099-NEC.

Legal settlements that are taxable (including previously deducted medical expenses related to physical injury or illness) are entered as miscellaneous (other) income. Interest earned on settlements is taxable income and should be entered as a Form 1099-INT.

Lawyers need to send Forms 1099, too

In general, anyone making payments in connection with a business must issue IRS Forms 1099 for payments of $600 or more. The penalties are not too severe for failing to do so (generally $50 for each Form you fail to file) but they are quite severe if you intentionally fail to do so.

Therefore, Forms 1099-MISC and Forms W-2, as appropriate, must be filed and furnished with the plaintiff and the attorney as payee when attorney's fees are paid pursuant to a settlement agreement that provides for payments includable in the claimant's income, even though only one check may be issued for the attorney's ...

According to the Internal Revenue Service, settlement funds must be included in federal income for tax filing purposes unless they are specifically exempted by the tax code. The good news is that any damages you receive based on physical injuries are exempted and don't have to be included as taxable income.

In almost all cases, car accident and personal injury settlements are considered nontaxable. So you can rest assured that you won't have to worry about paying taxes on your settlement.

Here are some examples of payments you need to report on the 1099-NEC: Professional service fees to architects, designers, accountants, software engineers, attorneys, and law firms.

Who is exempt from filing 1099s? ›

Who Doesn't Need to Receive a Form 1099-MISC or 1099-NEC? Generally, C corporations, S Corporations, and LLCs formed as corporations or S Corps don't need to receive a 1099-NEC or 1099-MISC. On irs.gov, check the 1099-NEC instructions and 1099-MISC instructions for exceptions when you are required to issue a 1099.

Payers who make Nonemployee Compensation payments below $600 are typically not required to file the 1099-NEC unless the payer withholds any amount of tax from the payments. However, they may do so if they wish. If you received less than $600 from a payer, you are still required to report the income on your tax return.

The 2023 IRS 1099 rules for Form 1099-MISC (for 2024 filings) require business payers to report payments of $600 or more for specified types of income and other payments, at least $10 in royalty payments, backup withholding of income taxes, and if your business made direct sales of at least $5,000 of consumer products ...

In general, you don't have to issue 1099-NEC forms to C Corporations and S Corporations. But there are some exceptions, including: Medical and health care payments. Payments to an attorney.

If you have mistakenly filed Form 1099-MISC for a recipient instead of Form 1099-NEC, you should void the filed form and file 1099-NEC for the recipient. The same applies if you filed Form 1099-NEC instead of 1099-MISC.

The party that pays a taxable settlement or judgment to the injured party and/or their attorney will issue a Form 1099-MISC, Form 1099-NEC, or W-2 to report the settlement. In some cases, the claimant and attorney are issued separate 1099s reporting the same settlement dollars.

According to the Internal Revenue Service, settlement funds must be included in federal income for tax filing purposes unless they are specifically exempted by the tax code. The good news is that any damages you receive based on physical injuries are exempted and don't have to be included as taxable income.

Generally, damages that are awarded for physical injuries or property damage are not taxable. This includes compensation for pain and suffering, lost wages, and medical expenses. However, if you receive punitive damages or interest on your settlement, those may be taxable.

There are generally two reasons: Some of the payouts might be taxable income. The company requires a W9 for all check recipients as a part of its protocols, regardless of whether it will issue a Form 1099.