Common questions we get from attorneys who are interested in deferring their contingent legal fees include:
- “How does the flow of 1099s work when I use a deferred compensation plan?”
- “Would the IRS think I’m under-reporting my income?”
When attorneys opt to defer fees into a deferred compensation plan, the defendant will send the plaintiff attorney a 1099 for the amount of the settlement. In a normal situation (e.g., when no legal fees are deferred), the plaintiff attorneys would take their fee and report the tax that would match the 1099 sent to the firm.
When deferring legal fees using a deferred compensation plan, plaintiff attorneys need to send a 1099 at the end of the year to the plan administrator indicating the amount of fees deferred for that year. This completes the loop so the IRS knows that the attorney is not supposed to be taxed on that income because there is a 1099 outgoing from the firm to the plan administrator.
So, the flow of 1099s when an attorney defers fee is as follows:
- 1099 from the Defendant to the Law Firm for the full amount of the settlement
- 1099 from the Law Firm to the deferred compensation plan administrator for the amount of the deferred legal fees.
If you have any questions about the specifics of using a deferred compensation plan, give us a call. We’d be happy to walk you through the process and find the best solution for your goals.