Have You Been Sending a Form 1099 for Your Company’s Legal Fees? If Not, You Should Be!

When most people think of a Form 1099 (i.e. Form 1099-MISC for prior tax years or beginning in 2020 Form 1099-NEC for reporting non-employee compensation), generally they associate the requirements for its use to report payments made to independent contractors. Many people are not aware that they are required to send one to their legal counsel as well if they have paid over $600.00 in legal fees throughout the year for business purposes. Penalties for not filing and issuing the appropriate Form 1099 in a timely manner can quickly add up.

Pursuant to I.R.C. § 6041A(a)(1) and 6045(f), any individual, limited liability company, corporation, non-profit or other entity that makes a payment for legal services in the course of its trade or business that exceeds $600.00 (including settlements) in a tax year, is required to issue an IRS Form 1099 to the attorney or firm and send a copy to the IRS. Unlike other businesses, this requirement still applies whether or not the law firm is incorporated. Per the IRS Instructions, settlement payments are reported under Box 10 on Form 1099-MISC (“Gross proceeds paid to an attorney”) and standard legal fees should be reported under Box 1 (“Nonemployee compensation”) on Form 1099-NEC. As with most matters, it is best to confirm the appropriate reporting requirements with your company’s tax professionals to ensure the correct figures are reported in the appropriate categories.

Failure to issue a Form 1099 on time can carry some pretty steep penalties that accrue over time. For smaller businesses and non-profits, this could result in a significant, unanticipated financial hit. During these unprecedented times with so many businesses struggling and barely surviving, that could be the final detrimental blow. Here is an outline of the penalties and associated timelines demonstrating how quickly the fines and penalties can grow (the information table below was copied from the IRS website and can be viewed in full here by CLICKING HERE):

Penalty Rates

The penalty rates and maximums for not filing correct information returns and/or not furnishing correct payee statements, including inflationary adjustments if applicable, are reflected in the following table (*-as adjusted for inflation):

Large Businesses with Gross Receipts of More Than $5 Million  (*Average annual gross receipts for the most recent 3 taxable years) and Government Entities (Other than Federal entities) IRC 6721 & IRC 6722
Time returns filed/furnished	Not more than 30 days late	31 days late – August 1	After August 1 or Not at All	Intentional Disregard
Due 01-01-2020 thru 12-31-2020	$50 per return or statement – $556,500* maximum	$110* per return or statement – $1,669,500* maximum	$270* per return or statement – $3,339,000* maximum	$550 per return or statement – No limitation
Due 01-01-2019 thru 12-31-2019	$50 per return or statement – $545,500* maximum	$100 per return or statement – $1,637,500* maximum	$270* per return or statement – $3,275,500* maximum	$540* per return or statement – No limitation
Due 01-01-2018 thru 12-31-2018	$50 per return or statement – $536,000* maximum	$100 per return or statement – $1,609,000* maximum	$260* per return or statement – $3,218,500* maximum	$530* per return or statement – No limitation
Due 01-01-2017 thru 12-31-2017	$50 per return or statement – $532,000* maximum	$100 per return or statement – $1,596,500* maximum	$260* per return or statement – $3,193,000* maximum	$530* per return or statement No limitation
Due 01-01-2016 thru 12-31-2016	$50 per return or statement – $529,500* maximum	$100 per return or statement – $1,589,000* maximum	$260* per return or statement – $3,178,500* maximum	$520* per return or statement – No limitation
Due 01-01-2011 thru 12-31-2015	$30 per return or statement – $250,000 maximum	$60 per return or statement – $500,000 maximum	$100 per return or statement – $1,500,000 maximum	$250 per return or statement – No limitation

Note: Increased penalty amounts may apply for certain failures in the case of intentional disregard. See IRC 6721(e)(2) and IRC 6722(e)(2).

Small Businesses with Gross Receipts $5 Million or Less (*Average annual gross receipts for the most recent 3 taxable years) IRC 6721 & IRC 6722
Time returns filed/furnished	Not more than 30 days late	31 days late – August 1	After August 1 or Not at All	Intentional Disregard
Due 01-01-2020 thru 12-31-2020	$50 per return or statement – $194,500* maximum	$110 *per return or statement – $556,500* maximum	$270* per return or statement – $1,113,000* maximum	$550* per return or statement – No limitation
Due 01-01-2019 thru 12-31-2019	$50 per return or statement – $191,000* maximum	$100 per return or statement – $545,500* maximum	$270* per return or statement – $1,091,500* maximum	$540* per return or statement – No limitation
Due 01-01-2018 thru 12-31-2018	$50 per return or statement – $187,500* maximum	$100 per return or statement – $536,000* maximum	$260* per return or statement – $1,072,500* maximum	$530* per return or statement – No limitation
Due 01-01-2017 thru 12-31-2017	$50 per return or statement – $186,000* maximum	$100 per return or statement – $532,000* maximum	$260* per return or statement – $1,064,000* maximum	$530* per return or statement – No limitation
Due 01-01-2016 thru 12-31-2016	$50 per return or statement – $185,000* maximum	$100 per return or statement – $529,500* maximum	$260* per return or statement – $1,059,500* maximum	$520* per return or statement – No limitation
Due 01-01-2011 thru 12-31-2015	$30 per return or statement – $75,000 maximum	$60 per return or statement – $200,000 maximum	$100 per return or statement – $500,000 maximum	$250 per return or statement – No limitation

Whether you are a small business or large corporation, managing W-2s, W-3s, Form 1099s and ACA Forms at year end and ensuring they are accurate and on time can be overwhelming. At CheckmateHCM we can help take away the stress with our payroll services and software, which helps you keep track of all employee and non-employee payments throughout the year. We also offer year-end services and take care of the appropriate paper filings and mailings so that you can focus your attention on getting back to business. With all the other challenges businesses are facing in 2020, wouldn’t you like a little peace of mind? We’ve been serving businesses like yours for more than 25 years with their payroll, timekeeping and HR needs and would welcome the opportunity to discuss how we can custom tailor our software and services to match your business’ needs.

Disclaimer: The information compiled on this page was written for general information purposes only and does not constitute legal, tax or other financial advice for an individual or specific company.  Each individual’s and entity’s specific legal, tax and/or financial circumstance can vary greatly. As such, we advise consulting with your attorney, CPA and/or other professional advisors to ensure you are following and complying with all necessary guidance and regulations based on your specific circumstances and/or internal policies, procedures and corporate structures.