Understanding the Misconception: Issuing 1099s to Lawyers for Amounts Under $600
Content:
I manage the Bookkeeping for our family business after previously overpaying for a professional who unfortunately mishandled several tasks. One of the lingering issues with our former bookkeeper was her strong belief that we were required to issue a 1099 to our lawyer, despite having paid them only $350 for the entire year. She argued that any payment exceeding $1 warranted a 1099 for lawyers and became quite upset when I questioned her rationale.
After delving into the tax code, conducting extensive online research, and consulting our lawyer, who also happens to be a CPA, I found no evidence supporting her claim. Interestingly, this topic resurfaced during a conversation with my mother-in-law, who worked as an in-house bookkeeper for a decade. To my surprise, she upheld the same view that lawyers need to be issued a 1099 for any amount paid. She explained that this was part of her training.
I’m left wondering about the source of this misunderstanding. Could it be that a misinterpretation of the tax code during a Bookkeeping training seminar led to the dissemination of this incorrect information?
One response
The misconception that businesses need to issue a Form 1099 to lawyers for any amount, even those under $600, likely stems from confusion about specific IRS requirements and the nuances in the tax code related to payments made to attorneys.
Key Reasons for the Misconception
General 1099-MISC Threshold: The IRS commonly requires that businesses issue a Form 1099-MISC to payees who are not corporations for services rendered, but only if the total annual amount exceeds $600. This general rule applies to most services and is rooted in the wider reporting requirements for independent contractors.
Specific Rule for Attorneys: There is a specific rule that requires businesses to issue a Form 1099 to attorneys for amounts exceeding $600, even if they are incorporated. Importantly, this rule does not override the $600 threshold; rather, it applies the same threshold to a wider category of payees, including incorporated law firms.
Possible Misinformation in Training: Bookkeeping training materials or seminars might misinterpret or oversimplify the specifics of the IRS rules. Trainers or materials that emphasize issuing 1099s to lawyers but fail to properly communicate the $600 threshold might inadvertently spread the misunderstanding that any payment, regardless of amount, requires reporting.
Emphasis on Legal Compliance: Professionals in Bookkeeping and Accounting might err on the side of caution, stressing strict compliance with IRS regulations. This hyper-vigilance can sometimes manifest as a misunderstanding of the regulations, leading individuals to believe they should report even minor payments to lawyers to avoid potential penalties.
Confusion with Other Reporting Rules: Various IRS requirements can be intricate, and misunderstandings often occur in crossover contexts. For instance, there’s an exception that requires reporting payments to corporations when they are legal services, which might add to the confusion if the threshold aspect is not clearly communicated.
IRS Guidelines on 1099 Reporting for Attorneys
The IRS specifically mentions in Publication 1099 that:
Conclusion
To address these kinds of misconceptions, it is essential for businesses to refer directly to