Ensuring your law firm’s books are closed accurately for the fiscal year can give you a clear idea about its financial stability and make tax return preparation easier. In case of an audit, you will also have all of the documents you need to pass. In this guide, we will discuss some bookkeeping tips that experienced legal accountants or tax professionals swear by.
Bookkeeping Tips for Law Firms for Successful Year-End Closings
Follow these bookkeeping tips at year-end to close your law firm's books quickly and efficiently:
1. Prepare 1099 Forms
Almost all business owners must send 1099 tax forms and file with the IRS. Unlike W-2s which are meant for employees, these are for companies and individuals other than your law firm's employees. Also, ensure you have W-9s from all vendors – they have 30 days to get back to you, but the last thing you should do is wait. For example, if you wait till January to ask for the W9s, you may miss the 1099 deadline (January 31st).
The following individuals and organizations have to send 1099s (i.e., those you paid $600 or more):
● Settlements that are paid to attorneys
● Payments that have withheld federal taxes
● Services rendered
And any others that are not directly relevant to your law firm. However, there may be some exceptions. You may not have to issue 1099 for the aforementioned even if you paid someone more than $600 if the following apply:
● The company is a corporation, such as LLCs.
● The individual or corporation was paid for services that weren’t directly related to the law firm. This can include rent.
For more information about who should and shouldn't receive a 1099, click here for official information from the IRS.
2. Resolve Accounts Payable and Accounts Receivable
Make informed financial decisions and ensure your books are clean around tax time by cleaning up accounts payable (A/P) and accounts receivable (A/R). Some A/Ps or pending bills may be duplicated even if paid, and some may have been overlooked.
If your financial statements show you owe payments or have made some twice by mistake, clear up everything. Remove duplicate invoices and pay outstanding bills before turning to accounts receivable, i.e., pending client payments.
Some clients may have paid already, but your financial statements state otherwise, or some may still need to pay you, but the statement says they already have. A professional law firm accountant or tax professional can also pinpoint the issue and remove old/resolved invoices. Get in touch with clients with pending payments or write invoices off as per your needs.
Ensure you also clear out unsettled transactions, i.e., transactions in the books that do not match bank transactions. This can be anything from an uncashed check to duplicate transactions that weren't cleared.
Please note that how you file your taxes (either as cash or accrual) will impact the method used to write off uncollectible invoices. The task can be overwhelming when you are closing the books at the end of the year. Professional legal accountants or tax professionals can help you determine and write off uncollectible client debts efficiently and accurately.
3. Evaluate Profit And Loss Statements
Before closing the books for the current year, evaluate your law firm's profit and loss statements. This includes evaluating all expenditures and income and ensuring client retainers are paid throughout the year.
Besides preparing 1099 forms for vendors and non-employees who were paid more than $600 during the current year, compare the numbers from the past year (2022) to numbers in the current year (2023).
This practice will help you clean up the books and better understand your law firm's financial health in terms of business requirements and cash flow. The profit and loss statement is unique for law firms compared to other service industries.
The first section should include income from billable hours (via hourly or retainer fees), and the second section should detail expenses (like commissions, salaries, malpractice or liability insurance, and expenses covering external services).
MJL Accounting Solutions Got You Covered
As a lawyer and law firm owner, you have a task list that is likely a mile-long on most days. Cross off legal bookkeeping from that list by outsourcing it to MJL Accounting Solutions. We will ensure your tax preparation is handled carefully and efficiently by guaranteeing filings are compliant with applicable regulations and optimized for savings.
Contact us for a free consultation. We look forward to working with you.