Kicking Off The New Year
When you own your own law practice, it can often feel as if you’re going in circles with keeping your house in order. As soon as one case wraps up, another begins. Tracking your billable hours, accounting for firm overhead, and keeping your books becomes a merry-go-round of tasks that are never quite finished. Come tax time, you’re scrambling to figure out where it all fits. Now, at the start of the New Year, is the time to implement a few key practices to make these tasks easier from today until 2021.
First, it’s time to streamline your hour tracking and bookkeeping to increase overall productivity. When it comes to tracking your billable hours, there is no better time than the start of the New Year to commit to keeping a log in one place, from which numbers can be pulled quickly to submit to clients for billing. Since following up and collecting payment for all hours billed is one of the top markers of law firm success, by doing this you’ll be ahead of the curve. It may also be time to consider hiring an outside bookkeeper if tracking your client accounts has gotten out of hand. Your time is best spent on increasing the hours you bill to clients, rather than on the studying the bills.
Looking back over the prior year, you’ll want your bookkeeper to “close the books” for 2019 in preparation for tax season. This means following up with all of your clients to ensure payments for services rendered in the prior year are received. If there are any billing disputes, you’ll want to rectify those as soon as possible in order to move ahead with new business.
Turning to taxes, there are several forms you want to have on hand and updated for tax season, including 1099s, W-2s, and W-4s. Which ones you need are dependent on what type of workers you have at your firm.
If your firm hires independent contractors, whether as attorneys or for other staff roles, you will need to provide each contractor with a Form 1099. The basic rule of thumb is that you must issue a Form 1099 to any person or small business you pay $600 or more in a tax year, for any kind of service. This could mean anyone from a co-counsel or consultant, to an expert witness, to a freelance virtual assistant who performs ad hoc tasks. Law firms need to pay special attention because, while incorporated businesses are typically exempt from the requirement, law firms do not fall within the exemption. If you paid an incorporated law firm $600 or more, you still need to issue a Form 1099.
It’s increasingly important for law firms to issue Form 1099s if they hire contract attorneys because the IRS has decided in several rulings that a failure to do so implies these contract attorneys are actually employees. This type of mistake could be a massive hit to a small law firm, so be mindful of the rules.
You’ll also need to consider the “W” forms, W-2 and W-4. A W-2 is a year-end tax form required by the IRS, used to report each employee’s annual income and taxes. You will need to issue a W-2 to each of your employees, attorney or staff, based on what they were paid the prior year and inclusive of any taxes you withheld as the employer from their paychecks. You will use a W-4 to gather tax-withholding information from each of these employees for use in the next tax year.
Renewing W-4 forms for each of your employees is important because changes to their lives in the past year may affect how much tax you need to withhold from their paychecks in the year to come. For example, a change in filing status from Single to Married or vice versa will have a major impact. So will a change in the number of dependent children the employee has, or whether their state of residence has moved. It’s your responsibility as the employer to use this information to withhold taxes accurately. If withholdings are too low in a given year, the IRS may impose penalties.
There is a new W-4 form for 2020. All employees, of law firms or other businesses, hired after January 1st of this year will be required to use the new form. Others may opt to do so. The new form streamlines the process to protect the privacy of employees and ensure greater accuracy in withholdings. There are 5 steps including entering personal information, job information for the employee and his/her spouse if applicable, the number of dependents, and any itemized deductions or investment or retirement income for the employee.
By attending to these housekeeping tasks, your firm will have its house in order for 2020. Are you ready?