- Firm bookkeepingOperating and trust books kept separate, reconciled every month and ready for an audit.Learn more about Firm bookkeeping →
- PayrollAttorney and staff payroll, filings and year-end W-2s.Learn more about Payroll →
- Partnership returnsForm 1065, K-1s, guaranteed payments and partner capital accounts.Learn more about Partnership returns →
- Owner tax planningS corporation salary, retirement plans and NJ BAIT or NY PTET elections.Learn more about Owner tax planning →
Trust money is not firm money
Client funds are the area where a bookkeeping mistake can turn into an ethics problem, so the books have to separate them cleanly.
- New Jersey. Court Rule 1:21-6 requires trust receipts and disbursements journals, a ledger for each client, and a reconciliation of the trust account every month. The Office of Attorney Ethics checks these records through its Random Audit Compliance Program, and the monthly reconciliations must be kept for seven years.
- New York. Rule 1.15 of the Rules of Professional Conduct sets bookkeeping requirements for attorney escrow and IOLA accounts and requires the records to be kept for seven years.
- The three-way reconciliation. Each month, the bank statement, the trust journal (or checkbook) balance and the total of the client ledgers should all agree. When they don’t, the difference needs to be found that month, not at year end.
We can prepare or review your monthly trust reconciliations and keep your operating books separate. Under the court rules, the trust account remains the attorney’s responsibility.
Retainers and case costs: the tax timing
- Advance fees held in trust are generally not income until you earn them and move them to the operating account. A nonrefundable retainer the firm controls on receipt can be income when received.
- Costs advanced on contingency cases (filing fees, experts, depositions) are generally treated as loans to the client, not deductible expenses, until the case resolves and any unrecovered amount is written off. Track them by matter in a client cost receivable account so they are neither deducted too early nor lost.
- Never pay firm expenses from trust. Transfer earned fees to operating first, with a record of which matter and invoice they relate to.
Taxes for law firm owners
- The QBI deduction. Law is a “specified service” business, so the 20% qualified business income deduction phases out for owners above certain income levels.
- S corporation or partnership. Solo and small firms often save payroll tax with an S corporation election once profit is well above a reasonable salary for an attorney. Multi-partner firms deal with K-1s, guaranteed payments, capital accounts and partner arrivals and departures.
- Pass-through entity taxes. New Jersey’s BAIT and New York’s PTET can reduce federal tax for firm owners affected by the cap on state and local tax deductions.
- New York City. Partnerships and LLCs doing business in the city generally pay the 4% Unincorporated Business Tax in addition to state tax.
Bookkeeping habits that pay off
- Separate bank accounts for operating, trust (IOLTA or IOLA) and, for larger firms, payroll.
- Connect your practice management software to QuickBooks so invoices, payments and trust transfers flow into the books the same way every month.
- Review accounts receivable aging and work in progress monthly. Unbilled time is the cash flow problem most firms don’t see until it’s large.
- Collect W-9s from experts, court reporters and other vendors up front. For payments made in 2026, the 1099-NEC and 1099-MISC threshold rose from $600 to $2,000.
Frequently asked questions
Do you handle attorney trust account reconciliations?
Yes. We can prepare or review the monthly three-way reconciliation of your trust account and keep it separate from the operating books. Under the court rules, the trust account remains your responsibility as the attorney.
Is a retainer taxable when I receive it?
It depends on the agreement. An advance fee held in trust is generally not income until you earn it and transfer it to operating. A nonrefundable retainer the firm controls on receipt can be income when received.
Can I deduct case costs I advance on contingency cases?
Generally not right away. Costs advanced on contingency matters are usually treated as loans to the client until the case resolves, and any unrecovered amount is deducted then.
Do lawyers get the QBI deduction?
Sometimes. Law is a specified service business, so the 20% deduction phases out above certain income levels, and higher-earning attorneys often lose it entirely.
Should my law practice be an S corporation?
Often, once profit is well above a reasonable salary for an attorney. The analysis also weighs payroll costs, state taxes, retirement plans and BAIT or PTET elections.