Do I Need to Issue a 1099-NEC for $500 in Attorney Fees?

Wait, seriously? EVERY payment? What if I just paid a lawyer $50 for a quick consultation? That seems excessive to have to report such a small amount.

Yes, the rule really does apply to any amount paid to attorneys, even very small amounts like $50. The IRS doesn't have a minimum threshold for attorney payments like they do for other service providers. The reason behind this rule is that the IRS wants to track all payments to attorneys, even small ones. It's a bit of extra work, but it's definitely required to issue that 1099-NEC even for small amounts paid to lawyers.

How does it work with identifying who's an attorney versus just another service provider? Do you have to manually mark them or does it somehow know?

Sounds interesting but I'm skeptical. How does it know the profession of each person you paid? Do you have to input that manually? And what about privacy concerns with uploading all your payment data?

It has a really simple classification system where you can tag vendors by their profession or service type. Once you mark someone as an attorney, it automatically applies the special reporting rules to them regardless of payment amount. The privacy aspect is actually what drew me to it - they use bank-level encryption and don't store your raw financial data after processing. They just analyze the payment patterns to identify reporting requirements, then give you the completed forms or filing instructions.

How exactly does this service work? Do they somehow jump you ahead in the IRS phone queue? That seems impossible with how backed up the IRS phone lines are.

This sounds like complete BS to me. Nobody can magically get through to the IRS faster than anyone else. I've been trying to reach them for 3 months about my refund. If this actually worked, everyone would be using it.

They don't jump ahead in the queue - they basically have an automated system that constantly redials the IRS for you using their algorithms to hit at the best times, then when they finally get through, they transfer the call directly to you. It's like having someone sit there and dial for hours so you don't have to. They don't have special access or anything - they just handle the frustrating redial process. I was skeptical too but figured it was worth trying since I had already wasted half a day trying to get through myself. The whole process took about 45 minutes total from signing up to talking with an actual IRS agent.

So wait, if I settled a lawsuit and the settlement check went to my attorney first (who then took their fee and gave me the rest), who has to issue what forms to whom? This is confusing me.

In your settlement scenario, whoever paid the settlement amount would issue a 1099-MISC with Box 10 completed to your attorney for the full settlement amount, even though the attorney only kept a portion as their fee. Your attorney would then issue you a 1099-MISC for the settlement amount you received (minus their fee). This ensures the IRS can track the full amount and that appropriate parties report their respective income portions. It can seem redundant but it's designed to prevent income from "disappearing" between the payer, attorney, and final recipient.

Yes, you absolutely need their Tax ID (either SSN or EIN). You should have had them fill out a W-9 form before paying them, which would include this info. Most attorneys know this and have W-9s ready to provide to clients. If you didn't get it upfront, you'll need to contact them now to request their W-9. They're legally required to provide it. If they refuse, you're supposed to do backup withholding, but that's a whole other complicated issue.

You should definitely reach out to the attorney ASAP to get their W-9! The deadline for collecting W-9s is actually before you make the payment, but since that ship has sailed, get it now. You'll need their tax ID info before you can file the 1099-NEC, and the filing deadline is January 31st for the current tax year. Regarding law firms vs individual attorneys - the reporting requirement is the same regardless. Whether it's a solo practitioner or a big firm, any payment for legal services requires a 1099-NEC no matter the amount. The key is that you're paying for legal services, not who's providing them. Most attorneys are used to this request and should provide the W-9 quickly since they know it's required. If they give you any pushback, just explain it's an IRS requirement for all payments to attorneys.

Great question about other professions with special reporting rules! Besides attorneys, there are a few other categories that have unique 1099 requirements: Medical and health care payments also have special rules - payments to physicians, hospitals, and other medical providers often require reporting regardless of amount in certain situations, particularly when made by insurance companies or third-party administrators. Fishing boat proceeds have their own rules too - payments to crew members on fishing boats require 1099-MISC reporting with no minimum threshold. Also, substitute payments in lieu of dividends or tax-exempt interest have special reporting requirements regardless of amount. The key is that these professions or payment types have heightened IRS scrutiny, so they want visibility into all payments, not just those over $600. It's definitely frustrating that these exceptions aren't more clearly communicated - most small business owners learn about them the hard way like you almost did! I'd recommend keeping a list of these special categories handy for future reference, especially if you regularly work with professionals in these fields.