SR Client Question: Do I issue a Form 1099 to a law firm collecting fees for my medical practice?
When a medical practice or another business hires a law firm or third party on a contingent basis to collect overdue fees or invoices, it triggers obligations under two distinct sections of the tax code.
If the law firm or third party is expected to charge for out-of-pocket expenses and retain a percentage of the collected amounts, they will receive the settlement checks directly from the payer and disburse the net proceeds to the client. The payer must issue two separate Form 1099s to report these transactions:
a) Under Code Section §6041: The payer must furnish a Form 1099-MISC to the medical practice or business, reporting the total payment amount, inclusive of any legal fees or out-of-pocket expenses.
b) Under Code Section §6045(f): The payer must also provide a Form 1099-MISC to the law firm or third party retained by the medical practice or business. This form must detail the entire payment made to the law firm or third party, encompassing their fees and other incurred out-of-pocket costs.
These reporting requirements ensure that both the medical practice (or business) and the law firm or third party accurately account for the financial transactions related to the collection of outstanding fees or invoices.