Just as your clients rely on your expertise with the law, there comes a point when you need to call in accounting professionals. Whether it means using legal accounting software to simplify and automate your accounting, hiring a professional legal accountant, or both—don’t be afraid to delegate when you need to. By establishing—and following—best practices for accounting for law firms like the examples below, you’ll be better able to help your firm stay on track. Accounting for law firms is often intimidating—even for seasoned lawyers. While you’ve spent years honing your skills to become a great lawyer, you didn’t learn about accounting or bookkeeping for attorneys at law school.
Federal insurance contributions consist of the social security and Medicare taxes you withhold from your employee’s pay and match with your own contributions. You will also need to understand your obligations in regards to employment law and employment tax. This is especially important when it comes to paying mandatory disability or worker’s compensation insurance. You can research this on your state government’s website, and consult with your CPA. The types of expenses you can deduct on your tax return will depend on the expenses you incur in the course of doing business. Everyone from your bookkeeper to your CPA and the IRS needs you to keep documents proving the income, credits, and deductions you put on your tax return.
Maximize Billable Time & Cash Flow
Our mission is to empower law firm owners to understand their finances and have peace of mind, knowing that they have professional partners to assist with all accounting functions. Our list of questions you should ask any potential or existing bookkeeper or accountant for your law firm will help you ensure you are working with a quality accounting law firm bookkeeping services provider. Successful law firms know everything about their money, from where it came from to where it will go. If you don’t have a strong accounting practice handling your affairs, you might be surprised at all the expenses you incur and pay each month. Top-of-the-line law firm accounting practices generate regular reports of activities.
- Since we try to make smart money decisions as readers of this site, we’ll be looking at this choice from the financial perspective of a law practice to make sure you’re maximizing your time and money.
- It is crucial to never commingle trust funds with the law firm’s operating funds and to promptly disburse funds as required.
- Do you want to learn 10 tips for law firm success by tracking revenue and expenses, click here.
- While each account is managed in accordance with the law of the state, they have common rules guiding them.
- Financial compliance is the complex dance of keeping your financial practices in line with regulatory requirements.
- Hiring myself as a bookkeeper would be an expensive waste of resources.
- Revenue recognition within law firm accounting is the same—a retainer might be recorded as unearned income until the service is delivered.
We’ll also show you how legal accounting software can make the whole process easier (and more effective). The number of billable hours you are able to charge is very important, our team can help you maximize your billable time with clients. We’ll help you blend applications and manual tasks to improve your firms overall efficiency. When we look at law firm financial metrics, we always want to be using accrual-based profit and loss.
Misconception 1: Bookkeeping Is Enough for Small Firms
In addition to their business checking and savings accounts, most law firms are required to hold client funds in a separate trust account—often called an “IOLTA”. Accrual accounting is a more sophisticated method that records revenue and expenses at the time they are earned or incurred, regardless of when you receive the money. The benefit of this approach is that you have a more realistic understanding of your law firm’s income and expenses. Legal work is at the heart of any law firm and the firm’s success and the opportunities for growth stem from serving clients and managing cases.
Granted, if your bookkeeper and accountant are on board with it, and you take care to flag transactions properly, using your business account for personal transactions (or vice versa) isn’t the end of the world. And when you commingle your personal and business finances, the following problems can arise. The first thing you should do if you think you’ve messed up is to contact a practice management advisor in your state. These consultants usually have experience dealing with IOLTA, and rules in most states don’t require them to report ethics violations to the bar.
Always keep your trust and business accounts separate
But taking the time to properly set up your finances won’t just make it easier to file your taxes each year. It’ll save you time, money, stress, and potentially legal headaches. You’ll have accurate financial statements on hand, which can show you how your practice is performing at any given moment. And it will be a lot easier to work with bookkeepers, accountants, new partners, and buyers, if you ever decide to sell the business.
This legal accounting software tool helps you run your business more effectively and efficiently. Allowing you to better manage and oversee all aspects of your firm both financially and operationally. Embracing technology in law firm accounting isn’t merely a modern convenience—it’s a strategic move that can power your practice’s growth and efficiency.