Instead of debiting cash and crediting income, you should debit the IOLTA account with a corresponding credit to Trust Account Liabilities. When you later earn your fee, you would debit Trust Account Liabilities and credit your revenue account. Having too many accounts creates headaches later on, as it takes more time to review the books and increases your chances of making mistakes. Fortunately, with a combination of technology, best practices, and the right help, it’s possible to stay on top of your bookkeeping with little effort. Each of these records should be kept for a specific time—some for 10 years, some for as few as three.
Managing your books via accounting software may get you started as a solo attorney. But, if you want to spend your time focused on practicing law rather than deep in the weeds of your firm’s finances, you’ll likely want to consider hiring help. One (or more) of these professionals can greatly assist with your law firm accounting. When it comes to accounting for law firms, whether you handle it yourself or hire someone, your bookkeeping system must maintain a consistent schedule for carrying out bookkeeping tasks.
Depending on your needs, opening a money market account for savings might be a smart move. It’s an interest-bearing account that offers a higher yield than traditional business savings accounts (interest rates for money market accounts sit at an average of 0.11% nationally). You’ll be required to maintain a higher minimum amount in the account, and have limited check-writing options. Once you’ve chosen a bank to work with, you’ll want to open a business checking account, a savings account, and an IOLTA (Interest on Lawyers Trust Account).
Many lawyers go to one or the other extreme—they either claim everything (and possibly more than they’re allowed to), or they’re so afraid to overstep they miss out on tax deductions. While there are a lot of factors to balance, here are the essentials for law firm accounting and bookkeeping success that you should get a handle on ASAP. An accountant who specializes in accounting for law firms is beneficial.
At the very least, you should leverage accounting software to track your transactions. There’s no reason to manually enter transactions anymore with so many affordable options available. Consider asking the prospective accountant about their familiarity with employment tax regulations and whether they have worked with independent contractors common in the legal industry. The FUTA tax rate is 6%, which taxes wages up to the first $7,000 earned by the employee during the year. There are also state and sometimes municipal payroll taxes to be collected.
These funds are stored in IOLTA or “interest on lawyers trust accounts” accounts. First things first, bookkeeping and accounting aren’t the same things. Although they share a common goal, they occur at different stages of managing your firm’s finances. Bookkeeping happens first and relates to the administrative side of tracking your cash.
It involves recording and classifying financial transactions, preparing bank reconciliation, and tracking all income and expenses. To keep things even more streamlined, consider using online payment software together with legal accounting software. For example, if you were using LawPay to collect payments and invoice clients, you could easily sync all your transactions into QuickBooks for easy reporting and reconciliation. You’ll also want to decide how your firm will track incoming and outgoing funds. Your business’s accounting method will affect cash flow, tax filing, and even how you do your bookkeeping.
When you know and monitor your numbers, you can quickly see when you’re off target and cut costs or make strategic investments to increase revenue. First, let’s review typical accounting and bookkeeping functions that need to happen law firm bookkeeping regularly so you can make sure you’ve got these covered. By now, you know you can’t simply create a financial strategy and budget and sit back and relax. Using key performance indicators will help you know sooner if you’re on track.