Law firm bookkeeping: what a bookkeeper does differently

One extra bank account, and the money in it isn't the firm's. The example is Pinecrest Law PLLC, a made-up solo firm in Raleigh, North Carolina: Dana Whitfield is the attorney, and you're closing September 2026.

The trust account held $4,900 on September 1 and took in $36,000. Dana approved three fees, $12,300, and moved them to operating, along with $1,030 that repaid costs the firm had fronted.

The firm paid $19,495 to a court clerk, a medical lienholder and two clients, and the bank took a $15 charge. That leaves $8,060 on the 30th: $4,900 + $36,000 − $12,300 − $1,030 − $19,495 − $15. Of that, $7,875 is owed to clients and $185 is the firm's own.

These four words get mixed up, and they don't mean the same thing:

• Trust account: a bank account that holds money belonging to clients or third parties. The ABA's model rule calls it a client trust account, and state names vary.
• IOLTA: one kind of trust account. In California's handbook, it pools amounts that are small or held briefly, and the bank sends the interest to the State Bar. Money that could earn the client more than the account costs goes to a separate account, and that interest belongs to the client.
• Escrow account: in some states, another name for a trust account. The Texas rule says the account is designated "trust" or "escrow", and Georgia's allows "Attorney Escrow Account".
• Retainer: what people call any money paid up front. It may be an advance against future fees, which is still the client's money. Or it may be a "true retainer", paid only to keep the lawyer available. Where each one goes depends on the state.

So when you hear "retainer," find out which kind it is before you record it, because the two can land in different accounts.

The firm's state does, in its own rules of professional conduct. The American Bar Association writes model rules that states adapt, so "the ABA requires it" names the wrong rule.

Model Rule 1.15 shows it: the retention period sits in brackets for each state to fill in.

“Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation.”

The eight states whose rules or bar handbooks we read filled it in with 5, 6 or 7 years. They split just as much on how often you reconcile and on who signs the reconciliation. Find your client's row:

Before your first month-end, copy your client's interval and retention period into your engagement letter, with the rule number. Then the letter names the rule that binds the firm, not a model.

Where the rule sets no interval, you still reconcile monthly. The ABA's model rule on trust records brackets the interval too, "[monthly] trial balances and [quarterly] reconciliations," and its comment explains the preference:

“Quarterly reconciliation is recommended only as a minimum requirement; monthly reconciliation is the preferred practice given the difficulty of identifying an error (whether by the lawyer or the bank) among three months' transactions.”

Texas is one of the silent states, and the State Bar of Texas still calls monthly reconciliation "practical, wise, and necessary for efficient law office management."

Florida and Ohio aren't in the table. Their official rule pages wouldn't open for us on October 13, 2026, and we don't quote a rule we couldn't read. For a client in either state, read the rule on the state bar's own site.

IOLTA or a separate account?

The attorney picks, under the state's rule, and the choice changes what you record. California's handbook puts money that is "nominal or deposited for a short period of time" in the pooled account.

In an IOLTA account the handbook says you don't need to record the interest; the bank sends it to the State Bar. In a separate account the interest belongs to the client, so post it to that client's ledger.

At year end, give the firm's CPA a list of the separate accounts and whose they are (our suggestion). The IRS's audit guide treats interest on a separate account as taxable to the client it's held for, and pooled IOLTA interest as not taxable to the clients, the attorney or the program. The guide cites Rev. Rul. 87-2 for both points, and it says it isn't an official IRS position.

Add a trust bank account and a liability that matches it, and keep clients' money off the P&L. If your P&L shows a client's deposit, the setup is wrong.

Here are the four accounts you'll add or check:

The first two are the pair the IRS's audit guide for attorneys describes:

“There should also appear on the attorney's balance sheet a liability account (e.g., "Liability for Client Trust Accounts") equal in value to the total amount of the schedule(s) and the balance(s) of the trust account(s).”

You may find a little of the firm's own money in the account too. Pinecrest keeps $200 there for bank charges. The ABA's model rule allows that, and North Carolina's rule gives it a ledger of its own (Rule 1.15-3(d)(2)(B)). After the bank's $15 charge on September 30, it's $200 − $15 = $185.

So your balance-sheet check each month is one line: the trust bank account, less the firm's own funds, equals Client trust liability. On September 30 that's $8,060 − $185 = $7,875.

In QuickBooks Online

Set up the trust bank account as a Bank account, so you can reconcile it to the statement. That part is our choice: Intuit's article sets up the account that holds the money as a liability too.

For the rest, follow Intuit's help article "Record a retainer or deposit" (updated August 4, 2026). We read it and haven't run the steps in a live file, so try them in a test company first:

1. Create the liability. Account Type Other Current Liabilities, Detail Type Trust Accounts - Liabilities.
2. Create a Retainer item. A Service item whose income account is that liability, so money recorded with it raises the liability, not income.
3. Record a deposit on a sales receipt (or an invoice) for the client, with the Retainer item, deposited to the trust bank account.
4. Apply a fee. Invoice the work and add the Retainer item as a negative line for the amount being applied. Then record a Transfer from the trust bank account to the operating account.
5. See each client's balance. Open the liability from the Balance Sheet. In the Customize report panel, select Rows/Columns, and from the Group by menu select Customer.
6. Pay a cost from a client's money with an item that posts to the liability. Intuit's reason: "as they should not appear on your Profit and Loss report."

Step 4 needs one change for a law firm. Intuit treats the retainer as income once it's applied to the invoice, but here the attorney's approval is what frees the money. So we'd date the negative Retainer line the day the attorney approves and moves the fee (September 16 for Lena Park), not the invoice date.

On a cash-basis file, read retainers from the liability, not the P&L (our advice). Intuit notes that cash-basis reports won't show a retainer as received "until the invoice is paid in full."

Intuit's article also lets a retainer sit in "your main operating account." For a law firm, an advance fee goes to trust under the ABA's model rule. Any exception depends on the state rule and the fee agreement (which payments go to trust).

If the firm runs legal billing software, the client balances probably live there, by client or by matter. Then that report is your client ledger, and its total has to match the liability in QuickBooks every month.

"Why does my P&L show the IOLTA deposits?"

Because a deposit was coded to an income account, or to an item that posts to one. Here's the test: no client's money belongs on the P&L. The only trust line you'll see there is a bank charge paid from the firm's own funds.

Recode each deposit to the client's balance in the liability. Your income drops by the deposit, and the client's money shows up on the balance sheet, where the attorney can check it.

Credit the client's liability for every deposit, and debit it for every payment out. Record fee income only when the attorney approves a transfer to the operating account.

Here's Pinecrest's September in 9 entries, in the order you'd record them. The accounts are the ones the IRS audit guide describes. The names and the debit and credit layout are ours, because no bar or IRS source we found prints the entries.

They're cash-basis entries: you record fee income when the money moves. If your client keeps accrual books, you add one step, shown after the last entry.

Card payments have one more point in North Carolina: the State Bar's handbook (2017, older than the current rule) says a client's card payment meant for trust can't pass through the operating account first. The handbook: "Client funds cannot be deposited by credit card to the office operating account and then transferred to the trust account." Who bears the card processor's fee is a question for the attorney (our advice).

Five of the nine entries take money out of a client's balance: the filing fee, both fee transfers, the settlement payout and the refund. We'd ask for the attorney's written approval for each one before the money moves, and keep it on file (our practice; what to hold).

On accrual books, you debit accounts receivable and credit fee income for $1,400 on September 15. On the 16th you debit the operating account and credit the receivable. The trust side doesn't change.

For the operating side (rent, payroll, card fees, the owner's draws), the journal entry examples tool builds the entries.

When the attorney has earned it and takes it out. Until then it's the client's money, whatever the invoice says, and the call is the attorney's, never yours.

“A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”

What if the client disputes the bill? Then the transfer waits. California's handbook: "Once a client disputes your fees, the disputed amount must remain in your client trust account until the dispute is settled."

Undisputed money can't sit there forever either. California's rule 1.15(f), as the State Bar's handbook states it, sets a rebuttable presumption of a violation when undisputed funds aren't distributed "within 45 days." So when you see an old, untouched client balance, put it in your month-end note to the attorney.

An earned fee left in trust mixes the firm's money with clients'. The ABA's model Rule 1.15(b) lets the firm keep its own money in trust only "for the sole purpose of paying bank service charges," so as we read it, an earned fee has to come out of trust. The state rule decides. When an approved fee hasn't moved, ask the attorney about it.

Does every up-front payment go into trust?

Not in every state. Here's how California's and Texas's sources sort three payments you'll hear called a retainer:

On the exceptions: the comment to the ABA's model rules on trust records notes that some states let certain advance fees go to the operating account, while California's handbook says "You are required to hold advance fees in the client trust account, including a "flat fee" paid in advance," with the flat-fee exception in the table above.

The label on the invoice doesn't settle it. The State Bar of Texas: "Simply stating that a flat fee is nonrefundable or earned upon receipt does not make it so."

That's why answers online conflict. In an r/Bookkeeping thread on recording retainers, a Florida commenter said retainers can go to the operating account with disclosure, and a California attorney answered that California allows that only for a flat fee, with written disclosure. Neither comment is a source for the rule, so read your client's own.

So get the fee agreement for every matter. Then ask the attorney about each deposit: "Is this an advance, a flat fee, or a true retainer?" Keep the answer in writing. If you're told "put all retainers in income," get that in writing too, matter by matter. You record what the attorney decides; you don't classify the money yourself.

The tax return may see it sooner

Keep the liability in your books either way. At year end, send the firm's CPA the client trust liability by client, and let the CPA decide the tax timing.

The IRS's audit guide for attorneys says, "Generally, if the attorney is on a cash basis of accounting, the retainer is taxable when received." But the same guide says it can't be "used, cited, or relied upon" as the IRS's position, and we found no Code section, regulation, or ruling on advance fees held in trust. That's why the timing is the CPA's call, not yours.

To an asset account, when the firm expects the client to pay them back. The IRS's audit guide treats those payments as loans to the client, not as the firm's expenses.

“Courts have determined that costs paid on behalf of a client are to be treated as in the nature of loans for tax purposes. They are not deductible by the attorney as a current cost of conducting business.”

A cost the firm puts on its credit card goes to the same asset. You debit Advanced client costs and credit the card (our layout).

The guide lists what you'll usually find in the account, from a Tax Court case: filing fees, deposition costs, witness fees, medical records, investigators. When a cost turns out to be uncollectible, it says a bad debt deduction may be taken in that year.

You'll meet two exceptions in the same guide. First, a cash-method attorney can generally deduct office-type costs billed to clients, such as copying or secretarial time, when they're paid.

Second, some contingency agreements (the guide calls them gross fee contracts) never require the client to repay the costs. In Boccardo (1995), the Ninth Circuit let a firm with that kind of contract deduct them. An IRS letter from 2010 says the IRS won't follow that decision outside the Ninth Circuit.

So you book fronted costs to the asset, client by client, and send the CPA the fee agreement for every contingency matter. Whether a cost is deductible turns on the agreement and the court circuit, and that's the CPA's decision.

Then follow each cost to the end. Once a month, list Advanced client costs by client and age, and ask the attorney about anything not billed back. A filing fee that sits there for a year was either never billed or never collected.

If you inherit years of costs that were expensed and never assigned to clients, list them by client and year. Take that list to the CPA before you change a closed year.

You prove three balances match on the statement date: the trust journal, the client ledgers, and the bank after outstanding items. Pinecrest's all come to $8,060.00 on September 30.

California's handbook says trust account journal, North Carolina says general ledger, and Illinois says checkbook register. The idea is the same in each, and these three steps (our order, closest to California's) do it each month:

1. Tie the journal to the ledgers. Every deposit and payment in the journal appears on exactly one client's ledger, for the same amount.
2. Tick the journal against the bank statement. Journal lines the bank hasn't seen are outstanding. Statement lines you haven't recorded get researched before you record them. This step on its own is an ordinary bank reconciliation.
3. Compare the three totals as of the last day of the statement period.

On step 2, North Carolina's handbook is blunt: "DO NOT record the bank statement entry in your records until you verify that the transaction occurred; banks make mistakes, too."

September ties, so the packet can go to Dana for her signature (below). Three details can trip you up:

• Adjust the bank side. California, Illinois and North Carolina all add deposits the bank hasn't credited and subtract checks it hasn't paid. The journal stays as it is.
• Count the firm's own money. Pinecrest's $185 for bank charges has its own ledger. Leave it out and your ledgers come up $185 short.
• Positive balances only. North Carolina's rule (1.15-3(d)(2)(B)) totals "the positive balances in the individual client ledgers." A negative ledger can't be netted against other clients' money. It gets explained on its own.

Does QuickBooks do this for you? Partly. As we understand it, its reconcile screen does one comparison: the journal against the bank. For the ledgers, run the Balance Sheet with the liability grouped by customer and add the firm's own funds: $7,875 + $185 = $8,060. That's our method for the setup above.

Who signs it?

In North Carolina, the lawyer. Rule 1.15-3(d)(3) says the lawyer "shall review, sign, date, and retain a copy of the reconciliations." California expects a supervisory review when someone else does the work. Its State Bar publishes a form for it.

North Carolina's rule also requires a monthly review of the bank statement and cancelled checks and a quarterly review, with any discrepancies discovered resolved "within ten days" (Rule 1.15-3(e)).

So send Dana a packet each month: the three schedules, the bank statement and the list of outstanding items. Ask for it back signed and dated, and file her copy with the month, so her review is on record.

Find which two of the three disagree, because that tells you where to look. Then fix the wrong entry by reversing it. A balancing entry is never the fix in a trust account.

Say you entered Lena Park's $1,000 deposit of September 30 in the journal and never posted it to her ledger.

The journal and the bank agree, so the bank side is fine and the ledgers are short. The gap is $1,000.00, a whole transaction, so you search the journal for a line of that amount.

You can sort every case the same way:

The third row is why you read each ledger against the client's file as well as the totals. Totals can't tell you whose money a line moved.

Skipping that read has a cost. In *Iowa Supreme Court Attorney Disciplinary Board v. Smith* (No. 17-1110, 2017), the lawyer "only looked at individual client ledger cards when there had been activity that month." One ledger was $48,700 negative, which "had not been immediately apparent" from the ledger card.

Where do you start? With the usual causes the State Bar of Texas lists. A client ledger was left out of the total. An item wasn't posted to the register or to the client's ledger. Or a running balance was added wrong.

Then check for swapped digits or a misplaced decimal point. Either one always leaves a difference that divides evenly by 9: $540 entered as $450 is off by $90. So when the difference divides by 9, check for those first.

How to correct it

Reverse the wrong entry and enter the right one, both dated the day you reconcile. California's handbook: "The first entry reverses the original incorrect entry and the second entry adds the corrected entry."

It also gives the reason: "You should not erase the original entry so that you maintain a good audit trail." In your software, that means a new entry that names the transaction it fixes. Don't edit September's line once the month is reconciled.

Does September still tie if the fix is dated in October? Yes, as we read California's example: its January reconciliation is done on February 5, with the correction entered that day, and it uses the corrected balance. So show the correction on September's schedule, with its date.

A client ledger is negative

Stop, and tell the attorney the same day, in writing. A negative ledger can mean one client's money paid for another client. California's handbook says it "could indicate a calculation error or, worse, that a client's funds have been misappropriated."

One way it happens: a client's deposit bounces after money was paid out against it. California's handbook warns that "writing checks against funds not yet deposited or cleared by the bank can lead to a "negative balance," which may indicate negligence or even theft." So record the returned deposit as the bank shows it, and treat the ledger as negative from that day (our reading).

Don't net it against other ledgers, and don't move it to a holding account yourself. How it's cured, and whether the bar is told, is the attorney's decision under the state rule.

In North Carolina, for example, the lawyer reports a misapplication to the State Bar (Rule 1.15-2(p)). The one exception is an accidental one, from an accounting or bank error, that's found and fixed by the next quarterly reconciliation.

It's only off by $2

In an operating account, you might write off a $2 difference. In a trust account the $2 belongs to someone, and California's handbook holds the attorney responsible for all funds "down to the penny."

So find it. If you have to send the month before you do, mark it not reconciled. Give the attorney the amount and what you've ruled out.

Eight steps, from the bank statement to the attorney's signature. The order is ours; each step points to the section that explains it.

1. Collect the trust bank statement with check images, the billing system's client balances, the month's invoices and settlement statements, and the attorney's written approval for each payment out. Download the check images each month (our advice; the ABA comment says "It is the lawyer's responsibility to download electronic images"). If records are kept only electronically, check the state rule for a backup requirement (Pennsylvania's Rule 1.15, for one, wants a backup at least at the end of any day entries are made).
2. Post every deposit and payment to the journal and to one client's ledger, for the same amount (entries).
3. Tick the journal against the statement, and list what's outstanding.
4. Compare the three balances as of the statement date (three-way). If they differ, find the difference before anything else (when it doesn't tie).
5. Read each client's ledger for a negative balance, a payment with no approval on file, and a balance that hasn't moved in months.
6. Check the balance sheet: the trust bank account, less the firm's own funds, equals Client trust liability. On the P&L, the only trust line is a bank charge paid from the firm's own funds (setup).
7. List advanced client costs by client and age, and ask about anything not billed back (client costs).
8. Send the packet to the attorney, and file the signed and dated copy with the month (who signs).

For Pinecrest's September, you post 11 lines to the trust journal. That's the trust lines of the entries above (the September 10 cost was paid from operating), with the settlement payout as three lines, plus Lena Park's September 30 deposit. You list two outstanding checks and one deposit in transit, the three balances agree at $8,060.00, and one packet goes to Dana to sign.

With the packet, add the client costs still outstanding, by client; the trust reconciliation doesn't show them.

Rebuild it forward from the last month that ties. No bar we read publishes a method. The handbooks give one rule: you can't reconcile a month until the month before it is right.

“you cannot perform a reconciliation for a specific month until your trust account journal and individual ledgers have the correct and matching balances at the end of the previous month.”

North Carolina's handbook says the same, and names who can help: "you may want to bring in a bookkeeper to straighten them out." So this is recognized work, and you can quote it as a job of its own.

The order below is ours, built on that rule. It isn't an official procedure:

1. Collect the bank's records. Every statement and check image back to the last signed reconciliation, or to the day the account opened.
2. Pick the starting point. The last date when the three balances provably tied. If there isn't one, start at the opening date with zero.
3. Rebuild the journal from the statements, one month at a time, so you always start from a month that ties.
4. Give every line a client, from the fee agreements, invoices and settlement statements. Lines you can't assign go on a list for the attorney, not onto a catch-all ledger.
5. Reconcile each month before you start the next.
6. Report what you found: the reconciliations, any ledger that went negative and when, and the list of money nobody can identify.

Expect the rebuild to turn up a shortage. In Smith, the lawyer's "outside bookkeeper therefore reconstructed the ledgers," and the auditor then found "a negative balance of nearly $50,000."

The lawyer deposited $50,000. About two months later, once the client accounts "had been verified and restated," the auditor found another $813.11 missing. So expect a second, smaller difference after the big one, and keep going until every month ties.

Money nobody can identify

Can the firm keep it? Not in Pennsylvania, and not in Texas when the owner can't be located. Pennsylvania's rule covers both cases: IOLTA funds whose owner the firm can't identify or locate go to the state's IOLTA Board after "reasonable efforts for a minimum of two (2) years."

The State Bar of Texas's guide covers an owner who can't be located: keep the funds in trust "for at least three years," then follow the state's abandoned property law. We didn't check other states, so look up your client's before anyone touches the money.

Scoping and pricing it

Quote the trust rebuild as its own line, apart from catching up the operating books. You can't know the hours until every line has a client (step 4), so bill it hourly with a cap you agree before starting.

One r/Bookkeeping thread describes a law firm that balked at a $12,000 quote ($10,000 for the catch-up and $2,000 for the trust liability by client). It accepted $17,500 instead: $12,500 for the catch-up and $5,000 on its own line for a forensic trust reconstruction going one year further back, once the license risk was explained. That's one thread, not a survey.

Price the rebuild in full, rather than discounting it to win the monthly work (our suggestion). If the firm leaves once the rebuild is done, your discount leaves with it. The proposal builder keeps one-time work on its own line, separate from the monthly fee.

The attorney decides whose money it is and when it moves. You record, reconcile and report what you find, and you keep the attorney's written approval behind every payment out of trust.

Hiring you doesn't move the responsibility. California's handbook says a properly supervised bookkeeper "is allowed; however, you are still personally responsible for accounting to your clients and the State Bar."

Don't sign, and don't move the money

North Carolina separates the two jobs in the rule itself:

“Every trust account check must be signed by a lawyer, or by an employee who is not responsible for performing monthly or quarterly reconciliations and who is supervised by a lawyer.”

The rule says "employee" and doesn't mention outside bookkeepers. We'd apply it to ourselves anyway: if you reconcile the account, decline check-signing authority and any bank login that can send money.

If a firm hands you signed blank checks, hand them back. California's handbook tells attorneys: "do not pre-sign blank client trust account checks."

Watch the statement for cash, too. The ABA's model rule on trust records allows withdrawals only "by check payable to a named payee and not to cash, or by authorized electronic transfer." If you see a cash withdrawal or a check to cash, put it in your note to the attorney.

What to hold before you record a transfer

You don't move the money. So these four are what the attorney needs before it moves, and what you want on file when you record it:

The comment to ABA Model Rule 5.3 says a lawyer who uses a nonlawyer outside the firm "should communicate directions appropriate under the circumstances." It's a model rule, and its examples don't name bookkeepers. An email reply is enough for us (our practice); keep it with your reconciliation packet for the month.

Do you have a duty to report?

We found no rule or case that puts a reporting duty, or bar discipline, on you as an outside bookkeeper. The rules we read bind lawyers. That's what we found in the eight states we read, not legal advice.

If you believe client money is missing and the attorney won't act, talk to your own attorney before you do anything else.

Lines for your engagement letter

CAMICO's guidance says engagement letters "Define the scope and limits of the engagement (specifically what the firm will and won't do)." It was written for CPA firms in general. The wording below is ours:

Add it to a letter from the engagement letter builder, where you can edit any line in place.

Six questions, before you quote. Some answers mean you slow down. Both lists are ours, built from the records the rules above require.

• Which state's rule applies, and is the account you'll keep an IOLTA account or a separate one?
• When did the attorney last sign a reconciliation, and can you see the client ledgers behind it?
• Can you have the fee agreements for the open matters?
• Can you get trust bank statements and check images back to that reconciliation?
• Where are client balances kept: in QuickBooks, or in billing software, by client or by matter?
• Who signs trust checks, and who can send money from the bank login you'd get?

Slow down if nobody can produce a reconciliation, the attorney won't review your work, you're asked to sign checks or move money, trust money has gone to a personal account, a ledger is negative and nobody will say why, or the firm is years behind and expects the monthly price.

Your letter can settle three of those: who reviews the reconciliation, who signs, and who moves money. Missing reconciliations and an unexplained negative ledger mean a rebuild comes before the monthly work. Trust money sent to a personal account is the one we'd walk away from. Years behind at the monthly price is a pricing conversation (scoping a rebuild).

Each one leaves a sign you can spot in the file. Two habits prevent most of them: keep clients' money off the P&L, and never let a difference pass.

Use the month's own numbers, say what you found, and say what you need back. These messages cover most months; the wording is ours, so change it to fit.

Asking for approval to move a fee

Reporting a difference you found and fixed

Reporting a negative client ledger

This one gets a different message, because the next step isn't yours:

Scoping a trust account that was never reconciled

Two rules, one for each direction. A business that pays a law firm $2,000 or more in fees, in the course of its trade or business, reports it, even when the firm is a corporation. A law firm paying out of trust reports the payments it manages, like an expert witness it hired. The client's share of a settlement isn't a payment the firm reports.

Start with your clients that pay a law firm:

“The exemption from reporting payments made to corporations does not apply to payments for legal services.”

So if your client paid a law firm $2,000 or more in fees in 2026, it files a 1099-NEC. That holds for a PLLC, a P.C., or a sole practitioner. Ask the firm for its TIN. The IRS instructions say an attorney must supply it "promptly", corporation or not, though it needn't certify it. The accounts payable template has a 1099 watch for it.

Payments the firm makes from trust

Here the person who chose and oversaw the payee reports the payment, not the person who only wrote the check. 26 CFR 1.6041-1 puts it as whoever "[p]erforms management or oversight functions in connection with the payment," or has a significant economic interest in it. Writing checks at another's direction doesn't count.

The regulation's own example is an attorney paying out of a client trust fund. The attorney chose the expert witnesses and investigators and approved their work, so the attorney reports paying them. Paying the client the remainder isn't reportable by the attorney.

So the $15,000 Pinecrest paid Maria Lopez gets no 1099 from the firm. Had Dana hired an expert witness and paid the expert from trust, that payment would be the firm's to report once it reaches the threshold. No example covers the $4,150 paid to the medical lienholder, so that one goes to the CPA.

Money shared with another law firm has its own rule. An attorney who received a settlement check generally reports what it pays other attorneys out of that check (26 CFR 1.6045-5). Wages and partners' shares are excepted.

Each January, give the CPA your list of every trust payment that didn't go to a client, by payee and what it was for. The CPA decides which ones get a form.

Ledgental Team wrote this article. Ledgental also makes a bookkeeping app that's free during its beta and free tools for bookkeepers; this article doesn't sell either one. We're a software company, not a law firm or a CPA firm.

What the rules rest on

• State rules: we read each of the 8 rows at the state's own source on October 13, 2026. That was the rule text for North Carolina, Illinois, Pennsylvania, Michigan, Georgia, and New York. For Texas it was the State Bar's reprint, and for California the State Bar's handbook. It's our reading, not an official chart.
• ABA texts: Model Rule 1.15, Model Rule 5.3, and the Model Rules for Client Trust Account Records, read at americanbar.org. They are models; no state is bound by them.
• Tax: the IRS's Attorneys Audit Technique Guide (Publication 5602), which says of itself that it isn't an official position; the Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026); and two Treasury regulations, read at Cornell's Legal Information Institute. The IRS page for the 1099 instructions carried the label "Rev. December 2026" when we read it on October 13, 2026.
• The reconciliation steps are what California's handbook, the Illinois rule, and North Carolina's handbook have in common. The month-end checklist, the list of what to ask for before you take the client, and the order for rebuilding an account are ours.
• The journal entries: the accounts are the ones the IRS guide describes. The names and the debit and credit layout are ours; no bar or IRS source we found prints entries.
• QuickBooks Online: quoted from Intuit's help article, read on October 13, 2026. We haven't tested the steps in a live file.
• What bookkeepers do (splitting a rebuild into its own line, the divide-by-9 check) comes from r/Bookkeeping threads we read. It shows what some people do, not a rule.
• The example (Pinecrest Law PLLC, Dana Whitfield, and the firm's clients) is fictional, and the amounts aren't real court fees. Every figure in the text, the entries, and the schedules comes from one tested data file, so they can be checked against each other.

What we couldn't confirm

• Florida's and Ohio's rules: the official pages wouldn't open for us, so neither state is in the table.
• An official method for rebuilding an unreconciled trust account: we looked and found none. The same goes for engagement-letter guidance written for a law firm's outside bookkeeper, and for any rule that puts a reporting duty on that bookkeeper.
• Who reports a trust payment to a medical lienholder on a Form 1099: the regulation's examples don't reach it.
• The tax timing of advance fees held in trust: only the IRS audit guide addresses it.

What changed

• October 13, 2026: first published.
• October 19, 2026: rewritten for easier reading: each section opens with its answer and ends with what to do, and the FAQ mostly restates the sections (the software answer keeps the Texas guide's note). Added, with sources: the parts of the September 30 balance; North Carolina's ten-day review rule (1.15-3(e)) and its card guidance (2017 handbook); the IRS audit guide on IOLTA and separate-account interest; the ABA comment on check images and a reminder to check the state's backup rule; the attorney's TIN; Intuit's cash-basis note; California's 45-day presumption (Rule 1.15(f)) and its warning on paying against uncleared deposits; Smith named; the two r/Bookkeeping threads linked, as reader experience; the divide-by-9 check, now from arithmetic with an example. Added as ours: a cost put on the firm's card (our layout), not discounting a rebuild (our suggestion), recording a returned deposit (our reading), asking about an earned fee left in trust (our reading of ABA Model Rule 1.15(b)), asking for written approval before money moves (our practice), the list of separate accounts for the CPA (our suggestion), and reading retainers from the liability on a cash-basis file (our advice). No example figure changed.

Reusing this page: the article's text, tables, and diagrams are licensed under CC BY 4.0. Credit "Ledgental" with a link to this page. Quotations from the IRS and from federal regulations are US government works. Every other quotation stays under its owner's terms.

Sources

1. Rule 1.15-3, Records and Accountings, North Carolina State Bar
2. Rule 1.15-2, General Rules, North Carolina State Bar
3. Rule 1.15A, Required Records (effective July 1, 2023), Illinois Supreme Court
4. 204 Pa. Code Rule 1.15, Safekeeping Property, Pennsylvania Code and Bulletin
5. Michigan Rules of Professional Conduct, Rule 1.15, Michigan Supreme Court
6. Georgia Rules of Professional Conduct, Rules 1.15(I) to 1.15(III), State Bar of Georgia
7. Rules of Professional Conduct, 22 NYCRR Part 1200, Rule 1.15, New York State Unified Court System
8. Handbook on Client Trust Accounting for California Attorneys (2024 update), State Bar of California
9. A Lawyer's Guide to Client Trust Accounts (updated January 2024), State Bar of Texas
10. Lawyer's Trust Account Handbook (revised November 2017), North Carolina State Bar
11. Model Rule 1.15, Safekeeping Property, American Bar Association
12. Model Rules for Client Trust Account Records, Rule 1 and Comment, American Bar Association
13. Model Rules for Client Trust Account Records, Rule 2, American Bar Association
14. Model Rule 5.3, Responsibilities Regarding Nonlawyer Assistance, and Comment, American Bar Association
15. Attorneys Audit Technique Guide, Publication 5602 (revised January 2022), Internal Revenue Service
16. Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026), Internal Revenue Service
17. 26 CFR 1.6041-1, Return of information as to payments of $600 or more, Legal Information Institute, Cornell Law School
18. 26 CFR 1.6045-5, Information reporting on payments to attorneys, Legal Information Institute, Cornell Law School
19. Chief Counsel information letter 2010-0242 (October 27, 2010), Internal Revenue Service
20. Iowa Supreme Court Attorney Disciplinary Board v. Smith, No. 17-1110 (2017, amended 2018), Iowa Judicial Branch
21. Report proposing an amendment to New York Rule 1.15(d)(1) (May 14, 2026), New York City Bar Association, Professional Discipline Committee
22. Engagement and Disengagement Letter Essentials, CAMICO
23. Record a retainer or deposit (updated August 4, 2026), Intuit QuickBooks help