Bookkeeping for law firms isn’t just about tracking expenses. It’s about trust, ethics, and compliance.
In this short guide, I’ll show you five common bookkeeping mistakes made by small law firms, why they matter, and how to avoid them.
Here are the top 5 mistakes we’ll cover:
Commingling Trust and Operating Funds
Not Performing Monthly Trust Reconciliations
Misclassifying Owner Draws and Distributions
DIY Bookkeeping Without Legal Accounting Knowledge
Ignoring 1099 Reporting Requirements
1. Commingling Trust & Operating Funds
What it is:
Depositing client trust funds into the firm's operating account, or paying firm expenses from the trust account.
Why it matters:
This violates legal ethics rules and can trigger bar complaints, fines, or even disbarment. Even if it was unintentional.
How to avoid it:
Maintain a separate trust account (IOLTA) and ensure three-way reconciliation is performed monthly.
2. Not Performing Monthly Trust Reconciliations
What it is:
Failing to match client ledgers, trust bank balances, and liability accounts monthly.
Why it matters:
Without reconciliation, you may not realize if client funds are missing or overdrawn.
How to avoid it:
Use tools like Clio or LawPay and reconcile all three ledgers every month, documenting the process.
3. Misclassifying Owner Draws and Distributions
What it is:
Recording owner withdrawals as business expenses (e.g., meals or travel).
Why it matters:
This misstates net profit and can cause problems during tax time or with compliance.
How to avoid it:
Clearly separate owner draws, and ensure personal expenses are not run through the business.
4. DIY Bookkeeping Without Legal Accounting Knowledge
What it is:
Relying on generic bookkeeping help or software without understanding legal-specific rules.
Why it matters:
Legal bookkeeping has unique requirements like tracking retainers, fee splitting, and 1099s.
How to avoid it:
Work with a bookkeeper who understands law firm trust compliance and legal software integrations.
5. Ignoring 1099 Reporting Requirements
What it is:
Not properly tracking payments to vendors or contractors who require a 1099-NEC.
Why it matters:
Can result in IRS penalties or trigger audits.
How to avoid it:
Collect W-9s from vendors early and use QBO or another system to track 1099-eligible payments throughout the year.
Honorable Mentions
Confusing Profits with Cashflow
A healthy revenue month doesn’t always mean you have cash in the bank.
Missing Estimated Tax Payments
Forgetting quarterly taxes creates IRS penalties and stress.
Trying to Do Everything Alone
Bookkeeping can quickly too complex to manage along. Delegate early.
DIY vs. Professional Bookkeeping for Small Law Firms
Feature / Risk | Doing It Yourself | Hiring a Legal Bookkeeper |
|---|---|---|
Trust Account Compliance | May overlook 3-way reconciliation or errors | Expert review ensures ethical compliance |
Time Spent on Admin | 5-10 hours / month or more | Near-zero time Just Review Reports |
IRS & 1099 Readiness | Often filed late or incorrectly | Fully prepared and filed on time |
Clio + QBO Sync Issues | Manual fixes and guesswork | Automated, monitored, and corrected regularly |
Stress During Tax Season | High Scrambling to catch up or explain | Low Clean books CPA-ready |
Opportunity Cost | "Free" in dollars, but expensive in time & risk | Predictable monthly fee with high ROI |
Need Professional Guidance?
You’ve just seen the most common bookkeeping mistakes small law firms make. If you're ready for clarity, compliance, and peace of mind, BooksBoss can help.
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