Before Accepting Credit Card Payments for Legal Fees, Think Documentation
There are many issues to keep in mind when documenting credit card payments from clients.
In conjunction with a shift to accepting credit card payments for legal fees, you will need to assess what changes you need to make to your accounting and documentation systems. None of these issues are major, but you want to handle these tasks carefully, so you don’t get into trouble down the road.
The first challenge is how to handle retainers or prepayments. Under state bar rules, you are not supposed to “receive” the payments until you have done the work, unless the client has authorized prepayment of fees. The primary exception to this rule is if the payment is truly a retainer paid to you in exchange for your taking the case—without your having to account for your time—then you can put the funds into your general business account. On the other hand, if your agreement makes it clear that any unexpended portion of the retainer will be promptly refunded and you plan to get the work done within the billing month, I think it is probably OK to deposit the funds into your general account before the work is done—but only with the client’s approval. Be careful here, as if you ever find yourself in the situation where you need to refund the fees and you don’t have the funds readily available, you could face disciplinary action for commingling your client’s retainer with your business operation funds.
My guiding rule is that wherever possible, I simply don’t charge a retainer at all when I have a client’s credit card number, in the belief that I can rely on their credit card number to get paid—and thus I don’t need a retainer. If I’m going to do the work in the next few weeks, I may be willing to deposit the funds into my business account directly, though my ledger (and the billing statement) clearly states that these are “unapplied” funds. The Time Net billing system that I use offers the term “matter unapplied funds” for this sort of deposit. However, where the fees won’t be incurred for a while and I feel the need for a retainer payment in advance, I will deposit it into my Client-Trust account, and designated it as such in my billing system.
Note: if your credit card system doesn’t allow you to send money into other than just one account, you can always have the fees deposited into your business account, and then promptly transfer them to your client trust account. My bank allows me to make these transfers on-line, so I can do it the same day the money comes into my regular business account. You’ll need to do your own analysis of the State Bar compliance issues, but my sense is that so long as the money ends up in your trust account within a day or so, it shouldn’t matter that you had to pass it through your business account to receive the funds from the credit card company.
The other tricky issue is how you allocate the fees charged by the credit card processor. You have two options: you can either report the entire amount paid by the client and post the fees as an expense of doing business, or you can report the net amount received by you, net of the fees. With the Square system, there is no “bill” that I get that shows the fees that they charge—they just deposit the amount net of the fees that they charge. For this reason, I prefer the latter approach, as then my deposits into my bank account match the income that I’m reporting for tax purposes.
The problem with this approach is that the actual income received doesn’t match the amount of the bill I’ve sent to the client, nor does it match what the clients have paid through Square. My solution—and it’s not a perfect one—is to give the client full credit in my billing system for the amount paid by the client, since in fact, that is what they have paid. If the invoiced amount was $1,000 and they paid by credit card, I give them full credit for their payment of $1,000. But then, in my own record of accounts and monies paid, I list the net amount I’ve received, net of the fees charged by the credit card processor.
From an accounting and tax reporting perspective, the preferred method is to report the gross fees, and then list the credit card fees as a business expense. That also makes most sense for your own comprehensive accounting of all fees charged and all funds received, or if you need to create a profit and loss statement or a report of attorney or partnership income. But if you handle it this way, there is going to be a 2-3% discrepancy between the total fees “paid” and the funds “received” into your bank account. The simple solution to this problem is to create an additional line item in your ledger for credit card fees, which accounts for the difference and explains the discrepancy for tax reporting purposes.
One last suggestion: in addition to the records compiled in your billing software and your own excel ledger of income received each month, keep a notebook in which you record, by hand, all payments received from each client, each month. In this ledger, note whether the payment came by check or by credit card, so that you always have a back-up set of figures to explain your income and credit card fee summaries.
Frederick Hertz, an attorney and mediator based in Oakland, has managed his practice for more than 25 years.
"The Art of Getting Paid" is a one-year series of blog posts that provides a comprehensive training to lawyers on how to get paid.
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