"I am a plaintiff’s PI attorney, and I was doing some research and saw your
article regarding 1099’s. A colleague suggested to me that I include language in settlement agreements stating that the insurer should only issue a 1099 for the settlement amount to me, but not to the plaintiff. Your article states “both attorney and plaintiff receive 1099s for the entire settlement amount.” Do you know if this is still the case presently, and are you aware of insurers agreeing to only issue 1099’s to plaintiff’s counsel and not plaintiff?"
The1099 rules are different for different kinds of transactions. Payments to an attorney need to be reported on a 1099 whether or not the payment is income to the attorney (IRC Sec 6045). For litigation, this means the attorney gets a 1099 for the entire settlement amount even if only a portion of it accounts for legal fees. The attorney only needs to report the attorney’s fee portion as income on their tax return, however.
The second rule is reporting for payments to another person in the course of a trade or business. In this case, paying out claims is the insurance company’s business and the payment to the plaintiff needs to be reported at the gross amount (IRC 6041). If legal fees are paid separately, the attorney will receive a 1099 just for the amount paid directly to the attorney (IRC 6045).
Example 1: If a defendant issues a single check for $140,000 payable to both the plaintiff and the attorney, the defendant must file a Form 1099 reporting the full $140,000 to the plaintiff (IRC 6041). Additionally, the defendant must file a Form 1099 for the attorney for the full $140,000 as "gross proceeds paid to an attorney" (IRC 6045).
Example 2: If the defendant issues two separate checks, one for $100,000 to the plaintiff and another for $40,000 to the attorney, the defendant must still file a Form 1099 reporting the full $140,000 to the plaintiff (IRC 6041). The defendant must also file a Form 1099 for the attorney for the $40,000 (IRC 6045).
In practice, I’d say about 50% of the settlement payments have 1099s issued to both the attorney and the plaintiff. You could draft an agreement for the defendant to issue the 1099 only to the attorney but I’m not sure it’s enforceable because it would be contrary to the tax law.
Keep in mind, though, that 1099s aren’t necessarily taxable income. In a home sale, for example, the seller gets a 1099 for the gross sales price but, once the tax basis is deducted, the taxable amount is only the net capital gain.
Similarly, even if the attorney gets a 1099 for the gross settlement, only the fees portion is taxable income to the attorney.
On the other hand, the IRS characterizes the settlement as if the plaintiff receives all the proceeds (constructive income) and then pays the attorney fees from the settlement amount. Therefore, even if the defendant issues two checks – one to the lawyer and one to the plaintiff – the gross amount of the settlement will be taxable income to the plaintiff.