The income side
A referral fee received in the course of practicing law is fee income. It is reported the same way the rest of your fee revenue is reported, whether the firm is a sole proprietorship, partnership, or corporation. Calling it a "referral fee" or a "fee division" rather than a fee for services does not change the character of the money.
Information reporting
Business payments for services of $600 or more are generally reported on Form 1099-NEC. Payments to attorneys carry an additional rule: IRC section 6045(f) requires reporting of payments made to attorneys in connection with legal services, and unlike most payees, attorneys are reportable even when they operate as a corporation. See the IRS instructions for Forms 1099-MISC and 1099-NEC for which form and box applies.
Who reports what when a fee is split
One firm collects, then pays the other
The collecting firm typically reports the payment it makes to the other firm and deducts that amount; the receiving firm reports the fee as income.
Each firm is paid directly
If the settlement or the client pays each firm its own share, each firm reports what it actually received.
Funds pass through trust
Amounts held in trust are not income until earned and disbursed, but the disbursement records still need to line up with what each firm reports.
Paying a referral fee out
A referral fee paid in the ordinary course of practice is generally a deductible business expense, assuming the fee division is permitted under the applicable rules of professional conduct — see can attorneys pay referral fees. To calculate the amount itself under a flat, percentage, or tiered arrangement, use the referral fee calculator.
The records that make tax season easy
Every referral fee should be traceable to a written agreement, the client's consent to the division, the total fee it was calculated from, and the disbursement. Our referral agreement template covers the agreement; Ethix keeps the rest in one place, with a verified record of each referral, the agreed terms, and a status history your referral partner can update without ever creating an account.
Common questions
Are attorney referral fees taxable income?
Yes. A referral fee received by a lawyer or law firm is ordinary business income and is reported like any other fee income. Receiving it as a fee division rather than a salary does not change that it is taxable.
Does a referral fee get reported on a 1099?
Payments of $600 or more made in the course of a trade or business for services are generally reported on Form 1099-NEC, and payments to attorneys have their own reporting rules under Internal Revenue Code section 6045(f). Notably, payments to attorneys are reportable even when the payee is a corporation, which is an exception to the usual rule. Your accountant should confirm which form and box applies to your arrangement.
Who reports the fee when it is split between two firms?
That depends on how the money moves. If one firm collects the full fee and then pays the other firm's share, the paying firm generally has the reporting obligation for what it paid out and deducts that amount. If the client or settlement pays each firm directly, each firm reports what it received. Getting this straight before disbursement avoids double-reporting.
Is a referral fee paid out deductible?
A referral fee paid in the ordinary course of practice is generally deductible as a business expense, provided the arrangement is lawful under the applicable rules of professional conduct. An unlawful fee division creates a problem well beyond the tax treatment.
What records should we keep?
Keep the written fee-division agreement, the client's written consent to the division, the settlement or invoice showing the total fee, the disbursement record for each firm's share, and the information return filed or received. Together these show why the amount was paid, on what basis, and to whom.
This page is general information, not tax or legal advice. Confirm the treatment of your specific arrangement with your accountant, and the ethics requirements with your jurisdiction's current rules.
Clean 1099 reporting starts with a clean record of what was agreed. Ethix referral management software stores the fee terms, payment status, and outstanding balances for every referral you send or receive.