It’s that time again! Not just for holidays and eggnog, but also taxes, 1099s, and other year-end financial must-dos. And after the year we’ve had – what with PPP loans and unplanned expenses – the process will be more complicated than ever. If we set aside just a few minutes to organize our year-end now, we’ll find ourselves much less stressed when the new year and tax deadlines roll around. This practical, step-by-step guide will set you and your firm up for a year-end win and success in 2021.
Step 1. Give the Gift of Time
Open up your calendar. Set aside at least one hour each week between now and Jan. 31 to work on your firm’s financials.
Fridays are great. By Friday, we’ve been working hard on legal issues all week, and our brains are giving diminishing returns. Turning to something different on a Friday afternoon gives us something fresh to work on.
If you received a Paycheck Protection Program (PPP) loan, make sure you know your deadline to apply for forgiveness, and calendar that just as prominently as any client-related court deadline.
Step 2. Complete IOLTA
Complete IOLTA (Interest on Lawyers Trust Accounts) bank statement and client ledger reconciliations, if yours are not up-to-date. Remember, under RPC 1.15A(h)(6), these reconciliations must be completed monthly. Ensure your reconciliation reports are safely stored and backed up. If you’re not sure what an IOLTA is, you can find more information on the WSBA IOLTA & Trust Accounts page.
We do this before diving into work required for taxes because, if we don’t satisfy our ethical duties in RPC 1.15A and RPC 1.15B, we could find ourselves without a law firm to file taxes for.
Step 3. Complete Operating Reconciliations
Complete reconciliations of all your operating accounts using real bookkeeping software. Excel is not bookkeeping software, and you will lose far more valuable time than the money you save.
Xero, for example, is $32 per month. If your hourly billable rate is $300, that means you only have to bill an extra six minutes each month to cover the cost; meanwhile, you’ll be saving far more of your own time, which is a win for both you and your firm.
If you haven’t done reconciliations for a while, it can be daunting. Take it one account and one month at a time. Or consider investing in a bookkeeper for a one-time catch-up. If you do think you’d like a bookkeeper’s help, book early! They fill up QUICKLY in January!
Step 4. Prepare Draft 1099s and Request W-9s
Know in advance who will receive 1099s and make sure you have their W9.
When you request a W-9 from your vendor, they generally have 30 days to get it back to you. So, if you wait until January to start requesting W-9s, you’re likely to miss your Jan. 31 1099 deadline.
Not sure who gets a 1099? This article from the IRS is helpful. Use a third-party service, such as Track1099.com, to make sure your 1099s get issued and filed correctly. They’re inexpensive, contact-free, and save significant time and headache.
Step 5. Spring Cleaning
It’s not spring, but review your account balances to make sure they’re accurate.
Check undeposited funds, suspense, opening balance equity, and adjustments. Normally these ought to zero out by year-end. Accounts payable and accounts receivable are also common culprits. Make sure their balances reflect the actual amounts due.
Step 6. Remove Stale Transactions
Search for transactions that haven’t cleared, but should have. You may find:
- Checks you mailed out haven’t been cashed. Contact the recipient and ask them to cash it; or, if they’ve lost it, stop payment and issue a new check.
- Unreconciled duplicates of reconciled transactions you’ll need to remove.
Step 7. Review Draft Financial Statements
Prepare a year-to-date (YTD) profit and loss statement and balance sheet. Sit down and give the numbers a hard look. What’s surprising?
For any surprises, dig into the individual transactions. Are they categorized correctly? Did your revenue and spending meet your expectations?
Prepare financial statements that show at least three to six months of data, with a YTD total at the end, to identify outliers.
Make sure your PPP and Economic Injury Disaster Loan (EIDL) loans are properly recorded. There are special rules around accounting for the PPP, and this IRS revised ruling (No. 2020-27) contains some surprising twists law firms need to know.
Finish 2020 Strong
You can check the Skepsis website for more information about any year-end matters. We’re passionate about helping attorneys improve their work/life balance while still reaching their financial goals. 2020 may have been nothing like any of us expected, but all it takes is a little planning and some simple steps to finish the year strong and set yourself up for success in 2021.
Devon M. Thurtle Anderson” class=”wp-image-15612″>Devon M. Thurtle Anderson. Devon is an attorney and the founder of Skepsis Technologies, which provides bookkeeping, financial strategy, and IOLTA compliance for law firms. Devon is recognized by peers and was selected to Rising Stars for 2012-2019. She graduated from Seattle University School of Law in 2005 and was admitted to legal practice the same year. Devon works with law firms to improve their finances and their IOLTA compliance.
