1099-NEC Reporting for Attorney Fees and Settlement Payments

When your business pays a lawyer, two different forms are in play: 1099 reporting for attorney fees and settlement payments splits along a clean line. Fees the attorney earns for legal services to your business go in Box 1 of Form 1099-NEC. Money you route through an attorney to settle a claim goes in Box 10 of Form 1099-MISC. For payments made in 2026, the 1099-NEC threshold rose from $600 to $2,000; the settlement-proceeds threshold on 1099-MISC stayed at $600.¹

Attorney Fees for Services: Form 1099-NEC, Box 1

Payments to an attorney for legal services performed for your business go in Box 1 of Form 1099-NEC once the total for the calendar year reaches the threshold.² This is the everyday work: contract drafting, employment advice, regulatory compliance, litigation defense. The threshold applies to the aggregate of all payments during the year, not to any single invoice.

Attorneys are one of the narrow exceptions to the corporate-payee rule. You normally skip 1099 reporting when you pay a corporation for services. Not with lawyers. You file a 1099-NEC whether the attorney operates as a sole practitioner, a partnership, a professional corporation, or an LLC.² A $3,000 lease-review bill paid to a law firm organized as an S-corp still gets reported.

Reporting applies only to payments made in the course of your trade or business. A lawyer you hire for a personal matter unrelated to the business doesn’t get a 1099. Nonprofits count as engaged in a trade or business here, so they report attorney fees the same way a for-profit company does.³

The New $2,000 Threshold

For payments made before 2026, the threshold was $600. Legislation enacted in 2025 permanently raised it to $2,000 for nonemployee compensation and most other general business payments, with inflation adjustments starting in 2027.¹ For returns filed in early 2026 covering 2025 payments, the old $600 threshold still applies. The $2,000 threshold kicks in for payments made during 2026, reported in early 2027.

Settlement Proceeds Through an Attorney: Form 1099-MISC, Box 10

When you write a settlement check to a lawyer who is receiving the funds on behalf of a claimant, you report the full amount in Box 10 of Form 1099-MISC as gross proceeds paid to an attorney.² The requirement comes from IRC Section 6045(f), which treats these payments separately from fees the attorney earns for services performed for your business.⁴

Report the entire check, not just the attorney’s cut. Settle a claim for $300,000 with a check payable jointly to the claimant and the attorney, and you report the full $300,000 in Box 10 on the attorney’s 1099-MISC, even if the attorney keeps only $100,000 as a fee and forwards the rest to the claimant.⁵ Reporting the full gross proceeds doesn’t mean the attorney owes tax on the entire amount. It creates the paper trail.

The Box 10 threshold is $600 in aggregate for the calendar year. The 2025 legislation did not raise this figure.²

Insurance companies paying settlements carry the same obligation as defendants paying directly. If the insurer writes the check to the claimant’s attorney, the insurer issues the 1099-MISC.⁴

Don’t Double-Report the Attorney’s Fee

When you pay a lawyer both for services to your business and as a conduit for settlement funds, keep them on separate forms. The attorney’s own fees for representing your company go in Box 1 of Form 1099-NEC. The settlement proceeds go in Box 10 of Form 1099-MISC. If the attorney’s fee is being carved out of gross proceeds already reported in Box 10, you generally don’t need to separately report that fee portion on a 1099-NEC.³

What the Claimant Gets

The attorney’s 1099-MISC is only half the picture. The claimant may need one too, or a W-2, or nothing at all, depending on what the damages compensate.

Taxable Damages: 1099-MISC, Box 3

When a settlement includes taxable damages paid to the claimant, report the claimant’s portion in Box 3 (Other Income) on a separate Form 1099-MISC.³ A single settlement can produce two 1099-MISC forms: one to the attorney for gross proceeds in Box 10, one to the claimant for taxable damages in Box 3. If the settlement agreement doesn’t spell out how damages are characterized, the IRS looks at the payer’s intent.⁴ The wording of the agreement matters for both sides.

Physical Injury Damages: No 1099 to the Claimant

Under IRC Section 104(a)(2), damages received on account of personal physical injuries or physical sickness are excluded from gross income and do not go on a 1099.⁶ Settle a slip-and-fall for a broken leg and the entire payment compensates the physical injury, and no 1099 goes to the claimant.

Three categories stay taxable and don’t qualify for the exclusion:

Emotional distress without physical injury. The statute specifically says emotional distress is not a physical injury. The only carve-out is reimbursement for actual medical expenses tied to emotional distress that the claimant hasn’t already deducted.⁶
Punitive damages. Always taxable, even when the underlying claim involved a physical injury. The narrow exception is wrongful-death cases in states where the only available remedy is punitive damages.⁴
Lost wages within a physical injury settlement. Compensatory damages for lost wages received on account of a physical injury are treated as excludable, but a portion allocated specifically to back pay in an employment context can be treated differently (see W-2 wages below).

Even when the claimant’s damages are tax-free, you still report the gross proceeds paid to the attorney in Box 10. The Section 6045(f) obligation applies regardless of whether the underlying settlement is taxable to the claimant.⁵

Back Pay and Wages: W-2, Not 1099

Some settlement money doesn’t belong on any 1099 because it’s wages. Amounts allocated to back pay, front pay, or severance are subject to federal income tax withholding plus Social Security and Medicare taxes, and they go on Form W-2.⁴ This holds even when the person is no longer your employee at the time you write the check.

A single employment lawsuit can therefore split three ways: the back-pay portion on a W-2 with payroll taxes withheld, the emotional distress portion on a 1099-MISC Box 3 to the claimant, and the gross proceeds on a 1099-MISC Box 10 to the attorney. Getting this wrong can leave the employer on the hook for payroll taxes that should have been withheld.

Get the W-9 First

You need the attorney’s taxpayer identification number, legal name, and address before you can complete any 1099. Form W-9 is how you collect it, and the time to ask is before the first payment, not at year-end.⁷

If the W-9 name doesn’t match IRS records, you’ll get a mismatch notice and may be required to begin backup withholding at 24 percent on future payments to that payee until it’s resolved.⁷ An outright refusal to provide a W-9 triggers backup withholding from the start. That 24 percent comes out of the payment and goes to the IRS.

Deadlines for Tax Year 2025 Returns

Form 1099-NEC: Due to the IRS and to the recipient by February 2, 2026. The standard January 31 deadline shifts to the next business day when it falls on a weekend.⁸
Form 1099-MISC (paper): Due to the IRS by March 2, 2026.⁸
Form 1099-MISC (electronic): Due to the IRS by March 31, 2026.⁸
Recipient copies of 1099-MISC: Due by February 2, 2026.⁸

File electronically if you’re issuing 10 or more information returns of any type during the calendar year. The count combines all 1099s, W-2s, and other information returns.⁹

Late-Filing Penalties

Penalties escalate the longer you wait:

Filed within 30 days of the deadline: $60 per return, up to $683,000 per year ($239,000 for small businesses).
Filed more than 30 days late but by August 1: $130 per return, up to $2,049,000 per year ($683,000 for small businesses).
Filed after August 1 or not filed at all: $340 per return, up to $4,098,500 per year ($1,366,000 for small businesses).
Intentional disregard: $680 per return with no annual cap.¹⁰

These penalties apply separately to each form, and the same schedule applies to failures to furnish correct payee statements.⁸

Quick Reference: Which Form and Which Box

Legal fees for services to your business: Form 1099-NEC, Box 1. Threshold: $2,000 for payments made in 2026.¹
Settlement proceeds paid to or through an attorney: Form 1099-MISC, Box 10. Threshold: $600.²
Taxable damages paid to a claimant (emotional distress, punitive damages, etc.): Form 1099-MISC, Box 3.³
Back pay or lost wages in an employment settlement: Form W-2 with payroll tax withholding.⁴
Damages for personal physical injury or sickness: No 1099 to the claimant. Still report gross proceeds to the attorney on Form 1099-MISC, Box 10.⁶

1
Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns
2
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
3
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
4
Internal Revenue Service. Tax Implications of Settlements and Judgments
5
GovInfo. 26 CFR 1.6045-5 – Information Reporting on Payments to Attorneys
6
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
7
Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
8
Internal Revenue Service. General Instructions for Certain Information Returns (2025)
9
Internal Revenue Service. Topic No. 801, Who Must File Information Returns Electronically
10
Internal Revenue Service. Information Return Penalties