While the primary focus of any law firm should be providing sound legal advice to clients, the only way to ensure quality service is to keep business up and running—which means matters of compliance and handling payments must also be top priorities. Fortunately, technology is here to help, and in this post, we’ll be discussing best practices for avoiding compliance issues when getting paid and highlighting tools that can help to keep your firm in check.
Compliant Payment Options for Your Law Firm
Option #1: Accepting Cash from Legal Clients
Depending on your type of practice, cash may be a permissible form of payment. However, there are several legal compliance concerns to consider prior to accepting cash, including:
- Co-mingling with personal cash
- Not maintaining cash receipts
- Difficulty identifying associated matter
- The IRS
So, what are the best practices when it comes to accepting cash while avoiding compliance concerns?
- Only accept cash when necessary.
- Maintain accurate cash receipts of which your client receives a copy.
- Be sure to get the customer’s signature on the cash receipt.
- Immediately deposit checks into your bank account to ensure proper records.
- Apply payment to client record in a billing system.
Option #2: Accepting Checks from Legal Clients
Unlike cash, nearly all law firms accept checks. Still, there are compliance concerns associated with checks including:
- Uncleared Funds
- Funds on Hold
- Fraudulent checks
So, what are the best practices when it comes to accepting checks while avoiding compliance concerns?
- Ensure each check has the matter identification number written on it.
- Scan and attach an image copy of the associated matter bill.
- Whenever possible, seek bank checks as a form of payment.
- ALWAYS wait for funds to clear before disbursing, especially if deposited into a trust account.
Option #3: Credit Cards & Online Payments from Legal Clients
In recent years, the ability to process credit cards and online payments has become essential for law firms of every size. However, the associated compliance concerns are twofold:
Internal problems can arise when firms keep their billing and accounting functions separate. With this setup, online payments are difficult to track, since credit card companies deposit payments as a batch into a firm’s operating account. Though from an accounting perspective this event may be captured, there is no record stating for which invoices the funds are intended.
Externally, it’s important to use a legal-specific credit card merchant to ensure the specific needs of a law firm relating to trust accounting, processing fees, and chargebacks are all handled properly.
So, what are the best practices when it comes to accepting credit cards and online payment while avoiding compliance concerns?
- Choose a payment processor that can fulfill the unique requirements of law firms and trust accounts.
- Integrate your billing and accounting records so that entries are accurate and offer a clear, long-term outlook.
- Look for payment providers that integrate with your billing and accounting system as well as promote streamlined online payments.
Option #4: Retainers from Legal Clients
Money paid upfront can originally be received by any method, but it usually ends up in a trust account. Though common practice, there are still compliance concerns to be aware of and guidelines to follow when making use of a retainer. Moreover, because these rules vary by state, you must be familiar with your jurisdiction’s particular requirements.
So, what are the best practices when it comes to utilizing a client retainer while avoiding compliance concerns?
- Know your state regulations regarding which funds need to be filtered through a trust account as well as any hold requirements; when in doubt, deposit payment into a trust and leave for 2 to 3 days until earning.
- Seek tools and processes that protect against retainer commingling and ledger overdrafts.
- Billing, trust, and accounting are closely linked, and these records must be tightly integrated and kept in sync.
Income Allocation in Law Firms
At the end of the day, no matter which option a client uses, payment must be recorded properly. For legal accounting, there is a specified order in which payments should be received:
- Cost recovery
- Late fees and finance charges
- Fee income
This means that a firm may receive a partial payment that only covers its costs and will not earn any fee income on that payment. It’s important to follow this formula to distinguish a reimbursed cost from an earned fee. Otherwise, firms run the risk of generating inaccurate P&L and A/R reports, which may also be skewed if parties are compensated based on earned income.
NOTE: general accounting tools do not adhere to this formula; instead, they apply the payment proportionally to each item. Later adjustments can be made to correct this, however, some firms choose to create an invoice for each part (cost, fee, etc.) and pay in the above order to ensure proper allocation.
So, what is the best practice when it comes to income allocation?
- Ensure partial payments apply in the designated order for accurate firm accounting.
It Can Be Easy to Maintain Compliant Collections
As the options for receiving payment have grown, so too have the associated compliance concerns. However, with the right technology, law firms can take advantage of this increased flexibility, and better protect themselves from the issues that may arise.
To help law firms learn more about this topic, legal practice management solution, CosmoLex, and legal-specific credit card processing merchant provider, LawPay, have teamed up in a new presentation that you can watch on-demand. Click to watch Avoiding Legal Compliance Issues When Getting Paid now