Form 1099-MISC, Line 10, Gross proceeds paid to attorney nominee reporting

[wmpyoungx]

Attorneys employed by law firms may receive a Form 1099-MISC reporting in line 10 "gross proceeds paid to attorneys", even though these payments are paid directly to the law firm. For example, assume Attorney A is an employee of law firm L.   L's clients 9 ("Claimants") who appeal SSA decision to deny them social security disability benefits, appoint A Representative to appeal these denials. A formally directs SSA to pay any attorney fees awarded by SSA regarding Claimants represented by A, directly to L via electronic deposit to L's bank account. 

In early 2026, A receives Form 1099-MISC for 2025 from SSA, reporting in Line 10, that SSA paid A, "Gross proceeds paid to an attorney" of $300,000.   A, a salaried employee of L, files Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) (effectively, a nominee information return) with IRS, attaching a Form 1099-MISC reporting in line 10 that A paid L  $300,000 (Gross proceeds paid to L.  A attaches a statement of explanation to A's 2025 Form 1040. 

Does TurboTax have any suugestions on how to input this infromation in its system?  Anyone in the Community familiar with this income tax reporting situation and how best to report using TurboTax?

[DianeW777]

The attorneys do receive direct payment from the payer (SSA) of the settlement group. The claimants are required to report this income on their tax returns because technically it's their income being used to pay for the services of the attorneys.

You are required to report the amount of the money used to pay the attorney even though it didn't actually come into you hands.  It is part of the award you received regardless the payment is for attorney fees.  

• Treatment of Payments to Attorneys - IRC 6041 and 6045 state that when a payor makes a payment to an attorney for an award of attorney's fees in a settlement awarding a payment that is includable in the plaintiff income, the payor must report the attorney's fees on separate information returns with the attorney and the plaintiff as payees. Therefore, Forms 1099-MISC and Forms W-2, as appropriate, must be filed and furnished with the plaintiff and the attorney as payee when attorney's fees are paid pursuant to a settlement agreement that provides for payments includable in the claimant's income, even though only one check may be issued for the attorney's fees. Click the link above for more information.
• Can I deduct legal fees on my taxes? Review the information here to see if you qualify for any deduction of those fees. Typically it's only if it's for business use.

If the law suit settlement was not awarded in relationship to a business activity you had, then it must be reported as other income.

• Are legal settlements taxable?
• Where do I enter an award from a taxable legal settlement?

[wmpyoungx]

Thank you, DianeW777. Appreciate your comments. In my example, regarding gross proceeds reported on line 10 of Form 1099-MISC by SSA to a salaried employee/attorney of the law firm, the legal tax result is quite clear.  In general, none of the proceeds should be taxable income of the employee of the law firm. The portion of the proceeds which represents fees actually paid by SSA to the law firm is the income of the law firm.  SSA also has a separate obligation to report fees it has paid to the law firm.  Presumably, SSA also reports any social security disability benefits it pays to the Claimant on Form SSA-1099.

My question was how does TurboTax process the infomation provided by its customer, the employee/attorney, for Form 1040 preparation purposes. Since my earlier post, I have learned that it is the obligation of the taxpayer/customer to input the Form 1099-MISC, Line 10 amount (Gross proceeds reported to an attorney) into the TurboTax system, and then input the amount of such proceeds that is taxable, as determined by its customer. The customer would need to attach a self-prepared statement to the Form 1040 supporting the answer.  Certainly, determination of the amount of Line 10 that is taxable to the attorney is the obligation of the customer, not TurboTax. Most law firms will provide assistance to its attorney/empyoyees with respect to such determination, including the filing of any required Form 1096/1099MISC (or 1099-NEC) information returns (so-called nominee reporting) that need to be filed with the IRS. 

[AmyC · Accepted solution]

 

Since you are a salaried employee and have already filed the Form 1096 and a "nominee" 1099-MISC to the law firm, follow these steps to zero out the income on your personal 1040:

1. Enter the 1099-MISC:
   • Navigate to Wages & Income > Other Common Income > 1099-MISC.
   • Enter the 1099-MISC exactly as received from the SSA ($300,000 in Box 10).
   • The Interview -to prevent it from creating a Schedule C: 
     • When TurboTax asks if the income was for your "main job" or "intent to earn money," say No. 
     • When asked about years, select  2025 only
2. Enter the Nominee Adjustment (The "Offset"):
   • Go to Wages & Income > Less Common Income > Miscellaneous Income, 1099-A, 1099-C.
   • Select Other reportable income.
   • Click Yes to "Any Other Taxable Income?"
   • Description:  Nominee Distribution - Law Firm Name and EIN.
   • Amount: Enter the negative amount using a minus sign, -300,000
3. The Result on Your Return:
   • This will show the full $300,000 on Schedule 1, Line 8z, followed immediately by the negative adjustment of -$300,000.
   • The net effect on your Form 1040, Line 8 will be $0.
4. Statement of explanation:
   • Various versions contain a general explanation or a blank form or a disclosure statement.
   • If you do not attach a statement, you will probably receive a CP 2000 and you can reply with the law firm documentation.

[wmpyoungx]

Thanks AmyC. That is the TurboTax input assistance I was seeking and that should work for me.