Do we pay taxes on attorney retainers in the year we received it or when the attorney fee is earned?

Forum|Forum|3 years ago
March 28, 2023
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Hi, my husband is an attorney. He works on retainers. When he has a new client, the client pays a retainer fee. My husband keeps it in a trust account for his client and bills against that account when he earns fees. When the retainer goes down to a certain amount, the client replenishes it. When the case is closed, my husband returns to the client whatever is not used.

Are the taxes to be paid on the entire retainer amount for the year when he received it even if it stays in the trust account and he didn't earn the entire amount until the next tax year or even if parts of it are eventually returned to the client?

Thanks.

PattiF

The income is to be reported in the year it was received even if there is still money in the account at the end of the year.

According to The Langel Firm, your husband's fee structure is called a:

Flat fee. The lawyer is hired for a particular matter or a particular purpose. The fee is agreed-upon in advance. The fee may be paid up-front, in installments, or in advance (while billing against it). The attorney must report (and pay) tax on that fee income when the income is received (even if billing against it from a trust account).

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