Accounting for Law Firms & Attorneys
IOLTA trust accounting, partner compensation, and tax strategy for solo attorneys and law firms in Garden City, across Long Island, and the surrounding area. Compliance and clarity in equal measure.
Reviewed by James R. Hurley, CPA · June 2026
Trust accounting is not optional. Neither is getting it right.
A law practice carries an accounting burden few other businesses face. You hold client money in trust under bar rules that demand meticulous reconciliation, you compensate partners through draws and guaranteed payments rather than ordinary payroll, you advance costs on behalf of clients, and you choose between cash and accrual methods that materially change your tax. A single mishandled trust account can put your license at risk, which is why your accountant needs to understand legal practice specifically.
JRH & Associates works with solo practitioners, partnerships, and multi-attorney firms throughout Long Island and the tri-state area. We keep your IOLTA and attorney trust accounts reconciled three ways, structure partner compensation so it is tax-efficient and clearly documented, track client cost advances correctly, and advise on the entity and accounting method that fit your practice. The goal is simple: clean books, full compliance, and a tax position that reflects real planning.
IOLTA and attorney trust accounting
Client funds held in an IOLTA or trust account are not your money, and the bar treats them accordingly. We maintain the individual client ledgers, the firm trust ledger, and the bank record so they can be reconciled together, keeping every client's funds segregated and accounted for. Mishandled trust money, even by accident, is among the most serious problems an attorney can face, so we treat this work as the foundation of everything else.
Three-way reconciliation
Three-way reconciliation is the discipline that proves your trust account is sound. On a regular schedule we tie out the trust bank balance, the internal trust ledger, and the total of all individual client ledgers, confirming that all three agree to the penny. When they match, you have documented evidence that no funds were commingled or misapplied. We build this reconciliation into your monthly close so you are always ready for a bar inquiry.
Partner compensation and guaranteed payments
Partners are not employees, and compensating them correctly is a tax exercise as much as a bookkeeping one. Draws distribute each partner's share of profit, while guaranteed payments compensate a partner for services or capital regardless of firm profitability and are deductible to the firm. We structure these payments so they are clearly documented, coordinate them with each partner's estimated taxes and retirement contributions, and make sure the firm's tax and accounting reflect the arrangement accurately.
Cash versus accrual accounting
The accounting method you use changes when income hits your return. Many firms operate on the cash method, recognizing fees when collected and expenses when paid, which can defer tax on billed but uncollected work. Larger firms or those with substantial receivables may be required to use accrual or may find it advantageous. We evaluate your size, structure, and cash flow to determine which method is available and which serves the firm best.
Cost advances and entity structure
Firms routinely advance filing fees, expert costs, and litigation expenses for clients, and those advances are generally receivables to be reimbursed rather than immediate deductions. We track advanced costs by matter and reconcile them against reimbursements so your financials stay accurate. Alongside this, we advise on entity structure, whether a PLLC, professional corporation, or partnership best fits your practice given liability, taxation, and how partners share in the firm.
"With a law firm, the trust account is where everything starts. If the three-way reconciliation is clean every month, the firm sleeps well and we can focus on partner compensation and tax strategy. If it is not, nothing else matters until it is fixed."
James R. Hurley, CPA Founder & President, JRH & Associates Built for legal practices
IOLTA & trust accounting
Segregated client ledgers maintained to bar-compliant standards.
Three-way reconciliation
Bank, trust ledger, and client ledgers tied out on a regular schedule.
Partner compensation
Draws and guaranteed payments structured and documented for tax efficiency.
Cash vs accrual guidance
The accounting method that fits your size, structure, and cash flow.
Client cost advances
Advanced costs tracked by matter and reconciled against reimbursements.
Entity structure
PLLC, professional corporation, or partnership matched to your practice.
Law firm accounting FAQs
Three-way reconciliation matches three figures that must always agree: the bank balance of your IOLTA or trust account, your internal trust ledger total, and the sum of every individual client ledger. When those three tie out on a regular basis, you know no client funds have been commingled, overdrawn, or misapplied. Most state bar rules expect this reconciliation, and a failure here is one of the fastest ways to draw a grievance, so we build it into your monthly close.
In a partnership, partners are not employees and do not receive W-2 wages. Instead they take draws against their share of profit, and guaranteed payments compensate a partner for services or capital regardless of firm profitability. Guaranteed payments are deductible to the firm and ordinary income to the partner, and both draws and guaranteed payments flow through the partners' individual returns. Structuring this correctly affects self-employment tax, retirement contributions, and each partner's estimated payments.
Many law firms operate on the cash method because it matches how a practice actually collects, recognizing income when fees are received and expenses when paid, which can defer tax on work that has been billed but not yet collected. Larger firms or those carrying significant receivables and work in progress may be required to use accrual or may benefit from it. We evaluate your size, your structure, and your cash flow to determine which method is available to you and which serves the firm best.
When a firm advances costs on behalf of a client, such as filing fees, expert witnesses, or deposition expenses, how those advances are treated affects both your books and your taxes. Advances that you expect to be reimbursed are generally a receivable rather than a deductible expense, while costs you absorb are treated differently. Tracking advanced costs by client matter and reconciling them against reimbursements keeps your financials accurate and your trust accounting clean.
Attorneys typically practice through a professional limited liability company (PLLC), a professional corporation, or a partnership, because state law restricts who may own a law practice. The choice affects liability, how income is taxed, and how partners are compensated. A multi-partner firm has different considerations than a solo practitioner, and the structure interacts with retirement planning and self-employment tax. We model the options for your specific practice rather than defaulting to one form.
Get trust accounting and tax strategy from one firm.
Your first consultation is free. We will review your trust reconciliation, your partner compensation, and your entity structure, then show you where to tighten up.