IOLTA Myths: There’s No Such Thing As “Cleared”
We’ve all been taught that we need to wait until funds “clear” to distribute them. How do I know when “clear”?
As attorneys, we take CLEs from time to time, and some of those have to be about ethics. So, to get our ethics credits, we often look for practical CLEs we can put to good use in the real world, like trust accounting CLEs. Now in those trust accounting CLEs, the presenter always – almost without fail – reminds us that we need to wait for funds to “clear” into our trust accounts before we’re allowed to take those funds back out.
Unfortunately, what most of those CLEs aren’t teaching us is that “cleared” funds are a myth.
What are “cleared” funds?
Understanding what “cleared” funds are – and aren’t – is critical to understanding why most attorneys’ concept of “cleared” funds is a myth. “Cleared” funds are simply money that is in the bank account and available for withdrawal. When funds aren’t available for withdrawal – for example, you just deposited them five minutes ago – they’re pending. Then, once they become available, they’re “cleared”. Most deposits “clear” within one business day.
Unfortunately, “cleared” does not mean that those funds are there to stay. “Cleared” does not mean that funds won’t get unilaterally and unexpectedly yanked back out of your bank account. It does not mean the funds are somehow settled and irrevocable. All it means is that the bank is willing to let you spend that money.
And that’s what makes both the myth and the legend about “cleared” funds: All that we’ve learned about banking and trust accounting implies that “cleared” funds are somehow safe and protected in our account, and they’re there to stay. They’re not.
Some funds really do “clear,” in the permanent sense.
Now that we know what “cleared” really means, let’s take a step back and see what funds, if any, really do “clear” into our accounts permanently. In other words, let’s first look at the kinds of deposits that can’t get yanked back without any warning, consent, or approval. Because luckily, there are a few.
Wire Transfers. Once a wire appears in your account, it’s there to stay. This is one reason savvy attorneys insist on wires for large trust deposits and for deposits of settlement funds. There’s no risk that your depositor will develop buyer’s remorse, yank the funds back out without warning, and leave your trust account with a negative balance while your bank reports you to the state bar.
Cash. Cash is another kind of deposit that is in your bank account to stay – or at least, it won’t be removed from your bank account without your knowledge or approval. Of course, cash deposits are at risk while they’re in transit, so many attorneys tend to stay away from them, despite cash being a great and otherwise secure medium for trust deposits. They’re also inconvenient for many clients.
Cashier’s Check. These are almost as good as cash. I say “almost,” because there is a small chance that a payor can cancel a cashier’s check in transit, before it’s deposited. But, once deposited into your trust account, the funds are safe and secure, and the payor can’t stop payment or cancel the cashier’s check to yank the funds back out.
What deposits are at risk, even after they “clear”?
As mentioned, some deposits are at risk of disappearing from your account without any warning or approval. When this happens, you may find your IOLTA balance negative, and your bank making a mandatory report to the state bar. Unfortunately, these are some of the most common payment methods that attorneys accept into their trust accounts.
Checks. Whether they’re personal checks or business checks, accepting checks as trust deposits does put your firm at some risk. Whether you wait three business days, two weeks, or a month after the check “clears” before distributing those trust funds back out, you can never guarantee the bank won’t yank those funds back out of your account without telling you. This can happen when the check is fraudulent, or simply when the payor gets buyer’s remorse and puts a stop payment on it. So, accepting trust payments via check always comes with some risk.
Credit Cards. You’ve probably disputed charges on your credit card, and you’ve probably gotten your money back pretty much every time. Well, when clients pay you with a credit card, they can dispute the charge, and they usually get their money back, too. And it doesn’t just happen with buyer’s remorse; scammers can use stolen credit cards to steal tens of thousands from your trust account if you’re not careful.
How Can I Keep My IOLTA and Trust Funds Safe?
We’ll be taking a look at this question in our next few posts. So, be sure to check back here (on our blog) regularly, and also be sure to sign up for our newsletter to make sure you don’t miss a post.
IOLTA: Top 5 Attorney Trust Accounting Mistakes (And How To Avoid Them)
Which IOLTA mistakes are you making that could put your law license at risk?
This month on the Skepsis blog, we’re focusing on trust accounting.
Asking an attorney to properly handle and account for IOLTA trust funds is like asking my 10-year-old to drive to the store. Sure, she’s studious, and book smart, and can take and pass a test – but she knows nothing about actually driving. I’m setting her up for failure if I just hand her the keys and tell her to get going.
And yet, that’s exactly what our state bars require us to do each and every day to maintain our privilege to practice law. We had a few classes in law school; we took an ethics portion of the bar exam; and we have the written rules of the road in the RPCs. But how do we actually drive that trust account?
At Skepsis, we’ve seen just about every mistake in the book, and the good news is there are some common themes. Why’s that good news? Because if you understand those common themes, you’ll be well on your way to steering clear of trust accounting trouble.
5. Entering IOLTA transfers as, well…. transfers.
When is a transfer between bank accounts not a transfer? When it’s a transfer into or out of IOLTA, of course. And yet, many attorneys (and frighteningly just as many professional bookkeepers and accountants) happily enter transfers on their books all day every day. A few weeks down the road, your IOLTA accounting is off by a few thousand. Years down the road, it can be off by tens or even hundreds of thousands of dollars.
What these attorneys and accountants don’t understand is that a transfer between IOLTA and operating is not a transfer. It’s two completely separate transactions, and it needs to be entered as such on your books. So, be careful about how you enter transfers between operating and IOLTA in your bookkeeping software, because recording a “transfer” is a classic trap for the unwary.
4. Sharing your bank login.
It is basic online security: no sharing login information. But all too frequently, attorneys will share their banking information with other attorneys, non-attorney staff, and their bookkeepers. This is a big no-no.
Why’s it so bad to share? First, some would argue that sharing banking login information is a violation of an attorney’s duties of both confidentiality and competency. Because there’s no point in putting a password on an account if the password gets distributed. Second, if your bank account allows transfers or withdrawals from trust, you’re arguably violating the RPCs requiring that only licensed attorneys handle trust funds. Third, from a practical standpoint, you don’t want the FBI to trace that offshore account that was embezzling funds from the firm back to you, just because your login was used to transfer all that money. In other words, the audit trail that individual logins provide is just as important as the security features.
Instead, any staff member that needs access to banking or other financial information must have their own login. Most banks will allow you to add extra logins to your online banking accounts for free. Others will charge a nominal monthly fee if that staff or bookkeeper login requires bill pay or any other access, beyond nust read-only. Individual online banking logins are typically simple and quick to set up, so there’s no excuse for sharing. This is one situation where sharing is NOT caring.
3. Failing to timely return client trust funds at the end of an engagement.
When you run a law firm, completing a project for a client isn’t as easy as a simple goodbye. Instead, as attorneys, we have ethical and insurance obligations we have to fulfill each time we close a matter. And one of the most important of those is returning client trust funds.
Returning client trust funds is so important that a disgruntled client can use failing to timely return funds as a basis for a bar complaint. We know, we’ve seen it happen.
And yet, most attorneys, when we take a peek at their books, have at least a few hundred dollars, if not several thousand, of “stale” trust account money just sitting there in their trust bank account. “Stale” money is any money that should have been returned to the client at least 30 days prior. In most cases, our diagnostics and cleanups find funds that are up to several years old!
One of the best ways to avoid this trust accounting mistake is with a formal matter closing procedure that staff and attorneys follow each and every time a case closes. And of course, that checklist should include a step where any client funds are returned. We’ve put one together and shared it here to help get you started.
Another important step to take is an easy one, and typically takes no more than three minutes each month. That is: When you receive your IOLTA 3-way reports each month, glance through the list of clients with funds in trust. You’ll find that clients with closed matters will catch your eye, and remind you that you’d better get those client funds back asap.
2. Failing to maintain required IOLTA backup documents.
If you haven’t done so recently, we recommend perusing RPC 1.15A and B. (You can find WA 1.15A here, and WA 1.15B here.) As you do, take note of the long list of backup documents we’re required to maintain, most of which is enumerated in 1.15B. Is your law firm keeping all that backup documentation? If they are, and if you were audited by the state bar, or grilled by a client, do you know how to dig it up quickly and easily? Or, would you have to go back to your bank to request some of it, and wait several agonizing weeks for the bank to respond?
Most attorneys don’t maintain the required backup documents. Which is a shame, because most of the electronic accounting software, including Xero and QBO, both allow you to attach backup documents directly to each and every transaction. That way, if a state bar or client were to inquire about that check you wrote out of IOLTA for $1,000, you’d simply pull up the transaction in your bookkeeping software, and BAM! There’s a copy of the check.
With almost infinite data storage at our fingertips, and simple tools to get critical backup documents in an electronic format, there’s no excuse these days for failing to maintain proper backup documentation for your IOLTA transactions. You don’t even have to scan it all in – just snap a quick photo with your phone. There’s even software that will help you snap the image and upload it all at once, saving huge time. However you do it, be sure to get your backup documentation saved in your books.
1. Skipping or short-cutting IOLTA 3-way reconciliations.
One of the first things we do here at Skepsis when considering working with a new client is ask to review their IOLTA 3-ways. More often than not, the response is a blank stare. Some attorneys are confident enough to ask what a 3-way is. It’s an extremely rare occasion when an attorney actually has done an IOLTA 3-way reconciliation.
And yet, this reconciliation is expressly required by the RPCs. See RPC 1.15A(h)(6). What’s more, it’s required “as often as bank statements are generated,” or at least quarterly. Well, most of our bank statements generate monthly, so that means we need to be completing our IOLTA 3-ways monthly, too.
We understand; reconciling can be complicated, especially when you need to go back several years to get caught up. This is one situation where investing in a professional accountant, experienced in trust accounting, can save you big-time in time, money, and headaches. And working with an accountant to get your 3-ways together doesn’t mean you’re stuck with them. Many law firm accountants, including Skepsis, will offer a clean-up to get you all caught up with your 3-ways, setting you up for success to do them yourself moving forward.
Whatever works best for you, we can’t emphasize enough: The number one trust accounting mistake is not doing IOLTA 3-way reconciliations each and every month. Don’t put your law license at risk. Get your 3-ways done every month.
We’re here to help.
Avoiding trust mistakes isn’t always easy. And avoiding that number one mistake can be time consuming. We know, because we do IOLTA 3-ways and fully RPC-compliant trust accounting for dozens of attorneys each and every month, freeing up attorney time to do what those attorneys do best: helping their clients.
Skepsis offers fully RPC-compliant trust accounting for attorneys. I founded Skepsis because, as an attorney myself, I found it extremely difficult to find bookkeepers and accountants who understood and could execute my own trust obligations under the RPCs. I interviewed dozens of professional bookkeepers and accountants for my own law firm, all of whom professed experience and even expertise in law firm trust accounting, only to discover that each and every one of them was making at least one of the top five mistakes above; and most were making all of them.
At Skepsis, our clients sleep better knowing their trust accounts are RPC-compliant. Book your IOLTA evaluation today to find out how your trust accounting measures up, and what you need to do to get your trust accounting fully RPC compliant.
Profit First for Law Firms
A DIYer’s quick guide to Profit First for law firms.
We’ve spent this month on the blog going through different budgeting philosophies, including what we’ve seen work, and why. We’ve talked about both Profit First and YNAB as great budgeting strategies for law firms. Today, we bring you an intro to how to implement Profit First for your firm. Of course, to get the most out of it, we definitely recommend you read the book (affiliate link).
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Reinvent Your Law Firm’s Budget with YNAB
The YNAB Approach to Budgeting Uses Real Numbers So You Can Make Real Decisions
Today we’re continuing our series on law firm budgeting. Our series started by explaining why traditional budget forecasting is for fortune-tellers, not lawyers. Instead, lawyers should implement a budget earmarking system to help them make great financial decisions for their firms. Then, we took a look at one such system, Profit First. Today, we’re looking at another budget earmarking system lawyers use to turn poor cashflow into abundant profits, and that’s YNAB.
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Reinvent Your Law Firm’s Budget With Profit First
The Profit First approach to law firm budgeting prioritizes putting profits in partners’ pockets.
Hopefully you’ve read our post about budget forecasting versus budget earmarking. And now you’re interested in learning more about budget earmarking. Today, we’re going to learn about one kind of budget earmarking: Profit First.
What is Profit First?
Profit First is a budgeting method Mike Michalowicz developed and described in his best-selling book, Profit First (affiliate link). In short, the idea is that business owners do business backward; they pay all their expenses, and pay themselves whatever is leftover. In other words, they’re taking their profit last. Instead, Michalowicz encourages business owners to take their profit first. Then, the business can run on what’s left over.
This is a great concept. Because none of us started our law firms just so we could work hard and pay the law firm’s bills and go home empty-handed every night. We started our firms so that we could make a paycheck for ourselves, on our own terms. So, we need to prioritize that paycheck, and take our profits first.
How Does Profit First Work?
Profit First is a way of budget earmarking for your law firm. In other words, Profit First is one method of taking the money you’ve made, and allocating it to different bank accounts within the firm, with each bank account having a specific spending purpose. And of course, the first allocation you make is to yourself – you take your profit first.
It works well for a lot of business owners because it presents your firm’s finances to you in a way that many business owners naturally run their businesses – by bank account. It’s common for a busy law firm owner to make financial decisions by simply logging into their bank account and seeing what funds are there. If the bank balance covers the expenditure I want to make, then I make it. If not, then I don’t.
The problem with “bank balance” financial decision-making is that we tend to rob ourselves of the opportunity to save up and really invest in both ourselves and in our firms. It’s like the “see-food” diet – if I see food, I eat it. Except in this case it’s “see-money” spending – if I see money in the account, I spend it.
There’s nothing wrong with a “see-money” mentality – it’s probably one of the most common money mentalities among small business owners. What Profit First does is harness that “see-money” instinct to help us manage our money smarter. It does this by allocating money to different bank accounts, so that I don’t see all my money in one place.
Does Profit First Work Long-Term?
Profit First gives law firms a budgeting tool that works wonders short-term, as firm owners begin to implement a budget that actually works for them. But, it’s even better long-term. Because typically, when we start a Profit First plan, we need to meet our firm where it is, and not where we want it to be.
Oftentimes we’re overspending on operating expenses and underpaying ourselves, so over time we want to slowly reduce our operating spending and increase our own paychecks. By making small, incremental changes in how we run our firm, and how we earmark our money, we’re able to make those long-term goals a reality. And Profit First gives us the framework we need to see where our money is, where it’s going, and what those changes are that we need to make. It helps us forge a path from where we are now, to where we want to be.
Who Is Profit First Great For?
Profit First is great for any law firm owner that tends to engage in “see-money” spending. It’s also great for firm owners who don’t like to (or more often don’t have time to) deal with more granular budgets or more detailed numbers. It does this by dividing your money into just 6 or so different budget categories. Finally, it’s hugely helpful to those of us who need to see real money in real bank accounts, because theories or allocations on paper just don’t cut it.
But Profit First isn’t the only method of budget earmarking. Stay tuned to our blog to learn about the YNAB budget, and see if it might be right for your firm.
How Do I Implement Profit First At My Firm?
If you’re not already on our mailing list, be sure to sign up. We’ll soon be posting a DIY step-by-step intro to getting started with Profit First.
For those of you who’d like a little more support and guidance, as well as a plan to make Profit First work for you both short- and long-term, Skepsis would love to help. Book your free discovery call today.
Reinvent Your Law Firm Budget
Traditional Law Firm Budget Forecasting is for Fortune-Tellers, Not Lawyers
When most lawyers think of budgeting, they think of budget forecasting. This is is the thing you do when you sit down each year, see what you spent on the different expense categories in your books, and then plan out what you’re going to spend in those categories in the coming year. You put together a great spreadsheet, or a nice report, so you know exactly where all your money will come from and where it’ll go each year, and maybe if you’re super on it you’ve broken it down by month. In other words, what you’ve done with your budget forecast is plan the upcoming year. You’ve just tried to predict the future.
Let’s be honest with ourselves. Traditional budgeting is – I’m going to just say it – fortune-telling. You might as well be spending time searching for the pot of gold at the end of the rainbow, or betting on the World Series.
2020 Is Clear Proof That Budget Forecasting Doesn’t Work.
Nothing showed us that more clearly than 2020. If you had a traditional budget forecast for 2020, you know exactly what I mean. Your budget forecast went out the window as soon the first shutdown order hit. Or when the courts shut down, so that huge con fee that was right in front of you was suddenly pushed out at least six months. Whatever income and expenses you had forecast for 2020, 2020 turned them on their heads almost overnight.
And it’s not just you. Law firms, and even Fortune 500 companies and governments, that spent tens of thousands or more on budget forecasting experts, research, and analysis found that their budgets were no better than expensive scratch paper by April. It’s also not just 2020. Even before 2020, studies show that budget forecasts are typically off by significant margins. (See Aaron, Henry J. 2000. “Presidential Address—Seeing through the Fog: Policy- making with Uncertain Forecasts.” Journal of Policy Analysis and Management 19 (2): 193–206.)
So Why, When We Think of Budgeting, Do We Think of Budget Forecasting?
There’s no doubt that budget forecasting has its place. Although a budget forecast tells you precious little about where you’ve been or where you’re going, it can be a useful tool to help you figure out where you want to be – the law firm’s financial goals. Budget forecasting can be a good aspirational and goal-defining tool. The key is to keep it at the thirty-thousand-foot view, and not get bogged down in the weeds. If our aspirational budget is the forest, then all those individual accounts with their precise numbers are the trees.
Another problem with forecasting? It can give us a false sense of security. When we forecast, it’s all too easy to make up for a large purchase on the expense side, with a good month on the revenue side. Maybe April is typically our firm’s best of month of the year. Well, let’s forecast another good April, and voila! That big expense is suddenly justifiable. And then April hits and we spend it – and the income doesn’t materialize. At that point, we’ve created a cashflow problem for ourselves.
Beyond setting a general direction, a budget forecast tells us very little about the law firm. It also is not particularly helpful in making financial decisions. And really, the point of any financial data about your firm is to help you make sound financial decisions.
So How Should Law Firms Budget To Make Great Financial Decisions? Earmarking Is the Answer.
So now is a great time to completely rethink law firm budgeting. Forget the traditional, “here’s what you should spend in which categories this year” budget forecast. It’s true, traditional budget forecasting can have its place, but before doing any forecasting, we recommend most firms do a different kind of budgeting entirely. It’s called budget earmarking.
With earmarking, we’re not trying to predict the future. Instead, we take known, measurable quantities – that is, dollar amounts – from the past, and we earmark those dollars for the future. So there’s no guesswork, and you always know exactly where your budget stands.
There are two kinds of budget earmarking that work well for law firms, and give you real, hard numbers – not future guesses – that you can use to make financial decisions. More about that is yet to come, so be sure to sign up for our newsletter to learn the secrets of successful earmark budgeting for law firms.
Would you like professional guidance to set up a great budget for your law firm? Would you like to make financial decisions for your firm quickly and easily, and angst-free? Set up a discovery call with Skepsis today.
Every Law Firm Needs A Good Matter Closing Checklist
And here’s a sample checklist to get you started.
When we close a matter, both our attorney malpractice insurance, and our state bar ethics rules, expect a lot of us! It’s not as simple as saying a friendly goodbye to the client and moving on with life. Instead, we have obligations that include formal disengagement or matter closing letters, returning funds held in trust, and more.
A basic matter closing checklist can, and has, saved firms thousands of dollars and more in insurance premiums, avoided bar complaints, and avoided malpractice claims.
Having a simple way to track these obligations, including what steps are involved in a matter closing, who’s responsible for each step, and what’s been done versus what remains to be done, can be complicated. And as attorneys, we don’t have time for complicated. So at Skepsis, we recommend streamlining this process with a simple checklist. With a checklist, you and your staff simply work through checking off boxes anytime you close a matter, to ensure that none of the critical matter closing steps fall through the cracks. A basic matter closing checklist can, and has, saved firms thousands of dollars and more in insurance premiums, avoided bar complaints, and avoided malpractice claims.
Here’s a sample matter closing checklist to get you started.
Skepsis Tech’s Sample Matter Closing Checklist.
- Change the matter to “Pending” in your practice management software.
- Confirm any settlement or other funds due from third parties are fully paid, and have cleared the bank.
- Confirm the case is closed on the court’s docket. If not, file dismissals or other paperwork necessary to close it.
- Confirm the firm has no original documents, and if it does, return them to the client.
- Email the matter closing letter to the client.
- Notes: Be sure to include critical matter closing information, including clear statements that “we will perform no further work on your behalf,” and “we do not have any original documents to return to you.” Also include a polite note that: (1) they will be receiving their final bill shortly, and per their fee agreement, payment is due within X days; and (2) once their final bill is paid, we’ll perform a final accounting of funds in trust and any remaining trust funds will be returned to them at that time.
- Pro Tip: We expect we’ll post a sample Matter Closing Letter soon, so be sure to sign up for our mailing list to be notified when that’s posted.
- Generate and issue final invoice to client.
- Client pays final invoice.
- Generate a “post-final” invoice to catch any WIP/EIP that didn’ make it into the final invoice. Apply a credit note to the invoice to zero out the client’s account.
- WIP stands for work in progress, and EIP stands for expenses in progress. This is just shorthand for time and expenses entered, but not billed out to the client.
- Change the matter to non-billable so that no more billable entries find their way into the system.
- Perform a final accounting of client trust funds, and return any funds remaining in trust to the client.
- Confirm the return of client trust funds clears (ie, that the client cashed the check).
- Change the case status to “Closed” in your practice management system.
For more time-saving simplicity, turn your checklist into a workflow.
A matter closing checklist is a great start, but when closing a client file involves multiple staff members, passing around a checklist isn’t particularly efficient. Save yourself time and headaches by turning your checklist into a workflow in your practice management software.
Not all practice management software supports this feature, but some of the most popular do. For instructions on how to create a workflow in Clio Manage, click here. For Practice Panther, click here.
Skepsis Tech’s Consulting Services Save Law Firms Time, Money, and Malpractice Claims.
Skepsis Tech works with law firms to develop matter closing and other processes that save time and increase profits, and also protect our clients’ licenses to practice law. If you’d like to learn more about what Skepsis Tech can do for your firm, don’t hesitate to book a discovery consultation today.
Choosing the Right Credit Card For Your Law Firm
Your business credit card should be a profit center, not an expense
A few weeks ago, we wrote about how credit cards are a key tool for any financially healthy law firm. But with so many options for credits cards out there, how does a firm know which card to choose? Today, we’re reviewing some of the most popular that we’ve had up close and personal experience with.
The Capital One Spark Card
Spark: This one is my current favorite because the cash back (2% on everything) is good, it’s super easy to manage users online, and in my experience it’s easy to connect to a real person. I find they handle issues quickly and easily without obscene wait times (even during COVID) or god-awful phone menus. Their app is good, with useful tools to manage charges and spending, and their fraud screens are quite good without being overzealous, blocking legitimate transactions. All of my businesses, and about half my clients, are satisfied with this card. At 17%, the interest rate isn’t great, but it could be worse, making it a good fit for law firms who can pay the balance in full monthly.
The Citibank Costco Visa
Costco: Although not as easy to work with as Spark when it comes to support and getting real humans on the phone, they’re also not the worst. The rate is decent at roughly 15%, BUT, the cash back percentages are only above average (although Costco gas earns up to 4%) when you’re making purchases at Costco. Many law firms use the Costco Citi card for Costco purchases and use another card for purchases elsewhere.
The Amazon Signature Visa
Amazon Signature Visa: This one is great for Amazon purchases, but again, for those other, everyday purchases, it’s lackluster. It’s a Chase card (see warning below), which is not a bonus at all. The interest rate is between 15% and 23%, so there’s interest advantage, but be warned. It’s actually higher. The fine print says if you don’t pay off your entire balance, they charge you interest on ALL your purchases, even the new purchases since your last statement, which is very different from most other cards. Not cool.
Chase Ink Cards
And another word of warning about Chase: I’m not a fan of the Chase Ink card because the cash back isn’t great (1.5%), and Chase is a beast to deal with when issues arise. I’m actually not even sure they actually employ humans. Their interest rate is a ridiculous 30% for many of our clients. Consider abandoning that card, and going with Spark instead (full disclosure: affiliate link. It’s that good.)
Wells Fargo Credit Cards
Wells Fargo: They offer some cards with decent rewards, so if you do your research on these, you might find a gem that works for you. But, like Chase, they don’t seem to employ actual humans, so if a problem ever comes up, don’t count on being able to get a hold of someone knowledgeable who can help you.
Alaska Airlines Visa
Alaska Visa: This one is popular for firms based in the Seattle area, where Alaska Airlines’ main hub is. So depending on your flight habits, this might be a great choice for you. But, it’s a Bank of America card, and like the other big banks, humans are hard to come by when help is needed. What’s more, when you do get a human on the line, our experience with Bank of America is that they’re far less willing to offer one-time fee waivers and other courtesy concessions than other banks.
How To Sort It All Out?
Got questions about credit for your law firm? We’re here to help. Just schedule a call and we can help you on your way to that perfect world where credit cards save your firm time, money, and headache, rather than generating chaos, cashflow problems, and extra expense.
Why Washington Law Firms Are Receiving Revised Unemployment Tax Rate Notices for 2021
Here’s why, and what your firm needs to do about them.
If you were floored when your law firm received its 2021 unemployment tax rate notice back in December from the Washington Employment Security Department (WA ESD), you’re not alone. Rates skyrocketed. Some firms’ tax rates went up nearly one full percent, even if they had never had an unemployment claim. One of our clients, with no prior claims, saw an increase of SIXTY PERCENT over their prior year’s tax. The good news is, you can expect to see a little relief in your mailbox soon, if you haven’t already.
WA SUI Basics
First, a bit of background. Your WA ESD rate notice includes two tax rates. The first is your State Unemployment Insurance, or SUI, rate. The second is an Employment Administrative Fund, or EAF, rate. The EAF rate is always either .02% or .03%, and it gets added to your SUI rate for your total rate. In this article, we’ll be focusing on just the SUI rate.
Now let’s break down that SUI rate. It’s made up of three sub-rates, and they are:
- Flat Social Tax. This rate is the same for all employers in Washington. It was .25% in 2020, and by law was slated to jump up to 1.22% in 2021. The only reason it stayed as low as it did is because the legislature capped it back in 2010 – otherwise, it could have jumped even higher. (Your initial rate notice may show .81% in for this rate in 2021, not 1.22%, thank goodness. This is because of how the statute backs out some numbers.)
- Experience Rating Tax. This tax is different for all employers. The calculation takes into account an employer’s unemployment history, and then assigns a tax based on tables laid out by the legislature. There are 40 categories of tax rates based on an employer’s unemployment history, and those taxes range from 0% to 5.4%. Needless to say, after the high unemployment of 2020, and even though certain time periods in weren’t counted against employers, many employers’ rates jumped up.
- Solvency Surcharge. This tax only applies if the state’s unemployment insurance (UI) fund becomes insolvent (as defined by statute), and it’s an extra tax designed to rebuild the state’s coffers. Employers haven’t paid this surcharge in years, so it went from 0% in 2020 to the state max of .2% in 2021. Luckily, the state did not add this tax to the first round of 2021 rate notices that went out, so employers didn’t have to factor this surcharge into their sticker shock.
So what this all means is, even if I have a perfectly clean unemployment record, and factoring in the state’s grace in NOT adding the insolvency surcharge, employers’ UI rates went up significantly.
And now to the revised notices…
If we and the UI system in general haven’t confused you enough already, you should have received a revised 2021 UI rate notice. (If you haven’t, contact ESD at the email below. For more confusing fun, the notice doesn’t say it’s revised, so you’ll only know by the February 2021 date on the notice.) On February 8, the state enacted legislation that did a few things to lower the 2021 rates (even though they’re still generally higher than 2020). That legislation included:
- Capping the flat social tax rate at .50% in 2021 instead of 1.22%.
- Making more modest increases o the flat social tax rate cap through 2025, up to a maximum of .9%.
- Suspending the solvency surcharge through 2025.
- Implementing other rules to reduce employers’ experience rating tax.
A good summary of the changes in the February 8 legislation can be found here.
So, that is why many law firms are receiving revised 2021 SUI rates – the February 8 legislation had an effective date of January 1, 2021. If you have received your 2021 rate notice, be sure to get that to your accountant or payroll provider to make sure your tax calculations remain correct. If you haven’t yet received your revised 2021 rate notice, contact ESD at [email protected].
Payroll can be complicated for small law firms, and become a huge administrative burden. We recommend outsourcing your payroll to a competent, reliable, and simple to use payroll provider. Our favorite for this is Gusto (affiliate link) – click here to learn more.