IOLTA Myths: There’s No Such Thing As “Cleared”

Posted on June 29, 2021November 19, 2024 by Devon

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.

What Your Solo/Small Law Firm Needs To Know About Washington’s New Paid Family & Medical Leave Law

Posted on December 7, 2018January 8, 2019 by Devon

In 2017, Washington passed a paid family and medical leave law, becoming the fifth state in the nation to provide such benefits. The new law goes into effect on January 1, 2019. Here’s what your solo/small law firm needs to know to be prepared.

Effective January 1, 2019, Washington State will begin collecting premiums for the new leave program. Employers, including solo and small law firms, must collect these premiums as withholdings from their employees’ paychecks – similar to federal tax withholdings.

How The New Law Affects Solo Practitioners and Self-Employed Partners

First, let’s deal with you solos and partners out there: If you are self-employed, then you are exempt from the tax on your own paycheck. You may choose to opt in and receive benefits for yourself, and you must commit to doing so for four years. If you do opt in, you’ll have to withhold the employee portion of the tax from your paycheck, and report and remit to the state on schedule. The flipside, of course, is that you’ll be eligible for the same family and medical leave benefits that other employees have.

Update: The state has finally ruled on treatment of PLLCs! If your PLLC is taxed as a sole prop, joint venture, or the like, then members of the LLC are exempt from the new tax (but you may opt in, as discussed below). If you are taxed as a corporation (either S- or C-corp), then anyone taking a salary from the LLC/corporation is subject to the tax.

How The New Law Affects All Other Employees

If you have even one other employee – even a part-time employee – you must begin premium collections on January 1, 2019, and then report to the state on schedule. Note that “employee” is not the same as an independent contractor, and the new law does not apply to independent contractors.

How Much Is The Tax?

The tax is 0.4% of the employee’s pay. So, for an employee who makes $50,000 in a year, the total tax is $200 for the year, or $8.33 per paycheck (assuming payday is twice per month).

There is an employee and an employer portion of the tax. The employee pays 63.33% of the tax, and the employer pays 36.67%. For our employee above, this means that the employee will pay $126.66 of the total $200 in a year (or $5.28 per paycheck), and the employer will pay $73.34 of the total $200 in a year (or $3.06 per paycheck).

If you’d like to run real numbers but don’t enjoy math, the state has developed a handy premium calculator. Skepsis staff are also available to help anytime.

Here’s What Solo & Small Law Firms Need To Know

If your firm averages fewer than 50 employees – which solo and small firms do by definition – then you are exempt from paying the employer portion of the tax. So, you’re off the hook for paying $3.06 per paycheck for our example employee above. But, you still have to withhold the employee portion of the tax from your employees’ paychecks, or pay it out of your own pocket, and remit those withholdings to the state. You’re also required to report employee wages and hours to the state, even if your employees do not qualify for coverage under the new law.

How Will I Collect And Pay The Tax?

As payroll becomes increasingly complex every year, we always recommend that law firms use professional payroll software. Our favorite is Gusto, because they are the most affordable, fully-featured, and reliable full-service payroll provider that we’ve worked with. We spoke with Gusto to confirm that they will handle all of the new tax collection, payment, and reporting seamlessly, and they will. At $39/month plus $5/month per employee, Gusto’s service, features, and pricing can’t be beat.

We also checked with another popular payroll provider, QuickBooks Payroll, to see if they would also be handling these new taxes seamlessly. What we discovered was that only “Full-Service” customers – those paying $80/month plus $4/month/employee – would have their taxes collected, paid, and reported for them. Any customers on the self-service plan (billed at $35/month plus $4/employee/month) will have the significant burden of collecting, paying, and reporting the new tax on their own.

Can I Opt Out?

As mentioned above, self-employed people don’t have to pay the tax if they don’t wish to receive benefits. But, there is a way to opt out of the tax entirely – although it will be neither practical nor economical for many solo and small firms. Rather than paying the tax, employers can provide, administer, and pay for private leave policies that satisfy the state requirements. These private policies, called “voluntary plans,” must be approved in advance by the state. Because these private plans are employer-paid and employer-administered, the cost of these plans for small business is generally much higher than the state plan, where the employees pay the majority of the premiums.

What Happens When My Employee Goes On Leave?

Even though employers and employees must start paying into the system in 2019, paid leave benefits do not become available until January 1, 2020. If an employee wishes to take leave, the employee must first meet all of the following eligibility requirements:

The employee must have worked 820 hours in the first four of the last five calendar quarters from the date the leave starts. In other words, if the employee intends to start leave in Q1 2020, count back five calendar quarters: Q4 2018, Q3, Q2, Q1, and then Q4 2017. Now, how many hours did the employee work in the first 4 of those quarters? (Q4 2017, Q1 2018, Q2 2018, and Q3 2018.)
If it’s more than 820 hours, leave may be available if there’s a “qualifying event.” A “qualifying event” can be any one of the following:
- Care and bonding after the birth of a baby, or placement of a child under 18
- Care of a family member experiencing an illness or medical event
- Certain military events
- Care of the employee’s self in relation to an illness or medical event.

If the employee meets the above requirements, the employee generally qualifies for paid leave for up to 12 weeks (or 18, in extenuating circumstances). The state, and not the employer, pays the employee during leave.

Of course, all small business owners know that the work still needs to get done, even when an employee is on leave. So, employers will still have to invest in hiring and training temporary staff. There are options for cash assistance for employers, but those are limited to employers who pay the employer portion of the tax even when they’re not required to. So, this benefit won’t be available to most small businesses.

Setting Up Washington Payroll In Xero

Posted on December 18, 2016April 8, 2017 by Devon

One great thing about Xero is that its payroll services are included in most plans at no additional cost. And using Xero’s wizard, setting up payroll is fairly simple and straightforward. But Washington, like many other states, has some payroll nuances that you’ll need to be prepared for as you run through payroll setup in Xero.

Step 1: Set Up Your Chart of Accounts For WA Payroll.

First, make sure you have at least the following accounts already set up in your chart of accounts:

Liability Accounts

Payroll: Wages Payable
Payroll: Federal Employment Tax Payable
Payroll: FUTA Payable
Payroll: WA UI Payable
Payroll: WA Workers Comp Payable

Expense Accounts

Payroll: Wages Expense
Payroll: Federal Employment Tax Expense
Payroll: FUTA Expense
Payroll: WA UI Expense
Payroll: WA Workers Comp Expense

Step 2: Set Up WA Unemployment Tax.

There are two places you’ll need to set up Washington-specific aspects of your payroll. The first is in Settings > Payroll, and then on the “Taxes” tab. Scroll down below the heading for “Federal (FED)” and click the down arrow next to “Washington (WA)”. (If you don’t see Washington, that means you have not yet added a work location in Washington. Do this on the “Work Locations” tab.)

After you click the arrow, the Washington panel will open. Scroll down to view the entire panel:

Enter your “WA ES Reference Number.” This is the ESD number shown in the upper right corner of your letter from the Employment Security Department setting up your ESD account:

Next, enter your WA UI Rate. This is something the Employment Security Department will send you annually. Here’s an example notice, with the WA UI Rate circled:

The next field is the WA EAF rate. That’s found on your same tax notice, here:

Finally, choose your liability and expense accounts. If you used the list we set up at the top of this post, your WA UI & Surtax Liability account will be Payroll: WA UI Payable; and your WA UI & Surtax Expense account will be Payroll: WA UI Expense.

Click save, and the UI component of your payroll is all set up!

Step 3: Set Up WA Workers Comp Deductions.

Next you’ll have to set up the second Washington-specific component of your payroll, which is the WA Workers Comp deduction. In Washington, there are two components to the state-provided workers compensation program: (1) an employer-paid portion; and (2) an employee-paid portion. The employer portion is not natively supported in Xero payroll, so it will require an extra calculation each time you run payroll. The employee portion will be set up as a deduction.

To create that deduction, select the “Pay Items” tab in your Payroll Settings screen. On the left, click “Deductions:”

To the right, click “Add,” and select “After Tax Deduction.” A window will pop up – fill in the following:

Deduction Name: WA LNI

Standard Amount: [Leave Blank]

Company Max: [Leave Blank]

Liability Account: Payroll: WA Workers Comp Payable.

Click Add.

You’ve now set up your WA Workers Comp tax withholdings, and your Washington-specific payroll setup is complete.

Would you like help setting up your payroll? Contact us today!

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Reconciling Client Trust Accounts In Clio

Posted on November 22, 2016February 4, 2019 by Devon

Performing an ethics-compliant, three-way trust accounting reconciliation in Clio is easy when done correctly.

Step 1: Ensure Your Individual Clio Trust Balances Match Your Bank Statement

First, make sure you’ve received your bank statement for the month. Reconciling with Clio works best when you receive a paper or PDF bank statement, rather than a download of transaction listings. Using the actual bank statement, it is easier to compare balances.

Print a Trust Listing Report. In Clio, select the tab for Reports, then click Trust Listing. Settings for the report should be as follows:

Uncheck “Show clients with zero balance”
Select the button for “All Clients”
Select Practice Area: All
Select Date Range: Custom: Leave the start date blank, and set the end date as the date of your statement
Output Format: CSV
Click “Generate Report”

The report will automatically download, and you can typically find it in your downloads folder. Move it to your trust reconciliation file, and save it there. Now open it.

If you have more than one trust account, you’ll have to delete all the other trust accounts from this report, so that only the trust balances for the account you’re reconciling remain. If you don’t have more than one trust account, skip this paragraph. To do this, sort Column B (the Account column) A > Z. (Place your cursor in Column B; click the Data tab; and click the button.) Delete all lines in the spreadsheet that contain any account other than the one currently being reconciled. Do you agree with me that it would be nice if Clio’s report feature would let us select a certain account so we don’t have to do this deletion step? Please email them and let them know.

In Cell E1, enter the following formula: =SUM(D:D) Hit enter. The number Excel spits out in the cell should equal the Ending Balance on your bank statement. When it does, the first of your three reconciliations is complete.

Step 2: Ensure Your Bank Account Activity Report Matches Your Bank Statement.

Print a Bank Account Activity Report. In Clio, select the tab for Reports, then click Bank Account Activity. Prepare your report with the following settings:

Trust Accounts: Select “Specific Account,” and choose the correct account
Select Practice Area: All
Select Date Range: Last Month (unless your bank statement doesn’t run with the calendar month, in which you’ll select “Custom” and enter the same dates as your bank statement)
Check the box for “Include Opening Balance”
Do not check the box for “Display Matter to Matter Transfer Transactions”
Output Format: PDF

Click “Generate Report” to download it, move it to your reconciliations folder, and open it. Ensure that the opening balance matches the opening balance on your bank statement. Ensure the closing balance also matches your statement. Finally, check to ensure that all transactions showing on your bank statement appear on your report (which they should, if the opening and closing balances match).

Step 3: Ensure Your Bank Account Activity Report Balance Matches Your Trust Ledger Balance

If you’ve performed the two steps above and the ending balances match, then this step is already complete: compare the total balance on your Trust Ledger Report (which was calculated in Cell E1 in Step 1) with the ending balance in your Bank Account Activity Report. When these two balances match, your three-way reconciliation is complete.

Not currently using Clio? Try it for free.

Skepsis would love to perform your monthly trust reconciliations for you, whether or not you’re using Clio. Please email email us at [email protected]. Gain more great insights by subscribing to our newsletter below.

Early Detection of Erroneous Bookkeeping Entries In Trust Account Records: Part 4

Posted on March 17, 2016March 12, 2016 by Devon

The key to appropriately managing a client trust account is having a system in place that will alert the attorney as soon as possible that a transaction may have been entered erroneously. Several simple, monthly checks will help you discover errors quickly. In Part 1 of this series, we considered the importance of ensuring that the total balance in the trust bank account always matches the total balance in the client trust liability account; Part 2 discussed the importance of maintaining a credit balance in the Trust Bank Account. In Part 3, we explained why and how involving the client in your system of trust accounting checks and balances is important. This last installment provides a few additional tips for ensuring you catch problems in your client trust account before they catch you.Continue reading→

Early Detection of Erroneous Bookkeeping Entries In Trust Account Records: Part 3

Posted on March 11, 2016March 12, 2016 by Devon

The key to appropriately managing a client trust account is having a system in place that will alert the attorney as soon as possible that a transaction may have been entered erroneously. Several simple, monthly checks will help you discover errors quickly. In Part 1 of this series, we considered the importance of ensuring that the total balance in the trust bank account always matches the total balance in the client trust liability account; Part 2 discussed the importance of maintaining a credit balance in the Trust Bank Account. In Part 3, we explain why and how involving the client in your system of trust accounting checks and balances is important.Continue reading→

Early Detection of Erroneous Bookkeeping Entries In Trust Account Records: Part 2

Posted on March 4, 2016March 12, 2016 by Devon

The key to appropriately managing a client trust account is having a system in place that will alert the attorney as soon as possible that a transaction may have been entered erroneously. Several simple, monthly checks will help you discover errors quickly. In Part 1 of this series, we considered the importance of ensuring that the total balance in the trust bank account always matches the total balance in the client trust liability account. Here, we discuss why a credit balance in the Client Trust Liability account, or a debit balance in the Trust Bank Account, is a big red flag.Continue reading→

Early Detection of Erroneous Bookkeeping Entries In Trust Account Records: Part 1

Posted on February 26, 2016February 21, 2016 by Devon

Category Archives: Bookkeeping