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Professional And Legal Services As A Self-Employment Deduction

Say you've hired a lawyer to help you with a legal matter, or brought in an accountant to make sense of your financial records and prepare your taxes. These types of services are often essential to self-employed individuals or small businesses. They can also minimize your tax liability because you can deduct these expenses as write offs. But you can't just hire anyone for anything and expect a deduction. For example, you can't write off the fees you paid your criminal defense lawyer when you were caught throwing paint on your neighbor's car, tax deductible legal fees have to be business-related. Professional and legal services as an IRS deduction category are like a little tax break for seeking the help you need. They make sure you don't get penalized for doing the responsible thing – getting professional advice when it matters. In this guide, we’ll dig deeper into how to write off these expenses and answer questions like are attorney fees tax deductible and are tax preparation fees deductible.

Table of contents

Key takeaways...Read more

Are legal fees tax deductible?...Read more

Are attorney fees tax deductible?...Read more

Are lawyer fees tax deductible?...Read more

Are tax preparation fees tax deductible?...Read more

Are tax prep fees deductible in California?...Read more

Line 10 vs Line 17 of Schedule C...Read more

Nondeductible legal and professional services...Read more

Claiming legal and professional service fees as a 1099 deduction...Read more

Key takeaways

Legal fees are only tax deductible if it is an ordinary and necessary business expense.
The tax preparation fees deduction can only be claimed if the service was availed for business reasons.
Legal and professional services should be reported on Schedule C.

Are legal fees tax deductible?

1099 individuals can deduct legal expenses that are directly related to their business from their self-employment taxes. They have to be ordinary and necessary and can include fees for services like contract negotiation, defending against lawsuits related to your business, and legal advice related to your business operations. Expenses related to the collection of business debts from customers can be claimed as deductible expenses. Additionally, legal fees pertaining to business bankruptcy proceedings are also typically tax-deductible. So, when are legal fees not tax deductible? Legal fees related to private matters are generally not tax-deductible. The IRS is pretty strict on the difference between personal and business-related legal expenses when it comes to deductibility. Personal legal matters, such as divorce, personal injury or criminal defense are typically considered expenses that are your responsibility, and are not viewed as eligible deductions. However, there are some exceptions to this rule. In specific cases where legal expenses are incurred in the process of producing or collecting taxable income, they may qualify for deductions. Legal fees related to a dispute with the IRS, and the costs associated with resolving those issues can be deductible. Additionally, legal expenses incurred for estate planning or will-related matters may also be eligible for deductions, if they involve your business. According to IRS Publication 523, you can also deduct legal fees if you’re selling your home. However, this expense will affect your capital gains rather than your 1099 income. It can be a good move to ask a tax pro to help classify your expenses.

Are attorney fees tax deductible?

Say you’re a freelance software developer who runs your own small business. You’ve been working on a project for a client when a disagreement arose over the project's scope and payment terms. Despite multiple attempts to negotiate a resolution, you both couldn't come to an agreement. You decide to hire an attorney to help navigate the dispute. The attorney's services included drafting legal documents related to the dispute and representing your interests in negotiations with the client. In this case, these attorney fees are tax deductible as they are directly associated with your business. So you can report the tax deductible legal fees on your Schedule C as a deductible business expense. Maybe you’re also wondering, “Can you deduct attorney fees from a settlement?” Generally, attorney fees related to settlements are not tax deductible. You may be able to claim attorney fees in the form of an income adjustment if you itemize your deductions.

Are lawyer fees tax deductible?

Most people use the terms “lawyers” and “attorneys” interchangeably, but there is a difference between the two. Lawyers usually act as consultants or advisors while attorneys represent people at court. Both these expenses count as legal fees and can be tax deductible if hired for your business. Let’s say you’re a self-employed marketing consultant. When your business started to grow, you wanted to get some legal expertise. You hire a legal consultant to review and draft contracts, provide guidance on compliance issues and advise you on intellectual property law. As this service is essential to your business growth and an ordinary and necessary expense, you can claim these tax deductible legal fees as a business write off. In this case, your lawyer fees are tax deductible and help you reduce your net income and your estimated tax payments.

Infographic entitled Legal Costs That Are Business Deductions listing expenses that are tax deductible apart from attorney’s fees.

In some cases, you may need to capitalize legal fees if they are part of your business startup costs. Business startup costs need to be amortized over 15 years. However, you can deduct up to $5,000 in startup costs in the first year you are in business. Classifying these expenses can be confusing but FlyFin can help. A.I. finds and categorizes your business deductions, and CPAs provide unlimited tax preparation and filing support on the app.

Are tax preparation fees tax deductible?

Starting from 2018 and continuing through to 2025, the Tax Cuts and Jobs Act (TCJA), changed the rules for tax preparation fees. If you’re a W-2 employee, you can no longer deduct these expenses. However, self-employed individuals can still write off their tax preparation fees as a business expense. Before 2018, taxpayers who weren't self-employed could potentially claim tax prep fees as a 2% miscellaneous deduction. Self-employed individuals can actually take advantage of several deductions related to tax preparation. It can include expenses like:

Tax software subscription
Hiring a CPA
Tax planning guidance
Managing your books

Let’s use a real-life example to demonstrate when accountant are fees tax deductible. Say you’re a freelance graphic designer. You’re diligent about keeping your financial records in order, but you have a lot more expenses this year and filing taxes as a self-employed individual can be complicated. To ensure your tax return is accurate, you decide to hire a CPA to handle your tax preparation and provide some tax advice. You both work closely to gather all the necessary financial information, sort through deductible expenses and calculate self-employment tax. And when tax season arrives, your accountant’s fees are tax deductible, too. It’s a win-win!

Are tax prep fees deductible in California?

If you’re an independent contractor in California, there are many business deductions you can take to lower your 1099 taxes, including tax prep fees. 1099 tax deductions are available in every state, and you may even be able to deduct some state-specific deductions from your income taxes. Make sure to research all the available deductions before you file.

Infographic entitled How Can You Deduct Tax Preparation Fees describing the steps to take the deduction.

Line 10 vs Line 17 of Schedule C

If you’ve looked at a Schedule C recently, you would have noticed that there are two lines for reporting fees – Line 10 and Line 17. Knowing where to report your business-related fees is an essential part of avoiding audits and keeping your returns accurate. Line 10, also called “Commission and fees” is generally used for reporting commissions earned from real estate or sales, administrative fees, bank fees and portfolio management fees. Line 17, also called “Legal and professional services” is usually used for reporting costs related to hiring an accountant, lawyer, attorney or consultant for your business. Some fees can be reported on either line, so it’s important that you stay consistent with whatever option you’re choosing. The IRS will accept your deduction as long you have an approximate estimation and the right documents to prove that it was business-related. So, are investment fees tax deductible? Investment fees are not tax deductible for any taxpayer but you can deduct investment interest if you itemize your deductions on Schedule A. What about hiring an advisor? Are advisory fees tax deductible? Advisory fees related to the management of your investment portfolio are no longer tax deductible thanks to the TJCA. If these advisory fees are linked to tax-advantaged accounts such as Individual Retirement Accounts (IRAs) or 401(k)s, there's a possibility that they may still qualify for a deduction, with some limitations.

Infographic entitled Line 10 And Line 17 of Schedule C showing the difference in expenses reported when taking the tax preparation fees deduction.

Nondeductible legal and professional services

There are some legal and professional service fees that are non deductible expenses for self-employed individuals, if they are incurred for personal reasons. They include:

Legal fees for divorce, child custody, personal will creation, personal settlements
Tax prep fees for filing personal tax returns
Fees related to retirement planning
Financial advisory fees
Fees related to personal property purchase or sale

Claiming legal and professional service fees as a 1099 deduction

Anytime you pay a professional over $600, you’ll need to report it on Form 1099-NEC. You will need to send them this form by January 31 and send a copy to the IRS, too. This is different to your own 1099 forms which you may receive for providing your business services to clients. You don’t need to file your personal 1099 forms, but you do need to file any 1099 forms that report your outgoing payments. Let’s suppose you’re an eBay seller. Your online business has been growing steadily, but you’re new to the game and want some professional advice to streamline your operations and reduce your tax liability in 2024. You decided to consult with several professionals to help optimize your business.

Tax Consultant: You hired a tax consultant to review your business structure, identify potential deductions, and develop a tax-efficient strategy. The tax consultant charged you $2,000 for their services.
Accountant: To ensure accurate financial record-keeping and compliance with tax regulations, you retained an accountant. The accountant helped you with bookkeeping, tracked deductible expenses, and prepared your tax returns. The accounting fees amounted to $1,500.
Business Attorney: You were also concerned about your contracts and business relationships. You hired an attorney to review brand partnership agreements to ensure your legal interests were protected. The legal fees for the attorney's services totaled $3,000.

When you file your taxes in 2024, you can write off all these professional service costs, including the tax deductible attorney fees, on Schedule C. These expenses were necessary and ordinary, and therefore, directly related to your business activities. This gives you a $6,500 deduction! Sole proprietors and single-member LLCs should report legal and professional service costs on Schedule C, under “Expenses”. Multi-member LLCs and partnerships should use Form 1065, C Corps should use Form 1120 and S Corps should use Form 1120-S.

Infographic entitled Reporting Legal and Professional Services listing the tax forms to claim tax deductible legal fees.

Deducting legal and professional service expenses requires good recordkeeping. That means making sure you have all the information about why you hired the professional, how much you paid them and what services they performed for you. There’s also nothing wrong with getting some extra help to classify your expenses correctly, who knows, you might even get a deduction out of it!

Phone Tax Deduction

Cell phones can be a business tax deduction for self-employed individuals if it is an ordinary and necessary expense. A separate business cell phone can be fully written off.