Lawyers: acceptance fees, retainers, and money held for clients
Money a client gives you to spend on their behalf is not your income, no matter which account it lands in.
A client pays an acceptance fee to engage you. They also hand over money for filing fees, sheriff's expenses, and other costs that will be paid out on their behalf.
Both arrive as deposits. Only one of them is yours, and mixing them up is the most consequential bookkeeping error in legal practice.
Fees are income, client money is not
An acceptance fee, a retainer, appearance fees, and success fees are payments for your professional services. They are your income when earned.
Money given to you to be spent on the client's behalf is different. You are holding it, not earning it. It belongs to the client until it is spent on their matter, and any unspent balance is returned.
Treating that second category as income overstates your earnings and creates a tax result on money that was never yours. Treating it casually, spending it, borrowing from it, mixing it, is a professional problem before it is an accounting one.
The remedy is old and simple: hold client money separately, and account for it separately, so at any moment you can say what belongs to whom.
The fee categories are not all the same
Legal practice uses several fee structures, and their timing differs.
An acceptance fee is generally earned on engagement. A retainer may cover a period of availability. Appearance and hourly fees are earned as the work is done. A success fee depends on an outcome that may be years away.
For a practice's records, the useful question per payment is what it was for and when it was earned. Money received for a case that will run for three years is not all earned in the year it arrived.
Clients deduct, and clients are slow
Corporate clients paying for professional services generally deduct an amount before paying and remit it in your name. Collect the certificate for each payment: it is credited against your own tax, and in a practice with corporate clients the amounts add up over a year.
Individual clients typically deduct nothing, which means the full amount arrives and the tax on it is entirely your responsibility to set aside. Practices with a mix of both should be careful not to assume the deductions on corporate work cover the tax on private work. They do not.
Practice costs and staff
A practice has real costs: office rent, staff, professional dues, continuing education, research subscriptions, filing costs not reimbursed, and equipment.
Staff are the item most often handled loosely in small practices. Secretaries, paralegals, and messengers are usually employees, with the obligations that attach. Occasional researchers may be independent. Whichever they are, the arrangement should be deliberate and documented.
Practical footing
Keep client money in a separate account, with a ledger per client showing what came in and what was disbursed.
Record fees and reimbursements as two different things, always.
Issue proper documents for fees received.
Collect withholding certificates from corporate clients.
Set aside tax from private client fees as they arrive, since nobody has deducted anything.
Running a practice and unsure how to treat money held for clients? Ask AskOnward for a plain answer from the official BIR rules, so your income figures show only what is actually yours.
This article is for general information and is not affiliated with the government. For official forms and the latest rules, see the Bureau of Internal Revenue at bir.gov.ph.