How to Setup Law Practice Retainers in QuickBooks Online

Have you ever tried to get law practice retainers to go correctly into QuickBooks Online?  It isn’t hard once you get it setup but it can be utterly confusing to get it setup properly.  Hi! I am Brandy Derrick with Legal Ease Bookkeeping, LLC and I specialize in bookkeeping for solo practitioners and small law firms.  You can follow along with this video:

Now, the first thing to understand is that retainers are a liability in accounting terms.  Even though you are depositing money, it isn’t really yours until you earn it.  If you never work on that case, you will need to refund that money to your client.  This is important to understand because if you go to record a deposit of a retainer into QuickBooks without setting up the back-end properly, it will result in your financial statements being off and having an accountant tell you that you owe taxes on that money at the end of the year.  I know that you want don’t want to pay taxes on that money so let me walk you through getting your trust accounts setup properly.

To set this up properly you need to follow these easy steps:

  1. Create a current liability account. To do this, click Transactions on the left hand side and click Chart of Accounts.  Next, click New in the top right corner.  For the Category Type, you want to select Other Current Liabilities.  Under detail select Trust Accounts – Liabilities.  In the name section you can choose to make this something that makes more sense to you.  For example, you could name it Client IOLTA Account- Unearned.  Now you are done creating this liability account, so click Save and Close.
  2. Next you need to create two products or services that will feed into that newly created liability account. You could be able to click All Lists near the top left part of the screen under the words “Chart of Accounts.” If you have moved away from that screen you can click the gear icon in the top right and select Al Lists.  Click Products and Services.  Click New in the top right corner. Select Service as the Product/Service type. Name the first service “Pre-Paid Retainer” or something that makes sense to you.  Under income account, select the liability account you made in the previous step (Client IOLTA Account- Unearned). Uncheck the box that says Is Taxable.  Click Save and New.
  3. Now we are going to create that second service that will feed into the newly created liability account. Name the second service “Earned Retainer” or something that makes sense to you. Under income account, select the liability account you made in the previous step (Client IOLTA Account- Unearned). Uncheck the box that says Is Taxable. Click Save and Close.

You are all setup and ready to rock and roll.  Yay!!!  Now what? Where these accounts come into play is when you are invoicing a client, receiving payments and transferring the money from your IOLTA account bank account to your operating account.

For example, let’s say you meet with a client.  You decide to take their case and they pay you a $1000 retainer to hire you.  The first thing in QuickBooks online that you need to do is add an invoice to this client.  You will click on customers on the left hand side.  Select the customer you want to invoice or add a new customer.  Click Invoice under New transaction in the top right corner.  Under product/service select Pre-Paid Retainer and enter $1000.  Click save.

You have already received the check payment for this retainer so now you need to receive payment in QuickBooks.  Click Receive payment in the top right corner.  Enter the info that is needed (payment date, method, amount, etc.) and if this check is getting deposited all by itself, select that you are depositing the check into your IOLTA account.

To make sure this is all entered correctly, you can look at your balance sheet.  You do this by clicking on reports on the left hand side.  You may need to change the date so your balance sheet shows the date you entered this transaction.   You should see that your IOTLA bank account shows $1000 in it and so does your IOLTA liability account.

Side Note: These two number should always match.  If they don’t, there is a problem.  It could be that you didn’t transfer money out like you should have and so you are owed money from the IOTLA account.  It could be that a transfer wasn’t recorded properly so you moved the money out of the IOLTA account like you should have but didn’t put into QuickBooks correctly.  It could be that you transferred money out of the IOLTA account when you shouldn’t have.  Making sure these two numbers match is very important in making sure your trust accounting is being done correctly.

Back to our client who we received a retainer for $1000.   You have now done $300 worth of work for this client and need to transfer the money out of the trust account and into your operating account.  You would go to your bank website and actually transfer the money, but there are two things you need to do to record this transaction properly in QuickBooks.

The first think you will do is click the plus sign at the top middle to add a transaction.  You will then click Transfer which is under Other on the right side. The transfer funds from will be your trust bank account and the transfer funds to will be your operating bank account.  The transfer amount is $300 because that is the amount of work you billed.  In the memo section, you could include the name of the client to make it easier to remember what the transaction is for in the future.  Also you could attach your invoice to the transfer so it is easy to pull up just in case you ever need it in the future.  When you are done, click Save and Close.

Next, you are going to move the money from that liability account we created to an income account. Click on clients on the left hand side and go to the client you did the work for.  Click create invoice on the right hand side.  You are going to make a zero dollar invoice that has two lines.  On the first line, the product/service is going to be Billable Hours (or whatever you call the service you preformed).  It will be in the amount of $300.  On the second line, the product/service is going to be “Earned Retainer” (the service we made at the beginning) and the amount is going to be -$300.  This will make it so your liabilities will decrease and your income will increase.

Now, you know how to setup law practice retainers in QuickBooks Online.  Whew, I feel like that is a lot of information and I hope I explained it simply enough for anyone to understand.  Please comment below if you have any questions!  Also if you would like help setting this up, click here and I would be happy to help you 🙂