Credit Card Processing and IOLTA
That depends on whether the client is paying an invoice or paying a retainer for use to bill against future charges. When the payment from a client is a retainer, that is where IOLTA comes into play. Lawyers have IOLTA or trust accounts at banks that are separate and distinct from the law firm’s operating account. The advance payments or retainers to go the trust account, and the interest from those accounts typically goes towards statewide legal services and not the clients. Many lawyers do not accept retainer payments by credit card because of the steps required to accept a credit card into a trust account. However, if they do, an IOLTA merchant account comes into play.
In reality, not much changes with credit cards. With IOLTA, your primary considerations remain whether the clients’ funds should be directed to an IOLTA account or the operating account. However, there is a growing trend with more law firms using credit cards for retainers. In either case, accepting credit cards will be a matter of linking the proper bank accounts to your merchant account and ensuring that you use the right account for each transaction.
You’ll need to work with a credit card processor that’s set up to deposit and withdraw from your correct accounts. Fortunately, there are many such companies, as we’ll discuss later in this article.
- IOLTA Overview
- IOLTA Bank Accounts
- IOLTA Merchant Accounts
- Choosing a Credit Card Processor for IOLTA
As you probably already know, IOLTA is a method of fundraising to provide legal aid to low income people by pooling the interest that lawyer trust accounts generate.
Lawyers who receive funds belonging to a client place those funds in an interest-bearing account. These funds may be for a variety of legal purposes, such as court fees, settlements, and retainers or fees paid for work not yet performed. Funds from multiple clients go into one IOLTA account, thus increasing the balance on which interest accrues.
If the amount of money from an individual client is sizable or will be held for a long time, the interest goes to the client whose fund are held in the account.
However, in many cases, the amounts are smaller or will only be held for a short period. If the amount of the funds will not earn interest income for the client that would exceed the cost of setting up an account individually to hold the funds, the funds will be deposited in an IOLTA account and the interest remitted to the state IOLTA program. At no time can attorneys receive the interest from client funds held in a trust account.
Interest on IOLTA accounts is not taxable.
Where does IOLTA apply?
According to the American Bar Association website, 49 out of 53 United States jurisdictions have mandatory IOLTA programs. Attorneys in those states are required to participate. Four jurisdictions have “opt-out” IOLTA participation, where attorneys participate unless they explicitly opt out. As of 2017, the ABA website indicates that there are no longer any “voluntary” IOLTA jurisdictions in the United States. All 50 states, Washington DC, Puerto Rico, and the Virgin Islands have either mandatory or opt-out IOLTA programs.
The “opt out” jurisdictions include:
Attorneys in all other locations must participate in IOLTA.
IOLTA Bank Accounts
For the purposes of IOLTA, the bank account where the funds are held is a crucial factor. You’ll need to use an IOLTA account specifically. Every jurisdiction maintains a list of financial institutions that offer IOLTA accounts.
The financial institution will be responsible for remitting interest to the IOLTA program; it will not be the attorney’s responsibility. However, you as the attorney may need to confirm that your accounts are set up to do so. You’ll receive reports from the financial institution detailing the interest paid to the program.
IOLTA Merchant Account
While it’s important to have an IOLTA bank account specifically equipped to properly handle and disburse interest, it’s just as important to have a merchant account for IOLTA payments if you accept credit cards.
The main concern is that processors should not deduct credit card processing fees from an IOLTA account. Rather, those fees (and other business expenses) must come from your operating / business bank account.
You’ll need to secure an account with a credit card processor that will deposit IOLTA transactions into your IOLTA account, but deduct fees for credit card processing from the operating account. You may also wish to have a separate merchant account set up for accepting non-IOLTA payments.
Multiple Merchant Accounts
As an attorney, there may be situations where you accept payments that won’t go into the IOLTA account. In those instances, you should not use your IOLTA-connected merchant account. Doing so can create the complicated (and against IOLTA rules) situation of commingled funds.
Instead, you should have a separate merchant account connected to your non-IOLTA business bank account. In this situation, your processor will deposit funds and withdraw processing fees from the same non-IOLTA bank account.
Credit Card Equipment with Multiple Merchant Accounts
Some attorneys wonder if they need different credit card machines if they have two or more merchant accounts. The answer is: maybe. Some credit card machines allow you to use the same machine for different Merchant IDs (MIDs) which would mean you don’t need a separate machine. However, not all credit card equipment has that capability. Be sure to confirm multi-MID capacity before purchasing a machine.
Another consideration is that if you use the same machine, you’ll need to remember to run IOLTA-eligible transactions through the MID connected to your IOLTA account and non-IOLTA transactions through the MID connected to your standard account. If it’s too much of a hassle to keep those separate or if you just prefer the visual reminder of different machines, you can select multiple machines.
In order to cut down on equipment costs, you could choose two different styles of processing equipment and opt for a low cost model. For example, you may opt for a basic countertop machine for your IOLTA payments and a smartphone credit card reader for non-IOLTA. Another option is a virtual terminal with attached USB reader. Smartphone readers and USB readers are both less costly than countertop credit card machines, but provide security and the lower costs of swiping cards.
Choosing a Credit Card Processor for IOLTA
The good news is that many processors can provide merchant accounts and help you comply with IOLTA.
While there are companies that market themselves exclusively to lawyers, it’s not necessary to use those companies. You’ll need to work with a processor that is familiar with lawyer accounts, and can deposit funds into one account (your IOLTA bank account) while deducting processing fees from a second account (your operating bank account.)
CardFellow works with several credit card processors that provide merchant accounts to attorneys. You’ll simply designate your IOLTA account for deposits and operating account for fee withdrawals. Additionally, you’ll benefit from CardFellow’s protections, including our rate guard feature to prevent markup rate increases, no cancellation fees, free ongoing statement monitoring to ensuring costs stay low, and more. And if you need help comparing costs to lawyer-specific credit card processors, we’re happy to help you
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