How to Separate Operating and IOLTA Payments Without Confusion in Bill

Law firms manage two very different money streams: Operating funds and IOLTA (Interest on Lawyers’ Trust Accounts). These funds must never be mixed—yet many firms find it hard to keep them separate when using payment platforms like Bill.com.

Bill.com streamlines payables, but without the right setup it can blur the line between operating and trust accounts. This guide explains why that happens and how to configure Bill.com so the separation stays clear, compliant, and easy to reconcile.

Operating vs. IOLTA (Quick refresher)

• Operating funds: Your firm’s money for day-to-day costs (payroll, rent, utilities, supplies).

• IOLTA funds: Client money held in trust, used only for client matters per instructions/regulations.

Mixing these funds is an ethical violation, not just a bookkeeping mistake. Consequences can include bar discipline, fines, and reputational damage. Robust controls are non-negotiable.

Understanding the Difference: Operating vs. IOLTA Funds

Operating funds

• Definition: The firm’s own money used for day-to-day operations.

• Typical expenses: Rent, salaries, office supplies, utilities.

• Role: Keeps the practice running; reflects operational cash flow.

• Risk if low: Missed obligations can harm service quality and overall stability.

IOLTA funds

• Definition: Client funds held in trust; do not belong to the firm.

• Handling: Must be kept separate in a dedicated trust account.

• Use: Only for client-related costs or as directed by client/law.

• Interest: Earns interest that is directed to legal aid/public interest programs.

Why mixing is serious

• Not a simple error: It’s an ethical violation with potential legal consequences.

• Controls required: Clear segregation, rigorous bookkeeping, and regular audits.

• Records: Maintain meticulous transaction logs; allocate any IOLTA interest correctly.

• Outcomes: Protects the firm from discipline/fines and reinforces ethical client care.

Ongoing education & compliance

• Jurisdiction matters: Rules vary by state/region—stay current.

• Training: Provide continuous staff training on trust-account obligations.

• Resources: Use state bar materials and workshops for best practices.

• Culture: Promote accountability, transparency, and trust-centric processes.

Dimension	Operating Funds	IOLTA (Trust) Funds
Ownership	Firm’s money	Client’s money
Purpose	Day-to-day firm expenses	Client matters only
Account	Operating bank account	Segregated IOLTA trust account
Interest	Retained by firm (if any)	Directed to legal aid/public interest
Typical Uses	Payroll, rent, utilities	Filing fees, experts, client disbursements
Controls	Standard AP controls	No commingling; client-level ledgers; restricted access
Reconciliation	Regular bank/GL	Monthly 3-way (bank ↔ client ledger ↔ GL trust liability)

Read more: Why More Law Firms Are Using Bill.com to Manage IOLTA Disbursements

Challenges When Using Bill.com for Law Firm Payments

Typical Bill.com setup for general business payments

Bill.com is designed primarily for general business payments. Most companies run a single AP/AR workflow: vendors are set with terms, invoices are approved, and payments are scheduled in one streamlined process. This works for many businesses, but law firms have more complex needs. The default setup doesn’t distinguish operating expenses from trust disbursements, and managing client funds in trust accounts adds a level of precision that standard practices don’t address—because any misallocation can carry serious ethical and legal implications.

Why this default setup can lead to commingling funds

When Bill.com treats all vendors and payments the same, firms can accidentally pay IOLTA expenses from operating accounts (or vice versa). Without clear distinctions, the system won’t flag errors. Over time, small mistakes accumulate, complicate reconciliation, and risk violations of state bar rules. A vendor tied to a client matter, for example, might be paid from the operating account if the profile isn’t clearly marked as trust-related, reducing visibility and undermining transparent client reporting.

Specific pain points: mis-categorized vendors, lack of clear “trust vs operating” distinction, reconciliation headaches

A frequent issue is mis-categorized vendors. One vendor may serve both operating and trust needs; without segmented profiles, payments are misapplied. Bill.com doesn’t natively enforce a “trust vs operating” split, so firms must create internal controls. Otherwise, bookkeeping teams spend hours untangling transactions—fueling reconciliation headaches and audit risk, and diverting time from client service or strategic work. Establishing checks and balances, and training staff on proper categorization, helps mitigate these risks and supports compliance.

Read more: Best Practices for Syncing Bill.com with QuickBooks for Trust Accounting

Best Practices to Separate Operating and IOLTA Payments in Bill.com

Structuring Vendor / Payee Profiles

Start by creating separate vendor profiles for operating and trust-related payees. For vendors who provide services in both contexts, establish two profiles-one for operating payments and one for trust payments.

Use clear naming conventions, such as appending “(Trust)” or “(Operating)” to vendor names. This simple step reduces confusion and ensures that payments are routed correctly.

Using Classes, Categories or Departments

Bill.com allows the use of classes, categories, or departments to tag transactions. Leverage these features to mark payments as either operating or IOLTA-related.

Assign each payment to the appropriate class. This tagging helps your accounting software sync with Bill.com, making it easier to generate reports and reconcile accounts. It also creates an audit trail demonstrating that funds were handled correctly.

Approval Workflows

Implement approval workflows that include checks for fund type. For example, require that any payment tagged as IOLTA be reviewed by a designated trust account manager before processing.

This additional layer of oversight helps catch errors early and reinforces compliance protocols. It also provides accountability, as approvers sign off on the correct use of funds.

Recording Payments in Your Books

When payments are made through Bill.com, ensure they are recorded accurately in your accounting system. Use the classes or categories assigned in Bill.com to post transactions to the correct accounts.

Reconcile trust account transactions separately from operating accounts on a regular basis. This practice prevents commingling and makes it easier to identify discrepancies.

Periodic Review & Audit

Schedule periodic reviews of your Bill.com setup and payment records. Regular audits help catch any misclassifications or errors before they become bigger problems.

Use reports filtered by classes or categories to verify that all IOLTA payments were made from the trust account and operating payments from the operating account. Document these reviews to demonstrate compliance during external audits.

How Irvine Bookkeeping Supports This Process

Irvine Bookkeeping specializes in supporting law firms with their unique financial needs. Their team understands the critical importance of separating operating and IOLTA funds and the challenges posed by tools like Bill.com.

They assist firms in setting up vendor profiles, classes, and workflows tailored to law firm compliance standards. Beyond configuration, Irvine Bookkeeping provides ongoing reconciliation services, periodic audits, and training to ensure that your team maintains best practices.