How to Set Up a Client Trust (IOLTA) Account in QuickBooks Online

If your practice holds money that belongs to clients — retainers, settlement funds, or advance costs — the way you set that up in QuickBooks Online decides whether you can prove, at any moment, that every dollar is accounted for. Getting the structure right from the start is far easier than untangling it later, and it comes down to a few accounts arranged the right way. Here is how to build it.

A note on scope: this is the bookkeeping setup. The rules for what your jurisdiction requires of a client trust or IOLTA account belong with your attorney or compliance advisor, and any tax questions belong with your CPA.

The two accounts every trust setup needs

A dedicated trust bank account. In QuickBooks Online, add the account as a Bank account and set the detail type to 'Trust account.' This mirrors the separate bank account your financial institution holds the client funds in, and it should never be blended with your operating checking account.

A trust liability account. Create an Other Current Liabilities account and set the detail type to 'Trust Accounts – Liabilities.' Because you are holding this money rather than earning it, it belongs on your books as a liability — something you owe back to clients — never as income. This parent account represents everything you owe clients collectively, and it should always equal the balance in the trust bank account.

Those two accounts moving together — the bank on the asset side, the liability on the other — is the backbone of the whole setup. When one changes, the other changes by the same amount.

One sub-account per client: your client ledgers

A single lump liability tells you the total you owe, but not how much belongs to each client — and that per-client detail is the whole point of trust accounting. Under the trust liability parent, create a sub-account for each client, or each matter, using consistent naming such as 'Trust – Client Name.' Check the 'Is sub-account of' option so every one nests under the parent.

These sub-accounts are your individual client ledgers. Added together, they must always equal the parent liability total, which in turn equals the trust bank balance. Set up this way from day one, your books can show exactly how much of the trust account belongs to each client at any time.

Recording the everyday trust transactions

Receiving a retainer into trust. Record the deposit into the trust bank account and assign the other side to that client's trust liability sub-account. This raises both the bank balance and what you owe that client by the same amount — and keeps the money out of income, where it does not belong.

Paying a client cost from trust. When you disburse funds on a client's behalf, record the payment from the trust bank account and assign it to that client's sub-account. Both the bank and the client's ledger come down together. A client's sub-account should never go below zero, since no client can spend more than they have on deposit.

Moving earned fees to operating. Once fees are earned and invoiced, transfer that amount from the trust bank account to your operating account and reduce the client's trust sub-account by the same amount. When money becomes yours is a question for your attorney; the bookkeeping job is to record the transfer so the client ledger stays accurate.

Why the setup matters: the three-way tie

Built this way, your trust account supports a three-way reconciliation — the monthly check that confirms the trust bank balance, the trust liability, and the sum of every client ledger are all the same number. That check is only possible if the accounts are structured correctly in the first place, which is exactly what this setup gives you. Skip the per-client sub-accounts and the reconciliation has nothing to compare against.

The setup mistakes we see most

Three errors turn up again and again: recording retainers as income instead of a liability, which overstates revenue and hides what is owed; using one lump trust liability with no per-client sub-accounts, so there is no way to prove each client's balance; and running trust money through the operating account, which blends client funds with the business. Each one is far easier to avoid at setup than to correct later — though correcting it is exactly what a QuickBooks Online cleanup is for.

Frequently asked questions

What account type is a trust account in QuickBooks Online? The trust bank account is a Bank account with the detail type 'Trust account,' paired with an Other Current Liabilities account using the detail type 'Trust Accounts – Liabilities' for what you owe clients.

How do I track each client's balance? Create one sub-account per client under the trust liability parent. Each sub-account is that client's ledger, and together they equal the parent total and the trust bank balance.

Should a retainer be recorded as income? No. Money held in trust is a liability until it is earned. Recording a retainer as income overstates revenue and misrepresents what you still owe the client.

QBO Cleanups brings Advanced QBO ProAdvisor certification and 20+ years of bookkeeping experience to trust and IOLTA account setup for law practices and property managers. If you want your trust account structured right from the start — or straightened out if it is not — book a call and we will help you set it up.