By Joel Chouinard, ChFC®
November 2, 2023
Becoming a law firm partner should be an exciting time in your life. All of the hard work that you’ve put in as an associate is finally paying off. Not that you can just hit cruise control from now until retirement, but you get the point—you’ve made it, and you should celebrate! Beyond the recognition, partnership also comes with some significant financial advantages, such as increased compensation (although some new partners may feel like they're taking less money home in the first couple of years). But it may also come at a time in your life where things are getting more complex. You may be raising a family with young kids, outgrowing your first home, saving for college, etc. Because you are now technically a business owner, your taxes may also become more complex. To help you with the transition, I put together 6 financial tips that every senior associate should follow ahead of making partner.
1. Organize your finances
With such a big milestone ahead, this is a great time to get organized with your finances. Think of this as doing a spring cleaning of your financial house. You can do this either by creating a good ole’ Excel spreadsheet, or you can use an account aggregator software, such as Mint.com (I personally use Monarch Money for my clients). Either way, the goal should be to map out all of your assets and liabilities, so you can assess where you currently stand. I like to organize assets and liabilities in the following categories:
Financial assets: bank accounts, 401(k)s, IRAs, health savings accounts, 529 accounts, custodial accounts, brokerage accounts, crypto accounts, etc.
Insurance policies: life, disability, health, and property & casualty (home, auto, umbrella, boat, etc.).
Real assets: primary home, vacation home, rental property, land, collectibles, etc.
Liabilities: mortgage, credit cards, auto loans, student loans, personal loans, etc.
This is also a good time to review who is the beneficiary on some of these accounts. For example, retirement accounts and life insurance policies are passed down directly to the beneficiaries on file, avoiding probate altogether. It’s also a good time to dust off your estate documents if it’s been a while since you last reviewed them.
2. Understand how you get paid…and pay taxes
Let’s face it, compensation as a law firm associate is pretty straightforward. But as a partner, you are now technically considered a business owner, and compensation and taxes can get a little bit more complex.
Most firms today use a subjective formula for how partnership compensation is determined. This means compensation packages may vary significantly between firms, but also between equity and non-equity partners at those firms. That said, regardless of your title and how your firm is structured, your new compensation may take up to three different forms: guaranteed payments to compensate you for your services provided to the firm (both legal and admin work), partner distributions, or a performance bonus. Note that the compensation structure might differ significantly for law firms structured as professional corporations. This information should all be provided to you in your partnership compensation memo.
The major difference between W2 employees (associates and employees) and self-employed individuals (partners) is that the firm no longer withholds taxes on your behalf. It is now your responsibility to pay your taxes through quarterly estimated tax payments. Quarterly estimated taxes include not only federal income tax, but also the FICA taxes (Social Security and Medicare), and in some cases, state taxes.
As you navigate through this transition, make sure you understand how you’ll get compensated and how you’ll get taxed in your new role. The last thing you need is to get hit with penalties for failing to pay your quarterly taxes. If you have any questions, or you are unsure about something, either reach out to your firm’s compensation department, or go to tip #3.
3. Look for a reputable tax professional
As I mentioned above, taxes as a partner can become quite complex, especially if your firm has offices in multiple states*. Working with a reputable tax professional will help you in three regards:
- Quarterly estimated tax payments: Your tax professional, along with your financial advisor, should help you map out your potential income for the year and help you remit the correct amount of taxes each quarter. They should also factor in your spouse’s income, if applicable, and any income tax deductions (401(k) contributions, health insurance premiums, health savings accounts contributions, etc.). The goal should be to roughly break even at the end of the year (i.e., not owe taxes, but also not get a huge return).
- State tax returns: If your firm has offices in multiple states, as a partner, you must pay income taxes in those states in addition to your resident state. Most firms should offer a composite tax return, where the firm remits taxes and files a return on your behalf. However, it may not always make sense to opt into the composite returns. You may benefit from filing individually in those states, depending on your situation.
- Tax planning: In my experience, most tax preparers are reactive, meaning they take a look at what happened in the previous year and see if they can save you on taxes. A good tax preparer should also be proactive and look for potential tax savings opportunities in the future. This may mean having a conversation with you about contributing to a Roth 401(k) versus a pre-tax 401(k) or making charitable contributions. Note that you should have these conversations in conjunction with your financial advisor, so everyone is on the same page!
4. Create a savings account earmarked for taxes
Maybe this is my type-A personality coming out, but I like my things compartmentalized—including my bank accounts. As a partner, you will be required to pay quarterly taxes and failing to do so could lead to tax penalties. I typically recommend opening a separate savings account specifically for paying your taxes. Every paycheck, put a percentage of your income, which you’ve previously determined with the help of your tax professional and your financial advisor, directly into that account. Some firms might even allow you to automatically split your paycheck into two different accounts. Once taxes are due, you simply pay them out of that account. This reduces the risk of you not having the money on hand to pay your taxes.
5. Review your employee benefits
As a partner, most of your employee benefits are likely no longer subsidized by your firm. This means you may pay much more for the same exact benefits that you had access to as an associate. For example, health insurance is likely going to be much more expensive, especially if you have a family. If you have a spouse who is working, take a look at their benefits as well and see if it would make sense to jump onto their plan. That said, you may still have access to some very important benefits, such as group life insurance and disability insurance. I’ve seen some firms even pay for an umbrella policy for their partners. It’s important that you review what is offered for partners and the cost associated with each benefit.
6. Dust off your budget
I feel like budgeting always somehow makes its way onto my list of tips for my blog. That’s because budgeting isn’t a one-time thing that you can set and forget. You always have to revisit and update your budget as your life changes. And becoming a partner at a law firm is a big change! Having a good handle on your spending will not only make you more confident as you make the transition, but it will help you when the time comes to pay your quarterly taxes. For a complete step-by-step guide to creating and following a budget, read my blogpost from June 2023.
Final Note
There is no doubt that making partner at a law firm is a huge accomplishment. But it’s safe to say that it comes with added responsibilities at work, at home, and with your finances. Make sure you surround yourself with the right team of advisors, so you can focus on what is most important to you!
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