From Associate to Partner: A Big Tax Shift
By Joel Chouinard, CFP®
January 20, 2025
Making partner at a big law firm is a major achievement, but it also comes with significant changes to how you get taxed.
When you become a partner, you switch from being an employee of your firm to becoming an owner. From an IRS standpoint, there’s a big difference between the two:
- As an associate:
- Wages are reported to you on Form W-2
- Your firm withholds federal, state (if applicable), and Social Security/Medicare taxes on your behalf
- As a partner:
- Income is reported to you on Form K-1
- Your firm no longer withholds taxes — you must remit them to the IRS each quarter
Understanding how you get taxed as an income (or nonequity) partner is crucial to avoiding underpayment penalties and minimizing the impact of taxes on your cash flow. This article will show you how to do that.
📌 Note: If your firm treats income partners as W-2 employees, this article won’t apply to you.
Law Firms Are Pass-Through Entities
Law firms themselves don’t pay taxes because they are set up as pass-through entities.
In the simplest terms:
“Pass-through” means that the net income (or loss) generated by the firm is passed on to its partners, pro-rata, according to their share of the partnership.
As an income partner of your firm, you get your piece of that income — even if you don’t technically own equity in the firm. Your income is now reported to you on Form K-1, and you are liable for the taxes due on that income.
Income Partner Compensation
As an income partner, your income will likely come from two sources:
Guaranteed Payments (Draws)
- The set amount your firm agreed to pay you for your services for the year
- Usually equal to or slightly higher than your base salary as a senior associate
- Paid bi-monthly, just like a regular paycheck
- Some firms split income partners’ compensation between guaranteed pay and “mock” profit distributions each quarter — although the sum of draws and distributions still equals guaranteed pay for the year
Performance Bonus
- Just like associates, income partners can receive an annual bonus based on performance
- Bonus requirements may resemble associates’ requirements, though firms may factor in non-billable performance metrics (e.g., business development)
Income Partner Taxation
As mentioned above, your firm stops withholding taxes when you become an income partner. It’s now your responsibility to make your tax payments directly to the IRS through quarterly estimated payments.
Before we talk about quarterly payments, let’s break down the three components that make up an income partner’s tax liability:
1. Federal Taxes
- Assessed on your taxable income
- Based on your filing status and your tax bracket
2. State and Local Taxes
- Varies depending on your state of residence
- You may owe tax in states where your firm has offices, even if you live in a no-income-tax state
- Example: A partner in Dallas, Texas, may owe California or New York taxes if their firm has offices there
- The good news: your firm is likely filing a composite return, which allows them to withhold a portion of your pay for your state tax liability. This helps minimize the cost of filing multiple returns in multiple states
3. Self-Employment Taxes
As an associate, you paid half of Social Security and Medicare taxes; your firm paid the other half.
As a partner, you now pay the entire 15.3%:
- Social Security: 12.4% (only the first $176,100 earned is subject to the social security tax for 2025)
- Medicare: 2.9% on all taxable income
- Medicare surtax: Additional 0.9% for income above $200,000 (individual) / $250,000 (married)
For more information about self-employment taxes, check out the IRS website.
Quarterly Estimated Tax Payments
Since your firm no longer withholds taxes, you must remit payments to the IRS. This is done through quarterly estimated tax payments.
General process:
- You (and your accountant) calculate your estimated tax liability for the year, based on your projected income, which includes guaranteed payments and potential bonus
- Divide into four equal payments
- Payments are due:
- April 15 (for Jan-Mar)
- June 15 (for Apr and May)
- September 15 (for June-Aug)
- January 15 of the following year (for Sept-Dec)
Note, the IRS assumes you earn income equally throughout the year and assesses underpayment penalties for not paying enough each quarter.
That’s why four equal payments are often the failproof approach — and why many accountants recommend it.
But this approach can create cash flow issues.
Cash Flow Issues
The issue with making four equal tax payments is that, as a partner, your income is often uneven throughout the year.
- You may receive relatively stable income in the first three quarters from guaranteed payments
- Then receive a massive bump in Q4 from your year-end bonus (or profit distribution for equity partners)
Example Scenario
Let’s say:
- Guaranteed pay: $450,000
- Potential bonus: $100,000 (paid in December)
Your accountant suggests you make four equal quarterly tax payments based on making $137,500 per quarter ($550,000 ÷ 4).
In reality, your income is:
- Q1 (Jan–Mar): $112,500
- Q2 (Apr–May): $75,000
- Q3 (Jun–Aug): $112,500
- Q4 (Sep–Dec): $250,000 (if full bonus received)
The problem: In Q2, you earn only $75,000 but owe taxes as if you earned $137,500. This can create a cash flow crunch if you’re not prepared.
Tax Planning Considerations for Big Law Income Partners
Thankfully, there are ways to ease these cash flow issues.
1. Create a “Tax” Savings Account
Since taxes aren’t withheld (except for state composite returns), your paycheck may look bigger than before — but part of it belongs to the IRS.
- Open a separate savings account labeled “Quarterly Taxes”
- Send a percentage or set amount of each paycheck to that account (based on your accountant’s recommendation)
- Consider a high-yield savings account for interest while the money sits
- When payments are due, pull from this account
2. Create a “Partnership Transition” Fund
Taxes are not the only thing that will change when you become an income partner. Your benefits will likely no longer be subsidized by your firm, and you may be required to make a large profit-sharing contribution to your 401(k) ($46,500 in 2025). This could further exacerbate your cash flow issue.
To ease the transition:
- Build a transition fund that covers your first two quarterly tax payments
- Use your previous year’s bonus to fund it
- This does not replace setting aside money each paycheck for taxes
3. Use the Annualized Income Installment Method
One strategy to minimize the impact of uneven cash flow while avoiding underpayment penalties is to use the Annualized Income Installment Method.
- Allows you to pay taxes in proportion to when you earn income each quarter
- Requires filing Form 2210 (Schedule AI)
- Work with a qualified tax/financial professional to determine quarterly payments
- If not feasible:
- Estimate potential underpayment penalties
- If the penalty is small, it may be worth paying to avoid a cash flow crunch in leaner quarters
For a complete guide on preparing your finances before making partner, check out this article.
Final Note
Navigating partnership taxation in Big Law requires careful planning.
By understanding:
- The nuances of self-employment income
- Quarterly payment obligations
- Strategies to smooth cash flow
…you can stay compliant and protect your financial stability.
🎯 If you’re about to make partner and want a tailored plan that works with your cash flow, book a free strategy call with me.
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