Becoming a partner at a law firm is a goal many lawyers spend their careers striving to reach. Once you’re there, however, you must re-evaluate your personal financial and tax strategies as you shift from employee to owner. If you recently were promoted to partner and have reviewed your personal financial strategy, keep reading.  

Personal financial considerations for new partners 

Many of the personal financial decisions partners need to make depend on two things: the partnership agreement and whether you became an equity (owner) or non-equity partner. The partnership agreement will detail a lot of information about compensation and benefit structures, as well as equity structures and required capital contributions. Factors include: 

• Capital contributions: As an equity partner, there is a chance you will be required to put capital into the law firm. Many firms allow a period of time to make the contributions. Another option to paying over time is to finance initial capital contributions.  
• Benefits changes: Many partners see changes to benefits plans, including eligible retirement benefits and paying for insurance premiums that were previously covered.  
• Estate planning updates: With the move from employee to owner and an increase in pay, changes may be needed to your current estate plan.  
• Risks associated with ownership: Understanding your law firm’s business classification is essential to know the risks you are taking on as an owner. Limited Liability Company (LLC) and Limited Liability Partnership (LLP) designations provide different risks.  
• Draw compensation structure: Know whether your new pay structure is based only on a draw of earnings or if there is a fixed compensation component as well.  
• Cash flow increases: Review your strategy for managing an influx in cash flow. Can you increase savings, pay down debt, or a combination of the two? 

Tax considerations for partners 

Switching from an employee to an owner of a law firm also provides additional tax considerations. You’ll most likely see a change from a Form W-2 employee to a Form K-1 owner when it comes time to file your taxes. Keep the following in mind: 

• Tax withholdings: Firms are not required to withhold income taxes for owners and partners are required to manage their required quarterly tax payments. This tax payment should fluctuate based on the performance of the firm due to the relationship between the draw and this financial metric.  
• Multi-state tax filings: If your firm does business in, or has employees in, multiple states, you may be required to file taxes in each of those states.  
• New deductions: You may be able to deduct any funds spent on health insurance premiums for yourself or your family, as well as interest on loans used to pay capital contributions to the firm.  
• Retirement planning: The partnership agreement should outline any retirement savings benefits the firm offers. This could be a defined contribution plan or 401(k). Contributing to eligible, tax-deferred retirement accounts can help reduce tax liability for equity and non-equity partners. The contribution limits change every year. The limit was $58,000 for 2021 and is $61,000 for 2022. These contribution limits may be lower if 100% of your compensation is less than the contribution limit for the year.  

Once you’ve thoroughly reviewed your new partnership agreement, meeting with your tax planner and financial advisor can help you outline a new plan for managing your finances moving forward. Contact us today to get started!