How to Optimize Estimated Tax Payments as a New Partner
For attorneys who recently made partner, one of the most jarring shifts isn’t the title or the compensation—it's the tax structure. Moving from a W-2 employee to a K-1-receiving partner means you’re now responsible for managing your own taxes, including estimated quarterly payments to the IRS and, often, state tax authorities.
Failing to understand how this works can lead to underpayment penalties, cash flow strain, or an unexpectedly large April tax bill.
In this article, we’ll break down how estimated taxes work for new law firm partners, why they matter, and—most importantly—how to optimize your approach so you can stay compliant, avoid surprises, and protect your cash flow.
Why Partners Must Make Estimated Tax Payments
When you were a W-2 employee, your firm withheld income taxes from your paycheck and remitted them directly to the IRS and your state. You never had to think about it.
As a partner, you’re no longer on payroll. You’re considered self-employed and taxed on your share of the partnership’s income, reported on a Schedule K-1—even if that income hasn’t been distributed to you yet (a concept known as phantom income, which we covered here).
Since there’s no automatic withholding, you’re now required to make quarterly estimated tax payments throughout the year.
Federal Estimated Tax Deadlines
For individuals, estimated tax payments are due on the following schedule:
April 15
June 15
September 15
January 15 (of the following year)
These payments cover:
Federal income tax
Self-employment tax (Social Security and Medicare, currently 15.3% on the first $168,600 in income for 2024)
The Net Investment Income Tax (3.8% on certain income if you exceed AGI thresholds)
In addition, you may owe state and local estimated taxes, which often follow similar schedules.
How Much Do You Need to Pay?
The IRS requires that your estimated tax payments total at least the lesser of:
90% of your current year’s tax liability, or
100% of your prior year’s tax liability
(or 110% if your adjusted gross income was over $150,000)
This is referred to as the “safe harbor” rule. Meeting this threshold protects you from underpayment penalties—even if your income ends up much higher.
However, hitting safe harbor doesn't protect you from a large balance due at filing time. That’s why optimizing your estimated tax payments is about more than avoiding penalties—it’s about proactively managing your cash flow and tax exposure.
Step-by-Step Guide to Optimizing Estimated Taxes as a New Partner
Let’s walk through the strategic process attorneys should follow in their first year of partnership.
1. Estimate Your Annual K-1 Income Early
Start by getting a realistic projection of your partnership income for the year.
Ask your firm:
What is my guaranteed payment, if any?
What is the expected profit allocation range?
When are distributions typically made?
Are tax draws issued, or am I responsible for all payments?
Be conservative—many new partners underestimate earnings and get hit with a surprise in Q1 of the following year when the K-1 arrives.
Action Step: Have your CPA model your projected K-1 income based on prior year firm performance and your expected draw.
2. Break Down the Tax Liability
With your income projection in hand, calculate your:
Federal income tax, using current marginal brackets
Self-employment tax on earned income (which includes your share of firm profits and guaranteed payments)
Net Investment Income Tax, if applicable
State and local taxes, based on residency and sourcing rules
Remember, many law firm partners owe tax in multiple states due to nexus or revenue-sourcing rules—even if you live and work in one place.
Action Step: Build a full-year tax projection with all jurisdictions accounted for. This is not something to estimate casually.
3. Create a Quarterly Payment Schedule
Once you’ve modeled your expected tax liability, divide it into four payments. Avoid the mistake of underpaying in the first half of the year and trying to “catch up” later—doing so can still trigger underpayment penalties.
Your CPA or tax software should help you prepare:
Form 1040-ES for federal payments
Equivalent state vouchers or electronic payment setup
City or local business tax estimates (in jurisdictions like New York City or San Francisco)
Action Step: Automate payment reminders or schedule them in advance using IRS Direct Pay and your state’s e-file portals.
4. Maintain a Dedicated Tax Reserve Account
Law firm income is often uneven. You might receive partner draws quarterly or even semi-annually, while your estimated taxes are due every quarter, like clockwork.
To avoid cash flow strain:
Open a separate high-yield savings account
Transfer 30% to 45% of each distribution into that account
Label it clearly: “2026 Tax Reserve” or similar
This buffer gives you peace of mind and eliminates the temptation to spend income that will ultimately go to the IRS.
Action Step: Automate transfers from your operating account into the reserve account as soon as partner draws hit.
5. Monitor Income and Adjust Payments Quarterly
As the year progresses, your actual income may diverge from your original estimate. You should revisit your projections and adjust payments accordingly.
Examples of when to recalculate:
You receive a larger-than-expected profit distribution
The firm’s quarterly financials indicate higher-than-budgeted revenue
Your personal circumstances change (e.g., move states, buy/sell a home, increase deductions)
This is especially important if you’re aiming to pay 90% of current year tax rather than relying on prior-year safe harbor.
Action Step: Have your CPA run an updated tax projection in late June and again in November to fine-tune your Q3 and Q4 payments.
6. Use Withholding Strategically (If Available)
If you or your spouse has W-2 income, consider adjusting withholding on that income to cover part of your joint tax liability. Withheld amounts are considered paid evenly throughout the year, which can help offset uneven estimated tax payments.
This is especially useful if your K-1 income is lumpy or deferred until late in the year.
Action Step: Have your CPA evaluate whether adjusting W-2 withholding can reduce the burden of quarterly estimates.
7. Understand Your State’s Estimated Tax Rules
Each state has its own rules. Some common variations:
California and New Jersey front-load a higher percentage of the annual estimated tax liability into the first two payments
New York requires nonresidents to make estimated payments on income sourced to New York firms
Some states allow Pass-Through Entity Tax (PTET) elections, which may reduce your need for personal estimated payments
Action Step: Confirm that you are following the correct schedule and amounts for every state in which you have tax obligations.
8. Don’t Ignore Local Taxes
Attorneys in cities like New York, San Francisco, or Philadelphia may be subject to city-level business or self-employment taxes, which are often due on the same quarterly cycle.
Missing these can result in penalties and late fees.
Action Step: Ask your CPA whether you are subject to local business taxes and how to remain compliant.
Common Mistakes to Avoid
MistakeWhy It HurtsRelying on prior-year safe harbor when income is increasingCreates a massive tax bill next AprilUnderpaying in Q1 and trying to catch upStill results in penaltiesNot accounting for multi-state incomeCan lead to underpayment and state auditsUsing personal checking accounts to manage tax paymentsLeads to disorganization and missed paymentsIgnoring city-level taxesRisk of penalties and legal exposure
Final Thoughts
As a new partner, estimated taxes are not just a compliance obligation—they're a financial management discipline. Done right, they help you:
Stay in control of your cash flow
Avoid penalties and interest
Reduce stress during tax season
Make better strategic financial decisions throughout the year
But estimated tax planning is only as good as the assumptions and systems behind it. The more unpredictable your K-1 income or your firm’s distributions, the more proactive you need to be.
Want help building a tax strategy that fits your new partner income?
Schedule a consultation with Balanced Capital and build a plan that protects your cash flow and keeps the IRS off your back.