The Year You Become Partner: Tax Planning Checklist
Making partner at a law firm is a career milestone that reflects years of billable hours, client development, and strategic positioning. It also comes with a dramatic change in how you’re compensated, taxed, and expected to manage your finances.
If you're about to make partner or have recently transitioned, you're moving from being a salaried employee to becoming a business owner. This shift introduces a host of new tax responsibilities and financial planning decisions—many of which are unfamiliar even to high-earning attorneys.
This guide outlines the critical tax and financial planning considerations to address during the year you become a partner. Use it as a working checklist to avoid missteps, reduce surprises, and make the most of your new role.
1. Understand Your New Tax Classification
Most law firm partners are not employees—they’re self-employed owners of a partnership. As a result, you will no longer receive a W-2. Instead, you’ll receive a Schedule K-1, which reports your share of the firm’s income, deductions, and distributions.
This change has immediate implications:
You're now responsible for your own tax withholding and payments.
You pay both the employer and employee sides of Social Security and Medicare taxes, totaling 15.3% on earnings up to the Social Security wage base.
Even if your firm provides a “guaranteed payment,” it’s still subject to self-employment tax.
Action Step: Engage a tax professional early in the year to understand how your projected income will be taxed and how to structure estimated payments.
2. Prepare for Quarterly Estimated Tax Payments
As a self-employed partner, the IRS expects you to make estimated tax payments four times a year. These payments cover:
Federal income tax
Self-employment tax
State and local income taxes
Any city or business-level taxes that apply to your firm
Missing or underpaying can result in penalties and interest. Many new partners underestimate their first-year obligations and scramble to catch up later.
Federal estimated tax deadlines are:
April 15
June 15
September 15
January 15 (of the following year)
Action Step: Calculate your estimated tax liability using safe harbor rules (100% of last year’s taxes, or 110% if your AGI exceeds $150,000), or, preferably, based on current-year projections.
3. Account for State and Local Tax Complexity
Depending on where your firm operates, you may owe taxes in multiple states. Partnership income is often "sourced" to the states where services are performed or where clients are located, not just where you live.
Complications to be aware of:
You may need to file nonresident state returns.
Some states don’t allow composite returns, meaning you’ll file individually.
Firms may elect Pass-Through Entity Taxes (PTET) in high-tax states like California, New York, or New Jersey—potentially allowing a workaround for the federal $10,000 SALT deduction cap.
Action Step: Review your K-1 with your CPA to understand state sourcing rules and whether your firm participates in PTET elections.
4. Plan for Phantom Income
“Phantom income” is income allocated to you on your K-1 that you haven’t actually received in cash. It’s one of the most unpleasant surprises for new partners.
For example, if your firm closes its books in December and allocates you $75,000 in profit but doesn’t distribute it until March, you still owe tax on that $75,000 in the current tax year—even though the cash hasn't hit your account yet.
Action Step: Ask your firm how distributions align with profit allocations and prepare for the mismatch. Maintain liquidity to cover any tax payments triggered by phantom income.
5. Establish a Dedicated Tax Reserve Account
You are now responsible for managing and remitting all your own tax payments. Because your firm won’t withhold taxes, it's easy to fall behind if you don’t proactively set funds aside.
A good rule of thumb is to reserve 30% to 45% of all distributions for taxes, especially in high-income, high-tax jurisdictions.
Action Step: Open a separate bank account to hold tax reserves. Automate transfers from each distribution or draw to this account to ensure you're covered when quarterly payments come due.
6. Review and Restructure Retirement Contributions
Many newly promoted partners are surprised to learn they can no longer contribute to their firm's 401(k) plan—especially if they’re not receiving W-2 income.
However, new doors open. Depending on how your firm is structured, and whether you have other sources of income, you may now be eligible for:
SEP-IRAs
Solo 401(k)s (if you earn self-employment income outside the firm)
Defined Benefit or Cash Balance Plans
Nonqualified deferred compensation plans (if offered)
These plans often allow for significantly higher contributions than traditional 401(k)s but come with their own complexity.
Action Step: Coordinate with a financial planner to identify which retirement strategies align with your income, tax goals, and savings horizon.
7. Evaluate Health, Disability, and Life Insurance Coverage
As a partner, you may need to self-fund insurance benefits that were previously subsidized or provided by the firm. In many cases:
Health insurance premiums are no longer withheld from payroll
Group disability and life coverage may end or become more expensive
HSA eligibility may change depending on how premiums are paid
Your firm may offer benefit options through the partnership, but you’ll likely need to make elections and manage payments on your own.
Action Step: Review your firm’s benefits structure for partners and fill any coverage gaps with private insurance or firm-sponsored alternatives.
8. Plan for Your Capital Contribution or Buy-In
Most firms require new partners to make a capital contribution—essentially buying into the firm. The amount can range from tens to hundreds of thousands of dollars.
Payment methods may include:
Personal savings
Promissory note (paid back over time from future distributions)
Withholding from partner draws
While not deductible, capital contributions increase your tax basis in the partnership—an important factor in tax planning.
Action Step: Clarify the amount, timing, and payment structure of your buy-in, and work with a CPA to model how it impacts your cash flow and basis.
9. Begin Tracking Your Tax Basis in the Partnership
Tax basis represents your investment in the partnership and determines:
Whether distributions are taxable
How much of a loss you can deduct
The capital gain or loss on the eventual sale of your partnership interest
Your basis increases with income and capital contributions and decreases with distributions and losses. The IRS now requires many partners to report basis annually on their tax returns.
Action Step: Start maintaining a basis worksheet from year one. Work with your CPA to update it annually based on your K-1.
10. Be Aware of Lesser-Known Taxes
Many high-income partners are surprised by taxes that don’t appear on the K-1 but still apply.
Two common examples:
Alternative Minimum Tax (AMT): Particularly relevant if you exercise incentive stock options or claim large deductions.
Net Investment Income Tax (NIIT): A 3.8% surtax on certain types of passive income from partnerships or investments, applicable if your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).
Action Step: Have your CPA run multi-scenario projections to identify any exposure to these additional taxes.
Summary Checklist
Here’s a consolidated view of the key planning areas for your first year as partner:
ItemWhat to DoTax ClassificationUnderstand transition to self-employed statusEstimated TaxesCalculate and pay quarterly to IRS and statesState FilingAddress multi-state taxation and PTET electionsPhantom IncomeAnticipate timing mismatches and prepare cashTax ReserveOpen a separate account and save 30-45% of incomeRetirement PlanningExplore SEP, Solo 401(k), or cash balance plansInsurance ReviewReevaluate coverage for health, life, and disabilityCapital ContributionsClarify amount and integrate into cash flowBasis TrackingMaintain annual tax basis recordsAMT & NIITIdentify exposure and plan accordingly
Final Thoughts
The first year as a law firm partner comes with exciting opportunities—and complex financial challenges. Without proper preparation, it’s easy to fall behind on taxes, mismanage cash flow, or miss opportunities to optimize your long-term financial position.
This is the year to take your planning seriously. Work closely with a CPA who understands partnership taxation and consider building a relationship with a financial planner who specializes in attorneys.
Need a financial partner to guide you through your first year as partner?
Schedule a consultation with Balanced Capital and take the guesswork out of your next financial chapter.