What to Expect on your Taxes When You Make Partner at a Law Firm

Making partner at a law firm is a milestone many attorneys work tirelessly to achieve. It’s a symbol of professional success, often accompanied by increased income and decision-making power within the firm. However, with great power comes great responsibility—and a host of new tax considerations. The financial dynamics of becoming a partner differ significantly from being an associate, and understanding these changes can save you from unexpected tax headaches.

Here’s what you need to know about how your taxes will change in the year you make partner, what challenges you may face, and how to navigate them effectively.

When you transition from associate to partner, your income structure typically changes. Most associates are employees of the firm, earning a W-2 salary. As a partner, you’ll likely move to earning partnership income, often distributed as a share of the firm’s profits. This shift from employee to business owner has significant tax implications. Instead of receiving a W-2, you’ll likely receive a K-1 form, which reports your share of the partnership’s income, deductions, and credits.

This change means your income is no longer subject to automatic withholding for federal and state taxes. You’ll need to calculate and pay estimated quarterly taxes to the IRS and your state tax authority. Missing or underpaying these payments can result in penalties, so it’s critical to get this right from the outset.

Another major change is self-employment tax. As a partner, you’re no longer classified as an employee, which means you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. Combined, these taxes amount to 15.3% of your income, up to the Social Security wage base limit. This can come as a surprise to many new partners, especially if their gross income significantly increases.

For example, if you previously earned $200,000 as an associate, you might have only paid the employee portion of these taxes. As a partner, earning the same or more, your self-employment tax liability will roughly double. It’s essential to factor this into your estimated tax payments.

While the tax burdens of partnership can feel overwhelming, there are also opportunities to reduce your tax liability. Partners often have access to a range of tax deductions not available to associates. For example, you may be able to deduct business-related expenses such as continuing education, travel, or client entertainment. If you’re required to contribute capital to the partnership, the interest on any loans you take out for this purpose may also be deductible.

Additionally, retirement planning becomes even more important. Many law firms offer defined contribution plans for partners, such as a 401(k) or a cash balance plan. Contributing to these plans can significantly reduce your taxable income while helping you build wealth for the future.

Depending on your law firm’s structure, you may be required to make a capital contribution when you become a partner. This contribution is essentially your buy-in to the firm, and the amount can range from tens of thousands to hundreds of thousands of dollars. It’s crucial to understand how this buy-in will be treated for tax purposes. In some cases, the firm may offer financing options, but the interest on the loan may not always be deductible.

Your increased income as a partner may also push you into a higher tax bracket. This can result in a higher marginal tax rate, which means a larger portion of your income will go toward taxes. It’s important to plan for this change and adjust your financial strategy accordingly.

Being in a higher tax bracket also makes tax-efficient strategies like charitable giving more valuable. For example, if you’re a regular donor to charitable causes, you might consider bunching contributions into a single year to maximize your deductions. Alternatively, setting up a donor-advised fund can help you manage your charitable giving while optimizing your tax benefits.

Becoming a partner may also expose you to alternative minimum tax (AMT). This parallel tax system ensures high earners pay at least a minimum amount of tax, even if they use deductions and credits to reduce their regular tax liability. If your partnership income or deductions make you a candidate for AMT, consult a tax professional to navigate this complexity.

One of the most important steps you can take when you make partner is to assemble a team of financial and tax advisors who understand the unique challenges attorneys face. A CPA familiar with partnership taxation can help you manage estimated payments, maximize deductions, and avoid pitfalls like underpayment penalties. A financial planner can help you create a strategy to balance your increased income with your long-term financial goals.

Communication with your firm’s accounting or finance department is also key. They can provide insights into the partnership’s financial structure, including expected distributions, required capital contributions, and available retirement plans. Understanding these details can help you make informed decisions and avoid surprises.

The year you make partner is filled with excitement and opportunity, but it also brings significant tax changes. By understanding these shifts and planning proactively, you can set yourself up for financial success and minimize stress during tax season. Taking the time to build a solid financial strategy now will not only help you navigate your first year as a partner but also lay the foundation for a prosperous future.