By Darren Wurz
Most people only think about taxes when it’s time to file their annual returns. But as an attorney or law firm owner, you cannot afford to put your taxes on the back burner. From self-employment taxes to employee taxes and quarterly estimated taxes, there’s a lot to keep track of, especially if your monthly income varies.
To make the most of your irregular income, proactive tax management is a necessary first step. Here are 5 steps you can take to manage and reduce taxes as an attorney.
1. Understand When Estimated Tax Payments Are Due
As in the case of contingency-fee attorneys or law firm owners, attorneys are often responsible for paying taxes directly to the IRS in the form of quarterly estimated payments. Being your own boss means you must calculate and remit payment for what you owe; it’s not automatically deducted from your paycheck like it is for W-2 employees.
This is great in that you don’t have to pay taxes right away, but it can quickly become an administrative and financial burden if you don’t stay on top of it.
To better manage your tax payments, you must first understand when they are due. This table highlights the typical due dates for quarterly estimated tax payments: (1)
|Taxes are due on…
|…for money earned…
|January 1 – March 31
|April 1 – May 31
|June 1 – August 31
|January 15 of the following year
|September 1 – December 31
Failure to pay your estimated taxes or late payment may result in penalties and fees charged by the IRS, so it’s important not to miss these deadlines.
2. Understand How Much You Should Pay
Understanding how much you should pay in taxes can be especially difficult if your income fluctuates each year. If you overpay, you run the risk of giving the IRS an interest-free loan; and if you underpay, you run the risk of being penalized. In this case, the safest thing to do is to avoid the underpayment penalty by paying the lesser of: (2)
- 90% of your current year tax liability or
- 100% of your prior year tax liability (if your adjusted gross income for the prior year was more than $150,000, then you must pay 110% of your prior tax liability)
Remember that the IRS also provides a stipulation if you receive uneven income throughout the year. You may be able to reduce or avoid penalties by annualizing your income and making unequal payments throughout the year. (3)
3. Create a Tax Plan
After you determine how much tax you should pay, the next step is to create a tax plan to ensure you save the appropriate amount. The general rule of thumb is for self-employed individuals to set aside 25-30% of their income for taxes, (4) but the exact amount you need to set aside depends on your business structure, tax bracket, state of residency, and more.
For individuals with irregular income, it’s important to adjust your savings as your income fluctuates. If you have a particularly successful month, consider putting 50-60% away to make up for months where your income is lower. Working with a wealth manager or utilizing a bookkeeping system are great ways to stay on top of your tax payments so you don’t find yourself facing a penalty come tax season.
4. Keep Track of Deductions
It’s easy to lose track of expenses when you’re focused on managing your irregular income. But it’s important to document as much as you can in order to take advantage of every deduction. This may help you reduce your tax liability, ultimately reducing your estimated tax payments and putting less strain on your uneven cash flow.
There are dozens of expenses you can deduct as an attorney. (5) Here are a few of the most common deductions:
- Startup costs
- Online services and subscriptions
- Travel expenses
- Continuing education
- Software, hardware, and other equipment
- Health insurance premiums and medical care expenses
- Home office and supplies
- Retirement contributions
5. Partner With a Professional
Managing your tax payments can be confusing, but with the right professionals by your side, it doesn’t have to be. At Wurz Financial Services, we strive to help attorneys manage the uneven income that comes with the job.
Are you feeling overwhelmed or confused as you sort through important tax-planning issues? Rather than going it alone, we want you to experience the comfort and clarity a financial professional can bring. Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or firstname.lastname@example.org today!
For more tips on maximizing wealth, minimizing taxes, and achieving financial independence, tune in to The Lawyer Millionaire Podcast available wherever you get your podcasts.
Also, join us at one or all of our free webinars:
- Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough to Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
Darren Wurz is a fee-based financial advisor and co-owner of Wurz Financial Services, where he operates the Northern Kentucky/Cincinnati office. He is a CERTIFIED FINANCIAL PLANNER™ and has a master’s degree in financial planning from Golden Gate University. Darren specializes in serving the unique financial planning needs of attorneys and law firm owners. He is the host of The Lawyer Millionaire Podcast and author of The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence, published by the American Bar Association.Darren is a member of the American Bar Association and the Financial Planning Association. He is also active in his local community as a member of the Northern Kentucky Bar Association, Covington Business Council, and Northern Kentucky Chamber of Commerce. To learn more about Darren, connect with him on LinkedIn.