New Financial Responsibilities as a Partner in Big Law

Written by Bobby Kaslander

Congratulations, you’ve been promoted to partnership at your law firm! All your hard work has paid off. Give yourself a huge round of applause as this is a significant milestone not only in the attorney field but in every profession! Now what?

Making Partner can come with many financial changes. As you adjust into your new role, you may be surprised by several key differences between being a partner vs. a counsel or associate position. You will now be faced with an entirely new set of financial implications. Careful financial planning will help you navigate this new world of quarterly estimates, capital buy-ins and adjusting to the new income structure. Let’s review a checklist of things you should be thinking about and what to expect going forward.

Non-Equity (Income) vs. Equity:

Let’s first start with the two basic differences between the types of partnership. Income vs. Equity Partners. Many law firms have both non-equity (income) and equity partner levels. Non-equity partners generally do not have the same financial requirements as equity partners do along with having less job security. Most non-equity partners receive a salary instead of partnership distributions. Depending on how the firm is set up you might be paid by W2 or K1 schedule (we will cover the differences of this later in this post). Non-equity partners typically demonstrate ambition and drive to eventually become an equity partner however there are many partners that never reach the equity partner level. They have a terrific set of skills, great leadership qualities, strong work ethic, however they just aren’t quite at the equity partner level yet. Non-equity partners do not face financial liability if the firm goes under and do not have full voting rights.

Equity partners are essentially owners of the firm. They are generally performing at higher levels, generating more business for the firm/responsible for bringing in new business, are responsible for evaluating attorney, firing, recruiting, and are involved in the strategic direction of the firm. They typically have much higher earning potential than income partners as performance can be correlated to the amount of business they bring into the firm. Equity partners also have “skin in the game” whereas many firms will require equity partners to “buy-in” to the firm with a significant amount of money (we will cover buy-ins on a later section in this post). They have an ownership stake in the firm and are entitled to a share of its profits and losses. They also have voting rights, which gives them more say in how the firm is run. 

W2 vs. K1 Income

One of the biggest changes that typically come with making partner is that you will now be paid on K-1 instead of W2 income. Every firm is different in that some firms will have their non-equity/income partners on W2 while other firms have them on a K1. Almost every firm pays their equity level partners on a K1 basis. Since everyone should be familiar with how W2 income works (this is likely how you’ve been getting paid your entire career), we will focus this section on K1 income.

There are significant differences and changes you need to understand between W2 & K1. W2 salary is counted as a business expense for the firm on the Profit & Loss statement and is taxed through payroll taxes. K1s are tax forms that are used for business partnerships to report to the IRS a partner’s income, losses, capital gain, dividends, etc., from the partnership for the tax year. For W2 employees, there is not much extra legwork needed as taxes, Medicare, and social security are already being withheld from your bi-weekly or monthly paychecks. For partners with K1 income, instead of receiving a paycheck with taxes and other withholdings deducted, you’ll most likely receive a semi-monthly or monthly draw. This means you’ll be responsible for withholding and paying your federal, state, Medicare, and Social Security taxes and making quarterly estimated tax payments to the IRS and any applicable state agencies. Tax planning and cash management are essential to avoid any unwelcome surprises that may occur in your first quarter as a partner. As a partner, it’s your responsibility to plan for your quarterly tax estimates. Many partnerships issue larger quarterly distributions which help their partners cover their tax liabilities. However, they do not always equal the taxes you may owe. It’s worth noting that distributions not used for current tax payments should be saved, and don’t assume you don’t need to save extra cash for taxes.

Estimated Quarterly Taxes

As noted in the section above, one of the biggest changes that occurs once you’ve made Partner is that you’ll be responsible for paying quarterly estimated taxes. We highly advise you hire a CPA or work with a tax professional to help calculate this number. Many new partners are shocked and surprised to see what they owe during their first year of partnership. Quarterly estimates can be a huge wakeup call for someone who has not prepared for them and can significantly alter their cash flow. We highly recommend making sure you set aside enough funds for quarterly estimated tax payments either in a “side” bank/savings account or some sort of a high-yielding savings/money market account until the bill is due. These payments can be substantial, given that wage withholding is no longer applicable if you receive a K-1. We encourage our clients to prioritize essential expenses (quarterly tax estimates, mortgage expenses, insurance, retirement contributions) before discretionary spending. Also, it’s very important to note and discuss with your CPA if the partnership operates in multiple states, the partner may be required to file in multiple states. We encourage partners to discuss any taxes for those states with their CPA to avoid penalties or interest for late payment of estimated taxes.

Capital Contributions / Firm “Buy-In”

Capital contributions, also known as buy-ins are typically required for equity partners at law firms. Law firm equity partners are business owners. They receive profit shares, help develop strategy to the firms overall direction, weigh in on significant financial decisions, and have voting rights. This generally comes with a significant introductory capital contribution known as a "capital buy-in”, which is essentially purchasing a stake in the firm's ownership. This amount can be correlated to a percentage of their projected annual profits and can range from tens of thousands to hundreds of thousands of dollars depending on the firm size and individual partner's equity share. These amounts are usually outlined in the firm's partnership agreement and can often be paid over time. This capital contribution illustrates the partner's financial stake in the firm and help demonstrate their commitment to the success of the partnership. Normally, when a partner contributes to their capital account, they will also establish their “book value” in the partnership. Book value is an accounting term that represents the value of a partner's capital account in a partnership. It reflects the amount of partnership assets that would be distributed to the partner if the partnership were to liquidate or wind up its operations. The higher the book value, the greater the partner's ownership in the partnership.

How will one handle the large capital contributions? Your capital contribution is a wealth-building investment that hopefully grows over time. It can be paid upfront, with cash on hand, or financed over time generally through banking relationships that the firm has in place. Whether you’re considering paying out of pocket in cash, or financing the buy-in, or some combination of both, Power Forward Group Law Fin team can help guide you in choosing the best path forward. 

Understanding the Tax Deductions, You Can Take Advantage of

You can take many new tax deductions since you are now considered a self-employed partner. The biggest deduction you can take is for your contributions to retirement plans. You may be able to contribute up to 25% of your income to a retirement plan each year; you are not limited to the maximum 401(K) amount ($23,500 for 2025). Typically, the partnership controls the type of plan and amount you must contribute, but this is fully deductible against your partnership income. If your firm requires you to contribute a certain amount, you will want to plan for this. Health insurance is another deduction you can take. Your premiums may be higher now but are fully tax deductible. You may also be eligible to contribute to a high-deductible health savings account (HSA). If you took out a loan to cover your buy-in, remember the interest paid is deductible. Finally, any out-of-pocket expenses that the firm did not reimburse are now deductible since you are now considered self-employed.

Financial Planning Quick-Checklist for New Law Firm Partners

1. Understand Taxes & Estimated Payments: Check with your firm's legal department and a trusted CPA/tax advisor to understand your firm’s entity type (Partnerships/LLCs, C Corporations, or S Corporations). Set aside funds for quarterly estimated tax payments. These payments can be a huge wakeup call for many new partners if not planned for correctly. These payments can be substantial, given that taxes & other typical withholdings don’t occur while on a K1.
2. Understand the Partnership Agreement & Required Capital Contributions
3. Insurance and Estate Planning: Consider reviewing your insurance needs and estate planning responsibilities. As a partner, you will have additional financial responsibilities for which it’s typically in your best interest to increase your coverage.
4. Cash Flow Management: Prioritize essential expenses (taxes, mortgage/housing payments, insurance, retirement contributions) before discretionary spending.
5. Budget Wisely: Create a budget that aligns with your new income level and financial obligations.
6. Investment and Retirement Planning: Consult with a wealth management expert to plan for your financial future and make sure you’re on track to reach your financial goals. 

Powering Forward with your Financial Future

Whether you just made partner or lateraling and joining a partnership, this is a new chapter in your career. Planning is critical to managing these added responsibilities of being a partner. By focusing on proactive cash flow management, financial & tax planning, you’ll avoid potential financial pitfalls and ensure that your investment in the partnership continues to thrive. The Power Forward Group Law Fin team can help you navigate these decisions to help you make the right financial choices.

Please reach out directly if you have any questions bobby@powerforwardgroup.com

Sources

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes

https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself

https://molentax.com/w-2-salary-vs-distributions-vs-k-1-for-s-corp-owners/#:~:text=Your%20W%2D2%20salary%20is%20recorded%20as%20an%20expense%20on,taken%20out%20of%20the%20business.

https://tax.thomsonreuters.com/blog/what-is-schedule-k-1/

Approval Code: 7489860DH_JAN27