Yes, tiny violin - did anyone else struggle first years of law partnership?

[Anonymous]

Anonymous wrote:I guess I’ve never thought about how lateral partners do it. The last fat year end bonus more than covered the first tax payments.

PP here. Last bonus as a senior associate, of course

[Anonymous]

As a 10 year partner, my draw doesn't exceed our quarterly tax payments until July. Today in fact. Woo hoo.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

When you’re a partner, they don’t withhold taxes. You have to rejigger your cash flows to accommodate quarterly estimated payments yourself. For a new partner that often involves either using up savings (if they’ve done that) or use of a line of credit.

This isn't true. DH's firm withholds and we make sure they withhold enough that we aren't left with a huge bill in April.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Also private school: yes it’s a lot but in our case it paid off for our DC.

Private school can add up quickly. We pay for private schools via cash flow (like OP). But it seems like a lot of the kids have grandparents paying the bill (instead of parents who are grinding away).

It's a lot harder to build wealth when you're spending $100,000 per year (for 2 kids), x 12. Then $85,000 per year per kid x 4.

What's the point of making 1m a year if you can't buy in a good school district?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

When you’re a partner, they don’t withhold taxes. You have to rejigger your cash flows to accommodate quarterly estimated payments yourself. For a new partner that often involves either using up savings (if they’ve done that) or use of a line of credit.

This isn't true. DH's firm withholds and we make sure they withhold enough that we aren't left with a huge bill in April.

His firm withholds his taxes? How cute.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Also private school: yes it’s a lot but in our case it paid off for our DC.

Private school can add up quickly. We pay for private schools via cash flow (like OP). But it seems like a lot of the kids have grandparents paying the bill (instead of parents who are grinding away).

It's a lot harder to build wealth when you're spending $100,000 per year (for 2 kids), x 12. Then $85,000 per year per kid x 4.

What's the point of making 1m a year if you can't buy in a good school district?

Your choice of private school puts you in a cash bind because you can't afford private school. So if you choose private school, you need to sacrifice other things. You're right, you cannot build wealth and you cannot compete with others who have grandparents footing the bill.
We were similar - first generation, no money, lawyers. We did everything we could to buy in a good school district and sent our kids to public elementary schools. Because we could eventually save and invest money, we're now in a position to be full pay for college and we'll be in a position to pay for our grandchildren's private schools if their parents want. You can't have it both ways -- or you end up in your position.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

When you’re a partner, they don’t withhold taxes. You have to rejigger your cash flows to accommodate quarterly estimated payments yourself. For a new partner that often involves either using up savings (if they’ve done that) or use of a line of credit.

This isn't true. DH's firm withholds and we make sure they withhold enough that we aren't left with a huge bill in April.

His firm withholds his taxes? How cute.

I'm surprised to see a firm withholds taxes from income partners. We had to have a long discussion with our accountant (that the firm recommended) when I made partner. Withholding taxes from income partners is not the norm.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

When you’re a partner, they don’t withhold taxes. You have to rejigger your cash flows to accommodate quarterly estimated payments yourself. For a new partner that often involves either using up savings (if they’ve done that) or use of a line of credit.

This isn't true. DH's firm withholds and we make sure they withhold enough that we aren't left with a huge bill in April.

We are talking about equity partners, not income partners. And equity partners by law must pay estimated quarterly taxes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Also private school: yes it’s a lot but in our case it paid off for our DC.

Private school can add up quickly. We pay for private schools via cash flow (like OP). But it seems like a lot of the kids have grandparents paying the bill (instead of parents who are grinding away).

It's a lot harder to build wealth when you're spending $100,000 per year (for 2 kids), x 12. Then $85,000 per year per kid x 4.

What's the point of making 1m a year if you can't buy in a good school district?

Your choice of private school puts you in a cash bind because you can't afford private school. So if you choose private school, you need to sacrifice other things. You're right, you cannot build wealth and you cannot compete with others who have grandparents footing the bill.
We were similar - first generation, no money, lawyers. We did everything we could to buy in a good school district and sent our kids to public elementary schools. Because we could eventually save and invest money, we're now in a position to be full pay for college and we'll be in a position to pay for our grandchildren's private schools if their parents want. You can't have it both ways -- or you end up in your position.

Or you could have given your own children the benefit of private schools instead of waiting a generation and never seeing the actual benefits. Or, really, why don’t you just do you instead of the ridiculous judgement. Sheesh.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

When you’re a partner, they don’t withhold taxes. You have to rejigger your cash flows to accommodate quarterly estimated payments yourself. For a new partner that often involves either using up savings (if they’ve done that) or use of a line of credit.

This isn't true. DH's firm withholds and we make sure they withhold enough that we aren't left with a huge bill in April.

We are talking about equity partners, not income partners. And equity partners by law must pay estimated quarterly taxes.

Income/nonequity partners too. Never seen otherwise in multiple firms. A partner gets a K-1 and has to pay their own estimates. If not their not a partner.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Also private school: yes it’s a lot but in our case it paid off for our DC.

Private school can add up quickly. We pay for private schools via cash flow (like OP). But it seems like a lot of the kids have grandparents paying the bill (instead of parents who are grinding away).

It's a lot harder to build wealth when you're spending $100,000 per year (for 2 kids), x 12. Then $85,000 per year per kid x 4.

What's the point of making 1m a year if you can't buy in a good school district?

Your choice of private school puts you in a cash bind because you can't afford private school. So if you choose private school, you need to sacrifice other things. You're right, you cannot build wealth and you cannot compete with others who have grandparents footing the bill.
We were similar - first generation, no money, lawyers. We did everything we could to buy in a good school district and sent our kids to public elementary schools. Because we could eventually save and invest money, we're now in a position to be full pay for college and we'll be in a position to pay for our grandchildren's private schools if their parents want. You can't have it both ways -- or you end up in your position.

Or you could have given your own children the benefit of private schools instead of waiting a generation and never seeing the actual benefits. Or, really, why don’t you just do you instead of the ridiculous judgement. Sheesh.

But PP is not wrong. If you want to pay for private school when you don't have the money, you sacrifice building wealth and your own retirement. It seems a silly tradeoff when private school doesn't return anywhere near what is lost. And yes, I myself went to private school and had my own kids in private early on until I saw the light and pulled them out.

[Anonymous]

Why would anyone want to be an equity partner?

[Anonymous]

Anonymous wrote:

Anonymous wrote:This is an equity partnership at top 50. All partners start at $800k. Retirement is around $70k, overhead around $130k. Monthly payout is around $20k. Draws about 55k, three times a year. Then end payout. Tax bills for quarterly payments about $80k, fed and state. That’s the gist of it.

So you can’t live on 280k/yr? Sounds like a you problem.

I hate responses like this. I'm not in law but no, I could not live comfortably on $280k/year or even double that with my spouse and three kids. Everyone has different levels of income they've structured their lives around. You might think it's outrageous, but too bad.

[Anonymous]

Anonymous wrote:Why would anyone want to be an equity partner?

b/c if you have a good book of business the year end payments can be substantial ($2M+). Getting and keeping the book is the hard part.

[Anonymous]

Anonymous wrote:Why would anyone want to be an equity partner?

Money.