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

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]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) [b]as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout[/b]. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions. [/quote]

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.[/quote]

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. [b]So my method above will keep working[/b].[/quote]

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.
[/quote]

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. [/quote]

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.[/quote]

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. [/quote]

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