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.

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.

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.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DH was in a very similar position except that while he was a mid-level associate, a young partner clued in DH. Basically, we saved a ton to try to stay ahead of the buyin, capital calls, deferred comp, quarterly taxes, etc. Sounds like OP started spending money and expanding lifestyle/expenses without calculating the future financial situation. Just how most others do it too. Still, a problem of your own making.

Oh, massive eye roll, lady. We bought a house. And sent a kid to school. Get over giving yourself gold stars for handling your husbands income so well.

You're the one who can't figure out how to survive on $240K/yr after taxes?
And you are rolling your eyes?

Yes, it’s a lot of money. It’s also less than we made previously. That’s the issue. Thank you for taking the time out of your busy day feeling morally superior and managing your husbands income to look down upon me.

If it gives you any comfort OP, we have a somewhat similar situation. A few years ago, DH joined Biglaw after many years in government. He is a non-equity partner. We thought he would be making much more than in government, but he's feels like a glorified associate, without the benefits. Long story short, it's been an eye-opening transition, with the firm giving him small bonuses, and meanwhile our paying a lot in taxes. Still, he's happy he made the move from government to the law firm, and the future is looking better (whether at this firm or elsewhere).

Hoping to move from income partner to equity in next two years. Feeling very fortunate I have $500k ‘available money’ (not retirement, not strictly savings but invested in medium risk unless/until needed) to consumption smooth, if needed. But could easily build that up given all my years in biglaw (and my spouse also spent abt 6 years). This was after paying almost $500k in debt too (and buying a house).

Anonymous wrote:

Anonymous wrote:If a newly minted equity partner is actually bringing home less than a senior associate the firm is poorly managed. Our firm saw to it that that was never the case.

You are nuts.

A senior associate will be making 500k ---- partners say 650 for first year -- so they are making more. But take home and draw are a lot less.

Senior associate may be, after taxes is brining home 18,000. That is what they have been getting for last bunch of years. Same firm -- new partner draws probably 12,000. Why so much less if they are making 150k more? Most firms pay partners on the back end. Associates get paid up front plus bonus. In addition you end up paying 3,000 a month for health insurance when a partner because you pay both the employee and employer portions yourself. Plus most firms have manadatory retirement contributions that eat up money.

You make more but your day to day cash flow is less. By a lot. In year 2 it is a little better as the firm may have paid you 100k plus as the rest of your comp. But that will come months after the new year. Year 3 is better and so on. And comp is rising. 650 for a first year is probably 750 plus as a third year so the draw increase to maybe 17,000 up from 12,000.

I am a 20 year partner with 1.8 in comp. My monthly draw is around 35k. There are counsel at my firm with higher take home. What they do not get is the rest of my money later on. So for 2023 in May 2024 I will get 500k. The rest is taxes, retirement, capital, etc.

I mean, I guess . . .

I was promoted from counsel to equity partner at a major DC firm around 20 years ago. At the time of my promotion I was one of the higher paid counsel and made a lot more than an eighth year associate.

My first year as a partner I made $450k. I remember it distinctly. I also remember making more than I did as a counsel that first year even after expenses were taken out.

I don’t remember my monthly draw, though. Maybe it was lower than my monthly pay as counsel, but it’s not like we spent every cent that I made as counsel so I don’t recall money ever being tight.

In other words, there was really no “adjustment” necessary for us, at least not that I remember.

My DH is a 4th year partner, I work FT, and cash flow is something we manage carefully. Honestly, DH makes low 7 figures but I keep working on part because my income ($200k) and benefits are what allow us to not be super tight with our cash flow. The quarterly tax payment in June is the tightest because it’s also when private school tuition is due, and we have prepaid all the summer camps for the kids.

I will just say that you should probably be more conservative with your income moving forward. It’s not just the cash flow - if you spend all you make, then you have golden handcuffed DH also came from government, and we are aggressively saving because while he loves his job, it’s a grind, and he may not want to do it anymore one day. For us, we have a house mortgages payment we can manage on $400K income (not crazy if I am also working). Private school tuition is our current golden handcuffs - DH knows he has an out in about 3 years when we have to pick to do public for high school or not. Then he’s stuck again for 6 years until the youngest finishes.

I also haven’t quit my job so that we don’t have golden handcuffs. We have 3 young kids, so juggling is hard, but working means more options for DH in the future.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What's the firm's recent financial situation? Most firms in AmLaw 100 had record years in 2020 and 2021, picture very different in 2022/23 due to significantly slowdown in deals last year. So you may have made partner at just a difficult cyclical moment, where you are dealing with all the "start up" costs of partnership but also seeing smaller payouts due to belt-tightening. It should even out longterm, but now might be a bit of a pinch point.

Firms don't always do a great job of preparing partners for the financial challenges of that shift. Do you have a good financial manager you can trust? Do you feel that you properly structuring your finances with regards to taxes? I would focus on finding a good, conservative advisor to help with tax and money management, and they will help you structure things so you can avoid cash flow issues during these initial years when the capital contribution and shifting from ordinary income to distributions can be tricky.

Thank you. We need to do this. We unfortunately bought a new home and signed on for private school for another child right before making partner, not aware how cash flow would change. Partnership was not from within but rather from government so we hadn’t saved. Just stressed about cash flow.

I haven't read all of the responses but I think the bolded was a HUGE mistake. You probably bought an expensive new house based on your salary projections just to realize afterward you weren't actually bringing home as much as you thought.

My DH is a big law partner and the first year or two we definitely did not make any major purchases since the tax bill was way higher than when he was a senior associate.

No, it wasn’t a huge mistake. That part is fine. We bought a home based on the combined salary we had at the time. Our mortgage is not that high. We were renting previously. Our home has also gone up almost a million in value. The issue, once more, for the wives in the back, is that we are making much less per month than we were. The smug judgments aren’t helpful, really. They’re just not. Keep them coming, though, it must make you feel good.

First time I’m posting on this thread but OP sounds obnoxious, entitled and unlikeable. Why are so many law partners like that?

Is this your first time learning to read as well? OP is not a law firm partner. OP is the spouse of a recent law firm partner who spouse came over to a firm from the government.

OP has not said that. Pretty obvious to me that OP is the partner. I’d also guess that OP is male.

Anonymous wrote:If a newly minted equity partner is actually bringing home less than a senior associate the firm is poorly managed. Our firm saw to it that that was never the case.

You are nuts.

A senior associate will be making 500k ---- partners say 650 for first year -- so they are making more. But take home and draw are a lot less.

Senior associate may be, after taxes is brining home 18,000. That is what they have been getting for last bunch of years. Same firm -- new partner draws probably 12,000. Why so much less if they are making 150k more? Most firms pay partners on the back end. Associates get paid up front plus bonus. In addition you end up paying 3,000 a month for health insurance when a partner because you pay both the employee and employer portions yourself. Plus most firms have manadatory retirement contributions that eat up money.

You make more but your day to day cash flow is less. By a lot. In year 2 it is a little better as the firm may have paid you 100k plus as the rest of your comp. But that will come months after the new year. Year 3 is better and so on. And comp is rising. 650 for a first year is probably 750 plus as a third year so the draw increase to maybe 17,000 up from 12,000.

I am a 20 year partner with 1.8 in comp. My monthly draw is around 35k. There are counsel at my firm with higher take home. What they do not get is the rest of my money later on. So for 2023 in May 2024 I will get 500k. The rest is taxes, retirement, capital, etc.

Anonymous wrote:If a newly minted equity partner is actually bringing home less than a senior associate the firm is poorly managed. Our firm saw to it that that was never the case.

I assume that you mean "on a monthly basis".

Under my assumption, your judgment that such a firm is "poorly managed" is premature without more knowledge about the specific law firm and about the particular individual's election to accept or reject firm financing.

If a newly minted equity partner is actually bringing home less than a senior associate the firm is poorly managed. Our firm saw to it that that was never the case.

Anonymous wrote:
Really? IME most law partners are married to SAHMs or their spouse is mommy/daddy-tracked so that at least one parent can be the primary parent. I honestly can't think of a single law partner whose spouse is in an equally or more demanding career.

Yes, I'm a law firm partner at a large firm, and my spouse is a doctor who works two (somewhat short) days a week. It works amazingly well for us. I can't imagine two spouses with my schedule.

And yes, starting as a new partner can have financial struggles. In part, it sounds like the capital contribution (assuming it is capital contribution and not overhead!) is fairly early lump sum. At my firm, the capital contribution is roughly about 20% of a partner's budgeted annual compensation. If you are a bit under that, you may have paid it all this year. Or perhaps you pay the rest next year, and then your capital contribution is done and better cash flow.

What is more standard at my firm, to even things out, is new partners generally get a loan with 3 or 5 years interest-only payments, and then 5-year repayment after that. The upshot is that the buy-in cost is spread over several years, so there isn't a big cash flow hit early. That may be no small part in what is causing a cash crunch for you.

Separately, this may not be your issue, but many firms have a ~6 month hold back, to capitalize the firm (on lieu of taking on debt). With our firm, for example, partners don't receive current year distributions until Q3 tax payments are due. Q1 & Q2 distributions are the payment for the remainder of the prior calendar year. A new partner, however, doesn't get a distribution until about 9 months in.

Moral of the story, new partners generally do need to plan ahead here, as it can pose challenges. These are good challenges, ones most folks would be thrilled to have. But challenges nonetheless.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DH was in a very similar position except that while he was a mid-level associate, a young partner clued in DH. Basically, we saved a ton to try to stay ahead of the buyin, capital calls, deferred comp, quarterly taxes, etc. Sounds like OP started spending money and expanding lifestyle/expenses without calculating the future financial situation. Just how most others do it too. Still, a problem of your own making.

Oh, massive eye roll, lady. We bought a house. And sent a kid to school. Get over giving yourself gold stars for handling your husbands income so well.

Well besides having a partner telling DH about all the money he wouldn’t be making as a new equity partner, it helped that I also worked in big law but the partnership track was longer and didn’t have the big buy in DH’s firm had. You asked how people managed the struggle of the early partnership years, and I answered that we stayed ahead of it. No need to get emotional.

+1

Law partners are often married to other law partners, at least at the big firms I have worked for.

Really? IME most law partners are married to SAHMs or their spouse is mommy/daddy-tracked so that at least one parent can be the primary parent. I honestly can't think of a single law partner whose spouse is in an equally or more demanding career.

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.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, did your family have a personal accountant aware of DH's career trajectory? If not, that's a critical mistake.

While the bumps in the road for a new partner can't completely be removed, a good accountant can certainly smooth them over.

The numbers for new partners are not shared with non-partners. There is no way to prepare. Other than save money and do not buy a house at this point. In 4-5 years you will be swimming in money. Just need to wait.

In my firm the incoming partners get a series of classes on law firms economics, how their draws and finances will work, which accountants are familiar with the firm’s K-1, etc. It’s very common knowledge that new partners are often cash flow constrained.

It gets better but you're not "swimming in money". My DH made partner at a top firm very early. Estimated to be around $3M gross this year for him after 6 years in. Call it $1.4M after all deductions and taxes. It's a nice life, but we're not talking tech founders that sell their company and make $15M+ in an exit.

Apparently it’s a requirement for law firm partner families to lose all perspective.

+1

That post did show perspective. That poster compared their situation to someone else, but didn’t lost sight of anything. They stated a fact.