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Tax Planning for Business Law Firm Partners

Tax Planning for Business Law Firm Partners: How to Keep More of Your Compensation in 2026

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High-earning law firm partners face some of the steepest tax bills in any profession. With 2026 on the horizon, and many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) slated to expire, now is the time to lock in smart strategies. In this guide, we’ll walk through proactive steps you can take on compensation, retirement contributions, and benefits to keep more of your revenue. We’ll also explain how a specialized CPA for business law firms (like Cloud Accounting Group) can help you implement these moves. Think of this as “tax planning for law firm partners,” tailored especially for corporate and business attorneys (including Florida lawyers who can additionally leverage no state income tax).

Prepare for 2026: The TCJA Sunset and Beyond

The 2017 TCJA cuts are scheduled to expire after 2025, potentially returning many tax rules to pre-2018 levels. If nothing changes, personal income tax brackets could revert to higher rates (e.g. 39.6% at the top, versus the current 37%) and deductions like the SALT cap and personal exemptions could be restored. (For example, if TCJA isn’t extended, the standard deduction would shrink and SALT deductions would no longer be capped at $10K.) We should be alert that Congress might legislate something different (a 2025 law kept the top rate at 37% for 2026), but prudent partners plan for the worst case. In practice, this means: accelerate income or deductions to 2025 if you expect tax rates to rise; and be ready for possible new breaks (like bonus depreciation or energy credits) under emerging tax bills. In short: work with your CPA to model both scenarios (sunset vs. extension) so you’re not caught off guard.

Optimize Your Compensation Mix

How you pay yourself makes a huge difference. In law firms you typically have a blend of salary-type payments and owner draws or profit distributions. If your firm is an S‑Corp, you’ll file as a shareholder-employee. That allows you to split compensation into a W‑2 salary and dividend distributions. For example, a partner with $300K earnings could take a $150K W‑2 wage and $150K distribution. By doing that, you’d save roughly $20K in payroll taxes on the distribution portion. The caveat: the IRS demands a “reasonable salary” for owner-employees. Courts (in Watson v. U.S., for example) have reclassified huge chunks of artificially low wages as taxable income when a shareholder paid themselves very little. So work with your advisor to set a defensible salary level (often 40–60% of total comp in professional practices) and document how you arrived at it.

If your firm is a partnership or LLC taxed as a partnership, partners usually receive guaranteed payments (like a salary) plus profit draws based on their equity share. Guaranteed payments ensure cash flow but are subject to self-employment tax (15.3%), just like a salary. Profit distributions (the remaining share of profits) are not subject to payroll tax, though partners still pay income and SE tax on their total K-1 income. Importantly, law firms are “specified service trades,” so the 20% QBI deduction may be limited once your income exceeds the phaseout (around $364K for singles in 2024). In practice, many partners find a hybrid approach works best: pay enough guaranteed income to cover living costs, then take the rest as profit draws. This balances tax savings against cash flow needs.

Key steps:

  • Set a reasonable salary or guaranteed payment. Treat that like fixed income; it’s deductible by the firm (for partnerships) but incurs 15.3% payroll/SE tax.
  • Favor distributions or profit draws where possible. These avoid an extra layer of tax. However, remember that S‑Corp dividends and partnership K-1 income are still taxed at individual rates, so the benefit is mostly avoiding FICA.
  • Use bonuses strategically. Large year-end bonuses or “success fees” (e.g. from a big M&A deal or contingency case) can be timed. For example, if you expect individual rates to rise in 2026, you might defer bonus income to 2025, or accelerate deductible expenses to the same year to offset it. Your CPA can model scenarios so you hit the best tax year.

Boost Retirement Contributions

High earners have powerful retirement vehicles to slash taxable income. First, maximize 401(k) or profit-sharing plans. In 2024, a participant can defer $23,000 ($30,500 if age 50+) into a 401(k), plus the firm can contribute up to ~$69,000 total including profit-sharing. (Partnerships often design a cash-balance or profit-sharing plan to mimic this for partners.) Every dollar contributed is a deduction now. Beyond that, cash-balance plans let older partners sock away hundreds of thousands each year. These hybrid defined-benefit plans can allow contributions of $100,000–$300,000+ annually for key partners (for example, contributions as high as $200K–$300K/year for partners aged 50+ are not uncommon). By adding a cash-balance plan on top of a 401(k), many law firm owners tack on an extra six figures of deductible savings. Over time this builds a sizable pension and defers more taxes.

Other plan options include SEP-IRAs (simple to set up for smaller firms, allowing up to 25% of income or $69K limit) and defined-benefit plans (traditional pensions that also yield high contributions for older partners). A good CPA can run the numbers each year: you may find that matching or exceeding profit-sharing percentages lets you hit the maximum tax-deductible contribution. Don’t miss out on free money, either. If the firm offers matching for its W-2 salaries, be sure to contribute at least enough to take full advantage.

Take Advantage of Tax-Free Benefits (HSAs, Insurance, etc.)

Using tax-advantaged accounts outside retirement can also keep more cash in your pocket. If you have a high-deductible health plan, fund a Health Savings Account (HSA). HSAs are a favorite among CPAs because of their triple tax break: contributions are tax-deductible (and exempt from payroll taxes), the account grows tax-free, and withdrawals for qualified medical expenses are tax-free. In 2024 you can put in up to $7,750 as a family (with an extra catch-up $1,000 at 55+). Over a career, an HSA can double as an additional retirement fund for healthcare costs.

Beyond HSAs, look at other fringe benefits: your firm can reimburse certain expenses pre-tax. For example, under an accountable plan you can cover CLE tuition, bar dues, business travel, and licensing fees tax-free. Section 127 education assistance allows up to $5,250 per year in tuition reimbursement, tax-free. Some firms even offer commuter benefits or group-term life insurance (the first $50K of life insurance per person is tax-free to the employee). A savvy CPA will review your benefits structure annually: often small perks (like paying for life or disability insurance through the firm) can yield tax savings.

Leverage every fringe benefit.

Key takeaways: set up or max out an HSA, use corporate plans for health/education reimbursement, and ensure any health insurance premiums for owners are handled in the most tax-efficient way (for example, self-employed partners can deduct health insurance on their personal return).

Time Income and Deductions Around Big Cases

Law firms often have lumpy income: a big success fee, settlement, or transactional bonus. Timing that income can move mountains. If you foresee a windfall in the new year, consider accelerating expenses or even billing early. Conversely, if a profitable year is coming to an end, see if you can defer income (e.g. delay invoicing certain fees) until the next tax year when you might be in a lower bracket (if for example you retire mid-year or expect new tax changes). The same goes for personal deductions: charitable gifts, mortgage interest, or medical payments can be shifted between tax years for best effect.

Coordinate with your firm’s general ledger. If your partnership will book extraordinary income in December, maybe push certain partner draws to January, or vice versa. This kind of tax timing is one of the most powerful levers, especially when federal rates could be changing. Your CPA can help with estimated tax planning too (to avoid underpayment penalties when bonuses hit).

Align Strategy with Your Firm’s Structure

Every firm is different: LLP, LLC taxed as partnership, or S-Corp. Each has its own rules. Whichever applies to you, make sure your tax plan matches. For example, in an S-Corp the business can pay retirement plan contributions on your W-2 wages but not on distributions. In a partnership, the firm’s profit‑and-loss statement and capital account rules govern how much cash each partner can take out. Keep detailed records of capital accounts and capital contributions, if you take too much too soon, you might trigger taxable distributions. Similarly, note that your share of firm profits affects your basis and your ability to deduct losses or take tax-free distributions later.

If your firm operates multi-tier (say a holding company with a law practice subsidiary), coordinate across all entities. The right CPA will analyze the entire structure: making sure payroll taxes are minimized, that any group health or retirement plans meet nondiscrimination rules, and that your draw schedule matches the partnership agreement and P&L. In practice, firms with strong bookkeeping and cloud accounting tools can simulate different partner payout scenarios. This is why we combine strategic tax advice with ongoing accounting: to keep your partnership books audit-ready and aligned with your personal tax strategy.

How Cloud Accounting Group Can Help

Tax planning for law firm partners can quickly become complex, but you don’t have to go it alone. Cloud Accounting Group specializes in modern accounting and tax advisory for businesses, including law firms and other professional practices. Think of us as a CPA for business law firms: we understand your issues (high incomes, LLCs/LLPs, trust accounting, etc.) and we use cloud technology to keep the numbers straight. We’ll work proactively with your management team to forecast profits, model partnership comps, and identify every deduction or credit you deserve. In practical terms, that means custom strategies. Whether it’s designing a cash-balance plan, setting up S-Corp payroll correctly, or optimizing which year to take that big bonus tailored to your firm’s P&L and goals.

Your firm’s success depends not just on winning clients, but also on keeping more of what you earn. With a personalized tax plan in place, you and your partners can make confident decisions, from setting bonus levels to choosing entity structure, knowing you’re not overpaying Uncle Sam. As managing partners or owners, proactive planning is your best defense against rising taxes. We encourage you to get ahead of 2026 now. Schedule a consultation with our team at Cloud Accounting Group and let us help you keep more of your compensation where it belongs, in your business and your family’s future.

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