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Tax Considerations for Attorneys Who Become Partners

in Tax Talk

Congratulations!! You have achieved your professional goal of becoming a partner in your law firm. In addition to the many professional and personal requirements that you now have upon achieving partner status, your individual federal and state tax requirements and filings will be extremely complicated.

Since most law firms operate as limited liability partnerships you will no longer receive a W-2 to report your income. Law firm limited liability partnerships are pass-through or flow-through entities for income tax purposes where income “flows through” to the partners; that is, the income of the entity is treated as the income of the partners. Therefore, it is the responsibility of each partner to report their share of income and pay their federal and state taxes. This article will discuss the tax considerations for attorneys who become partners.

You will receive a Federal Schedule K-1 rather than a W-2 to report your income and deductions. The K-1 will separately state each income and deduction item and you are responsible for accurate reporting on your individual forms and schedules. Unfortunately, the

K-1 is very complicated and will require several IRS forms and schedules.

In addition to the federal return, you may be required to file state tax returns other than your resident state. Your firm will advise you what states you should file, the amount of income to report in each state and other relevant information to report in that state. This information is usually reported on an equivalent State Schedule K-1 that is included in your annual tax package from your firm that includes your Federal Schedule K-1. The firm is required to report your state tax information to each state. Therefore, if you do not file the state tax return, the state will eventually send you a notice requiring a return or file a return for you and issue a notice assessing tax, penalty and interest.

As an employee, you had applicable federal, state and local taxes withheld from your pay check. Now as a partner, you are responsible for paying these taxes on a quarterly basis. Estimated quarterly payments are generally due April 15, June 15 and September 15 of the current year and January 15 of the following year. You will need to determine your income for each quarter and remit the appropriate amounts.

Our firm works with many attorneys who become partners and we can help you navigate the complexities of tax laws and compliance.

Eric J. Lawrence, CPA is a partner in the firm of Gelman, Rosenberg & Freedman that specializes in taxation and estate work. He has more than 20 years of experience in public accounting and currently administers the firm’s Corporate Tax Department.

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