n order to stay on top of your accounts and make sure you can focus on your profession rather than spending a lot of time on your tax return, knowledge and preparation is key.
Money ranks as a leading cause of stress in America, with the APA’s Stress in America survey finding that stress is heightened during the tax-filing season. It’s unsurprising, then, that so many professionals put off organizing their financial affairs, choosing instead to focus on the careers they’re trained for. Legal professionals are no exception, but working in the legal field does not exempt you from tax laws, and failure to comply can result in fines – or in extreme cases involving fraud or evasion, sentencing. Here’s what law firms need to be aware of when it comes to taxes and accounting.
Your Firm’s Tax Responsibilities
The tax planning for your law firm depends on the type of entity your business is, the number of partners you have, how the firm is financed, and where your practice is based. Other variables, including how partners are paid, the employee hiring process and your savings and expenses accounts will affect the procedure too. For example, your firm will need to pay tax on any interest accrued by savings accounts, and you’ll be required to cover employment taxes.
Solo attorneys will need to file using a Schedule C on their individual tax returns and pay estimated taxes at designated times during the year. Knowing when these intervals are is crucial to staying on top of the process. Small firms, be they partnerships, S-corporations, E-corporations or limited liability companies (LLCs) also have specific requirements to comply with. In both cases, being fully aware of all the required documentation before the deadline is essential. Both solo attorneys and larger firms are advised to save the correct paperwork throughout the year. All paperwork must be kept for at least three years, and should therefore be included in your company’s larger filing system.
Common Deductions
Tax deductions reduce the amount of your firm’s income that is taxable. All deductions should be business-related and must comply with the regulations. This means all expenses must be essential for maintaining your business, but that does include some hospitality allowances. 50% of expenses accrued for networking meetings and meals can be deducted, for example – just be sure that your firm keeps a record of all the receipts in case you’re audited. Other deductions include office supplies (including those for home offices), professional fees, essential equipment, travel, professional development costs and health insurance.
Checking allowable expenses with an accountant is advisable to make sure you claim neither too much nor too little. Some accountants also advise businesses to spend more money towards the end of the year to increase their deductions, but this is a controversial position. It’s a good idea if your firm genuinely needs things like equipment upgrades that you’ll need to spend money on anyway, but it rarely works out as cost-effective if it simply means spending your profit.
Accountants and Accounting Software are Worth the Investment
Working with an accountant is the best way to keep on top of everything and make sure your firm saves enough to cover taxes. It’s recommended to save at least 15% of your income for taxes each month — any surplus can always be funneled back into the business for the following year. If you don’t have a designated accountant, consider investing in accounting software for your firm. A good piece of software for a law firm will include bookkeeping, expense tracking, reporting and analytics, billing and invoicing and payroll, and there are companies (such as Xero) that specialize in software specifically for law firms. While it may seem like an expense you’d rather your firm could avoid, either an accountant or some solid accounting software can make a huge difference in making sure your business stays in control of its finances and keeps the stress out of tax-filing.
No matter what their field, there are few professionals who relish filing taxes. In order to stay on top of your accounts and make sure you can focus on your profession rather than spending a lot of time on your tax return, knowledge and preparation is key.
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