Congratulations! You finally made partner at an esteemed law firm. It’ a significant accomplishment. Along with the added responsibility, additional workload and higher compensation comes a more complex tax return. You can now expect to make quarterly estimated tax payments, file a K-1, and possibly file additional state returns.
Each law firm issues their K-1 at different times, so check with your HR department to get an idea of when to expect yours. Most likely, you will need to file an extension because it won’t be available until after April 15th.
The biggest change is the move from a W2 employee (with regular paychecks and tax withholding) to becoming a partner with distributions throughout the year. When making this transition, it’s important to prepare for the “lumpiness” of your cash flow as you may be paid larger lump sum amounts at various times throughout the year. I recommend that you prepare a budget and set aside enough cash for every day expenses for several months. Next, make sure you have cash available for quarterly estimated tax payments when they come due in January, April, July, and October. This often causes the need for additional tax planning so it may make sense to use a tax accountant, if you’re not already. Don’t stress the changes, but just make sure you prepare. Give yourself a “safety net” and build a cash reserve to cover any unexpected expenses as you get comfortable with your new normal.
The next wrinkle to your tax return is the extra state filings that may be required. No longer must you just file your federal return and a state return of your primary residence state. Now that you are a partner at your firm, taxable activity in other states the firm does business in will flow through to your tax return. Speak with your CPA to determine which state returns are necessary.
If you didn’t use an accountant before becoming a partner, this big promotion may be the reason to evaluate other options. Tax planning and additional state filings are now more important than ever.