Pay Less in Taxes, Sleep Better at Night, and Enjoy Life a Little More

By Reid F. Trautz

Solo and small firm lawyers work tirelessly for their clients, often to the detriment of their own business. Yes, it’s the legal work that generates income, but what good is it if Uncle Sam gets most of it, you can’t sleep because of it, and you have no time to enjoy it? Here are a few quick suggestions to help your business in the new year.

Tax Strategies and Tips

Electronic Federal Tax Payment System from the IRS. Never miss a quarterly tax payment again with the Electronic Federal Tax Payment System (EFTPS) offered free from the U.S. Department of the Treasury. Make your federal tax payments (personal or business) electronically 24 hours a day, 7 days a week through the Internet or by phone. According to the IRS, there is nothing special to learn here—whichever method you use, you will be prompted for the information required to make a payment. No one has access to your account except you.

Best of all, you can schedule payments up to 365 days in advance, so you don’t have to remember or worry if you are on vacation or busy. Simply schedule your payments, and on the selected dates your payments will be made—conveniently and on time. This is especially useful for 1040-ES estimated tax payments that are due quarterly. You can simply and easily cancel a payment by phone or online, up to two calendar days in advance of the scheduled payment date. To enroll online, visit www.eftps.gov.

Social Security payments. Inaccurate Social Security numbers and inaccurate names can cause law firms to improperly submit employee tax payments to the government. Save that hassle by verifying proper names and numbers before you send the first payment. The name and SSN listed on each employee’s W-2 form must match the name and SSN on the employee’s Social Security card. This match ensures that the earnings of each worker are properly recorded to his or her lifetime earnings record. The earnings record is the basis for determining Social Security benefits eligibility and benefit amount.

The U.S. Social Security Administration’s Employee Verification Service (EVS) easily identifies inaccurate name and SSN combinations so they can be corrected before you submit your W-2s to the Social Security Administration (SSA). Simply go to www.ssa.gov/employer/ssnv.htm. For each name and SSN you want verified, have ready the following information when you call: SSN, last name, first name, middle initial (if applicable), date of birth, and gender. Also have available the employer name and Employer Identification Number (EIN).

Section 179 expense deductions. This is an important deduction for firms buying new or used equipment, including software. Under this section of the Internal Revenue Code, businesses may deduct up to $108,000 (in 2006) for tangible property placed into service in that tax year. This is a huge benefit to firms upgrading computer systems or making other large qualifying purchases. Although in the past some lawyers bought large SUVs using this deduction, Congress closed that loophole by limiting section 179 deductions for passenger automobiles to $8,800 or less depending on the vehicle purchased. The section 179 deduction is not automatic. You must complete IRS Form 4562 with your tax return to be eligible. See IRS Publication 946 for more information, or check with a tax adviser or the IRS.

Selecting your business entity. Some lawyers decline limited liability entity options and opt for being an S corporation. Why? The perceived tax advantage of paying yourself a low salary and not paying higher FICA taxes. Electing a Subchapter S corporation tax status enables shareholders to treat earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, must pay herself wages if there is a profit, and these wages must meet the standard of “reasonable compensation.” This standard can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone else to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount. According to some sources, the IRS is cracking down on lawyers who fail to meet the “reasonable compensation” standard.

Income Protection: Disability Insurance

As a small business owner whose income is generated by personal services, it is important to protect your stream of income against loss owing to disability. Many business owners rationalize that they don’t need income replacement insurance, but is that wise?

According to the Disability Management Sourcebook, the number of folks between 17 and 44 years of age with severe disabilities has increased 400 percent during the past 25 years. One in seven people will become disabled for five years or more before the age of 65. The Health Insurance Association of America reported in 2000: “Government statistics show that women who work outside of the home are three times more likely than men to miss work due to a disability-related illness.” Every year 12 percent of the adult population in the United States suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65, and if you’re 35 now, your chances of experiencing a three-month or longer disability before you reach age 65 are 50 percent. If you’re 45, the figure is 44 percent. Disability is more often sickness related, not accident related. Such disability can include mental and nervous disorders, heart conditions, or even back problems.

There are five common reasons why people don’t get disability insurance, but those reasons just don’t stand up to scrutiny:

1. “I’m young and healthy and I never get sick. Nothing will happen to me.” False. Disability strikes many who have never been seriously ill. Car accidents, sports accidents, and mental health issues are but a few of the things beyond our control. Statistics show that a person is three times more likely to become disabled than die between the ages of 32 to 65.

2. “Social Security will cover my living expenses.” This is often a false assumption. To qualify for Social Security disability payments, you must first be disabled for five months and projected to be totally disabled for 12 months or longer. Moreover, the monthly benefit is barely above poverty level. Take a minute to surf the Social Security website and calculate your benefit, then decide if you can really live on that amount.

3. “ My investments will carry me through any short-term problem.” Hopefully so, but aren’t those for retirement, too? Calculate present income from all investments and compare it to your present income needs. Is it enough? If not, read on.

4. “My partners will carry me.” Possibly, but has this been discussed with your partners? Is it in your partnership agreement? If it isn’t, you shouldn’t rely on it.

5. “My spouse will support me.” That’s probably true if he or she is employed, but try living on one income for 90 days right now and see what happens.

Now that we’ve debunked those five myths, what should you look for in a good disability policy? Definitions are the keys to a good policy. It is extremely important to read the whole policy you are considering. “Own occupation” definitions of work and tasks are preferred. “Own-Occ” means you can return to work in another occupation with no offsets on the disability benefit if you are unable to perform your own occupation. Look for a policy that has specific tasks that attorneys perform. Waiting periods can vary and adjust the premium. Longer waiting periods (90 days or more) can save you money on your monthly premiums. Be sure you understand the claims process of the company before buying. You don’t want to be surprised about the process and procedures when you need it most. Buy from a reputable company or a broker you trust. Check AM Best, Moody’s, or Standard and Poor’s for the financial soundness of the company. Check the commission schedule; the more front-end loaded it is, the worse for you. How much insurance is enough? You should have enough so that, when combined with your other liquid assets, it will provide you with the yearly stream of income you need. Armed with this information, get a referral to a good insurance company or agent to find the policy that is best for you.

Protecting Your Business (to Sleep Better at Night)

Personnel: Trustworthy as a Boy Scout? You’ve heard the saying “Power corrupts and absolute power corrupts absolutely”? That same principle can apply to a law office or firm when one person has too much authority or too little oversight. Associates, partners, office personnel—all can succumb to temptation when the opportunity arises. Avoid the financial hardship, tarnished reputation, or loss of your license to practice law by implementing procedures and controls, confidentiality agreements, and Internet office policies.

Standardize tasks and responsibilities so the same person does not have too much power and control over office systems, especially finances and client communications. Review trust accounts and other finances at least monthly; the person who opens the mail should not deposit incoming checks; the person who deposits checks should not have signatory authority on the checking accounts. Consider opening your own mail, then delegate responsibility for further tasks.

Review with each staff member the risks and requirements of Rule 1.6. Have them sign an agreement that they understand the consequences of talking about clients or client matters outside of the office. Take precautions to make sure client information is not available for others to see or hear. Make sure those in the waiting area or conference room cannot hear the receptionist. Keep certain files and documents for clients from being accidentally read by others visiting your office.

Surfing the web and forwarding jokes can cause embarrassment and harm. Draft and implement a firm-wide Internet usage policy and discuss it with all attorneys and staff.

Avoidance syndrome. Is there a file in the office that you just can’t stand to look at? It’s often related to a client you really can’t stand or a matter you now know you should not have accepted. Has it been languishing on the corner of your desk? Is a deadline approaching? You know you’ve got to tackle it, but you just can’t seem to get started. These unwanted files are a major cause of grievance and malpractice complaints and can cause the premature end of a lawyer’s career. And almost every lawyer has one of these “dog” files. How do you deal with the “dog” file?

There are several ways to get moving on it and extract yourself from a potentially dangerous problem. If you are in a small firm, trade the file with a colleague. Approach your partner or another associate and offer to trade your “dog” file for hers. At least this way you don’t already have problems with the client. Call a valued colleague and ask him to lunch. Hypothetically, explain the case. Ask him what he would do, where he would start, how he might proceed. Read the file now with the intention to do no work on it. Set the file on your desk and start reading it immediately. Sometimes our own procrastination is the real problem. Just open the file and start reading it. As ideas and tasks come to mind, write them down. Work on the file for a minimum of 30 minutes. If you can, work longer. When you can’t work anymore, schedule time on your calendar to work on it again tomorrow. As you re-familiarize yourself with the file, it will become easier to work on.

Protecting your future. We’d rather not think about severe injury, sudden illness, or even death. If we’re going to take the medicine we often prescribe to our clients, we need to prepare for these potential scenarios.

Every lawyer needs a backup lawyer: someone who can step in when needed if you take a vacation, have a death in the family, or are sick or suddenly injured or incapacitated. Large firms and some small firms have the ability to do this almost seamlessly, but for solos and some small firms, this is more of a problem.

The “When I Die Letter” is an idea straight from Ross Sussman’s chapter in the ABA book, Flying Solo » (fourth edition, 2005). Write a detailed letter with information to help both your family and office deal with your sudden incapacitation or death. Topics should include: computer passwords, location of insurance policies, name of backup attorney, location of partnership documents with any buy-out provisions, instructions on the sale or closing of the practice—anything that will make it easier on your family and maximize the investment you have in your practice or firm. Give the letter in a sealed envelope to a spouse or other family member. Update it annually.

Several times a year I hear about a solo lawyer who died with an active practice but did not take any precautions to protect clients or the practice. The family is left to sort things out. That often means turning over the practice to an unfamiliar lawyer. It also means leaving behind some value in the practice, including the stream of income from current cases and the goodwill built up from years of solid, dependable legal service. A few years ago lawyers were not ethically allowed to sell their practices, but that has changed in most jurisdictions. Take time now to investigate your options. That doesn’t mean to arrange a sale now, but just to make sure a backup attorney and a “When I Die” letter will point your family in the right direction. As retirement age approaches, take more concrete steps to understand the value and salability of your practice.

Enjoy Life More

Using values to determine your future. As your practice matures and grows, so do the demands on your time. Often, lawyers turn to time management techniques to help meet these demands. In reality, we all have the same amount of time each day; the key is how we choose to spend that time and the tools we use to achieve those choices. The right choices coupled with the proper tools will help you achieve your goals.

How you practice is a choice—not just a professional choice, but a lifestyle choice: total hours in the office, clients represented, areas of practice, hours billed, fees collected, and money earned. Even if you work for a law firm as an associate or partner, you have the choice to practice within the culture and norms of that firm or seek another work environment.

Some lawyers have difficulty accepting this responsibility, choosing instead to ascribe their choice to demanding clients, senior partners, or others. Some lawyers thrive on being a lawyer, making the choice to remain busy in the office, spending 12 to 16 hours each weekday, and additional hours each weekend. Others choose to spend less time in the office and more time doing other things. The point is that it is a personal choice, not one placed upon us by others. Because there are a set number of hours each day, the choice we make in our professional lives has a certain impact on our personal lives.

The most contented lawyers in practice have accepted responsibility for their choice and analyzed their personal values, needs, and desires to make the right choice for them. Not everyone gets this right the first time, but with a little work you can shape your busy practice into what you want it to be.

What do you want your practice to look like? This is a question that you should have asked yourself as you started your practice. As your practice grows, take time to ask this question again. This time you have certain luxuries you may not have had before: more clients, better cash flow, administrative help, and a better understanding of the business of law. Your personal life also may have changed over that time.

So what do you want your practice to look like? What changes or improvements will provide you with greater satisfaction in the practice of law? More time in the office? Less? Fewer troublesome clients and more paying clients? Fewer administrative hassles? More time counseling clients and less time putting out fires?

Only you can analyze this using your personal value system within the context of your personal and professional lives. Take some time over the course of a week or month to create a description of what you want from your practice. Then apply that to your practice to make the changes necessary to achieve the choices you have made.

Most lawyers choose to spend less time in the office, representing fewer but better-paying clients. Still others want to spend time in the office, but quality time with fewer headaches. Again, it is hard for an outsider to tell you how to create this balance, but most lawyers who attempt to improve their practices do so by making improvements in three areas of practice: office systems and procedures, financial management, and self-improvement.

Daily strategies to improve the practice of law. The life of a lawyer, especially a solo or small firm practitioner, is often stressful. Stress itself is not necessarily a bad thing; some people thrive on stress. Our body’s reaction to stress actually helps us to meet the sudden demands and extra tasks that we face as busy lawyers. However, too much stress too often—chronic stress—takes its toll on our physical, mental, and emotional well-being. That in turn affects our personal lives and our ability to serve our clients. The trick is to eliminate some of the stressors in life and build our resiliency for the stresses we cannot change. Try to incorporate the practical tips below into your daily routine to help you reduce your stress and enhance your performance in the practice of law.

Don’t let your client make you work for free. Make sure you are the one, not your client, who decides which cases will be pro bono. Working for a client who can’t or won’t pay leads to frustration and anger, which can lead to ignoring the file and the client, which can lead to a disciplinary complaint. Working for a non-paying client is worse than not working at all. Remember to follow all procedures for withdrawing from the attorney-client relationship.

Prominently display your law degree, bar admission, and court admission certificates. Your clients will gain confidence by seeing proof of your legal accomplishments, and it will remind you how hard you worked to get where you are. Take pride in what you have achieved as a lawyer.

Set your own work priorities. Too often we let someone else’s priorities dictate our work schedules. When that occurs, it is often owing to that person’s failure to plan—like the client who was served 20 days ago and wants you to drop everything to respond by tomorrow. When you have competing priorities for your time, it is best to avoid clients and others who seek to take us away from important matters to address their urgent ones.

Use block scheduling for returning phone calls. Reduce your stress by curtailing the game of phone tag. The best times to reach people in the office are between 9:15 and 11:00 AM and between 3:00 and 5:00 PM. If you are having trouble reaching clients, set aside an hour or two per day for telephone calls during these times.

Enjoy the process, not just the outcome. Many of us live for certain moments or events. We ignore much of work and life between those special moments, causing us to miss much of life. By so living, we become hurried and impatient trying to get to another special moment or highlight. Consciously focus on the process of what you do. Learn to enjoy each aspect in the process. Learn to enjoy life.

Avoid bargain-hunters. Bargain-hunters are lawyer-shoppers who have unrealistic expectations about the cost of your legal services. They won’t appreciate lower fees; in fact, they will probably think your fees are too high no matter how little you charge. Often, these clients require more time and attention, making the relationship financially unprofitable. Don’t do loss-leaders; they create expectations that you will continue to charge low fees, which is inconsistent with your intention to charge your regular fees in the future. Avoid these types of clients in your part of the jungle!

Spend time with the people who mean the most. Neglecting family and friends can ruin those relationships. Be sure to spend enough quality time to keep these relationships thriving. For added fun, periodically recreate a romantic date or favorite family outing. Remember a particularly good time you’ve had with your family, spouse, or significant other? Do it again and relive the good memories while creating new ones. You’ll have fun, and your family and significant other will thank you.

The person who has the most toys wins. Keep several stress-relieving toys in your desk drawer and take them out when the need arises—five minutes is all it takes. Yo-yos, slinkys, and “fast food” meal toys can be lots of fun. Be sure to share them with your colleagues.

Remember: Even God rested on the seventh day!

Reid F. Trautz is the director of the Practice and Professionalism Center of the American Immigration Lawyers Association in Washington, D.C. He can be reached at . This article originally appeared as a presentation at the 2004 Oklahoma Bar Association Solo and Small Firm Conference, © 2004, 2007, Reid F. Trautz. Reprinted by permission. The article has been updated for publication in this issue of GPSolo.

Copyright 2007

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