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Avoid These 5 Law Firm Tax Mistakes Before It’s Too Late
If you’re a law firm owner entering tax season without a clear financial strategy, you’re not alone. But you’re also playing a dangerous game.
From incorrect deductions to late filings, tax mistakes cost firms thousands every year—and often, those mistakes are completely avoidable with the right systems in place.
Let’s walk through the top 5 tax mistakes we see attorneys make—and how you can avoid them before it’s too late.
1. Waiting Until March to Talk to Your CPA
By the time March rolls around, it’s often too late to implement meaningful tax-saving strategies. If you’re only talking to your accountant during tax prep season, you’re doing yourself a disservice.
What to do instead:
Set mid-year and year-end tax planning sessions. This allows you to adjust for profitability, make smart investments, and avoid surprises.
Need a proactive CPA who works with law firms all year long? Book a consultation with Prestige.2. Not Tracking Owner Draws and Compensation Properly
Owner draws aren’t automatically “expenses” and can confuse your cash flow picture—especially if you’re taking draws inconsistently or without understanding your tax liability.
Common mistake:
Taking random transfers from your business account without documenting it, then being shocked at your tax bill.
The fix:
- Set a consistent owner compensation strategy.
- Understand the tax implications of your draws (especially if you’re an S Corp).
- Forecast how much you should be paying yourself and leave room for taxes.
3. Misclassifying Contractors vs. Employees
1099 or W-2? The wrong choice can lead to IRS penalties, back taxes, and even legal consequences—especially if your contractor looks and functions like an employee.
Signs you may have it wrong:
- You control when and how the person works.
- They use your firm’s equipment and resources.
- They don’t have other clients or operate independently.
What to do:
Conduct a worker classification review every year—especially before issuing 1099s in January. The IRS is paying close attention to this issue.
4. Ignoring IOLTA Implications in Your Tax Strategy
Many law firms separate IOLTA from their financial planning—but this is a critical error. Mismanagement can trigger ethics complaints, audits, and fines.
Even worse, firms often overlook:
- IOLTA reconciliation timing
- Improper transfers from trust to operating accounts
- Failing to track client funds vs. firm income
Avoid it by:
- Reconciling monthly
- Using dedicated software (like FixMyTrustAccount.com)
- Consulting with a CPA who understands your state’s trust account rules
5. Missing Deductions Because of Poor Bookkeeping
If your records are a mess, you will miss legitimate deductions. Every year, we see law firms overpay because:
- Personal and business expenses are mixed
- Mileage logs aren’t tracked
- Tech subscriptions go unclaimed
- Meals or educational expenses aren’t categorized properly
The solution:
- Clean your books by January 31
- Work with a bookkeeper or use tools designed for legal practices
- Don’t guess—track everything
Don’t Let Avoidable Mistakes Hurt Your Bottom Line
Mistakes don’t just cost money—they cost peace of mind.
With proactive support, you can:
- Minimize your tax burden
- Maximize deductions legally
- Stay compliant with trust and payroll rules
- Plan for growth, not just survival
Final Tip: Don’t Wait Until April
Even if you think “I have time,” the reality is that the most effective tax moves happen before March hits—and even better, before January ends.
If you haven’t reviewed your numbers, owner compensation, IOLTA handling, or payroll classifications yet, now’s the time.
Ready to stop guessing and start planning?Let Prestige Accounting show you how to get it right.
