Cash vs. Accrual Accounting: Which Saves More at Tax Time?
October 9, 2025
Is Your Entity Structure Hurting Your Tax Strategy?
Spoiler alert: Your tax bill isn’t just about how much you make—it’s about how you’re structured.
Far too many law firm owners leave money on the table every year because their business entity no longer matches their current size, goals, or income strategy.
Whether you’re a solo attorney still operating under a PLLC or a growing firm running payroll through an S Corporation, your entity structure can either be a powerful tax-saving tool—or an expensive liability.
Let’s talk about how to know the difference—and what to do before December 31 to protect your profit.
The Big Three: How Entity Type Impacts Law Firm Taxes
Here’s how each of the most common legal structures affects your taxes—and what lawyers need to know about each.
1. PLLC or Single-Member LLC (Disregarded Entity)
- Default for solo attorneys who set up a limited liability company
- Income flows through directly to your personal tax return (Schedule C)
- Subject to full self-employment tax (15.3%) on all net profit
- Simpler to manage but not the most tax-efficient long-term
Best for: brand-new solo firms under ~$75K net income, where simplicity outweighs tax savings.
Red flag: If you’re taking home six figures and still filing as a Schedule C, you’re almost certainly overpaying the IRS.
2. S Corporation
- Requires reasonable salary + profit distributions
- Only the salary portion is subject to self-employment tax
- Can reduce overall tax burden when set up correctly
- Requires payroll processing and more formal accounting
Best for: firms with consistent profits of $100K+ who are ready to run payroll and separate their owner comp.
Red flag: If your distributions are high but you’re paying yourself a low or no salary, the IRS may reclassify distributions as wages and hit you with back payroll taxes + penalties.
3. Partnership (Multi-Member LLC)
- Used when more than one attorney owns the firm (and isn’t electing S Corp status)
- Profits pass through to each partner via K-1 forms
- Partners pay self-employment tax on their share
- Must track guaranteed payments, capital accounts, and draws carefully
Best for: collaborative ownership structures with built-in profit-sharing and clear accounting support
Red flag: Lack of clarity on who owns what, or poor recordkeeping around distributions, often leads to mismatched taxes, partner disputes, or audits.
💡 Pro Tip: Your Entity Type Affects More Than Just Taxes
Your structure also determines:
- How you pay yourself
- Whether you’re required to file quarterly payroll taxes
- What kind of retirement accounts you can use (e.g., Solo 401(k)s for S Corps)
- Whether your law firm can raise outside capital or add new partners easily
If you’ve grown, changed niches, or brought on staff and haven’t revisited your setup—now’s the time.
🔍 Example (That Could Be You)
One of our clients—a solo attorney earning ~$250K/year—was operating under a PLLC and paying self-employment tax on every dollar.
We converted the firm to an S Corp, established reasonable salary + distributions, and saved over $12,000 in taxes that first year alone.
This is the kind of tax move that must be planned before December 31—or you miss your window.
🧾 What to Review Before Year-End
- Net profit projections for the year
- Current owner compensation structure
- Whether you’re already running payroll
- The complexity of your practice (e.g., partners, employees, office space)
- Whether your financials are clean enough for a transition (we help with this)
⏰ Timing Matters: Some Changes Must Be Made This Year
For example:
- To elect S Corp status for 2025, you typically must file Form 2553 by March 15, 2025
- But to make salary and distribution decisions that affect 2024 taxes, you need to act by December 31, 2024
This is why October and November are the sweet spots for tax planning. Once the year ends, your options are limited.
🎯 What If You’re Not Sure?
If you’re reading this and thinking:
“I don’t even know what structure I’m under…”
“I’ve had the same setup since I started my firm…”
“I think I’m paying myself wrong, but I’m scared to touch it…”
You’re not alone. But now is the best time to get clarity and fix it.
🔗 Schedule Your Entity Review Today
At Prestige Accounting & Consulting, we specialize in helping attorneys like you:
- Evaluate your current structure
- Run salary vs. distribution scenarios
- Ensure compliance with IRS, state bar, and employment rules
- Save real dollars by working smarter—not just billing harder
