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Tax Moves for Law Firms with Employees: End-of-Year Payroll and Benefit Strategies
As the end of the year approaches, there’s one critical area that should not be overlooked—payroll and employee benefit strategies. For law firms with employees, these final weeks of the year offer a unique opportunity to make strategic tax moves that can significantly reduce your tax liability and maximize your deductions.
Whether you’re managing a small firm or a larger practice, taking action now can set your firm up for financial success in 2025. Here’s a comprehensive guide to the end-of-year payroll and benefit strategies every law firm with employees should consider.
1. Review Payroll Tax Payments and Withholdings
Before the year ends, it’s essential to review your payroll tax payments and withholdings to ensure everything is accurate and up to date. The IRS requires employers to withhold income taxes, Social Security, and Medicare taxes from employees’ wages, and any discrepancies can lead to penalties or increased tax liability.
What to review:
- Ensure accuracy of withholdings: Verify that your firm has accurately withheld the right amount of federal and state income taxes for each employee. Cross-check employee payroll records with IRS Form 941 (quarterly payroll tax return) to confirm the numbers align.
- Make final payroll tax payments: If there are any outstanding payroll tax liabilities, make sure to settle them before December 31 to avoid penalties.
Pro Tip: Use payroll software or consult with a CPA to double-check your payroll tax calculations and ensure that all payments have been submitted on time.
2. Consider Year-End Bonuses and the Tax Implications
Year-end bonuses are a great way to reward employees for their hard work, but they also come with tax implications for both the firm and the employees. Structuring bonuses in a tax-efficient manner can benefit your employees and help your firm manage its taxable income.
Key considerations:
- Bonuses are considered wages: Bonuses are subject to the same payroll taxes (Social Security, Medicare, and income tax withholding) as regular wages. However, the IRS allows employers to withhold a flat 22% for federal taxes on bonuses, simplifying the process.
- Firm tax deductions: Bonuses paid to employees are generally tax-deductible for the firm, reducing your overall taxable income for the year.
- Deferring bonuses: If your firm has had a particularly profitable year and you want to defer income, consider paying bonuses in January 2025. This allows you to push the tax deduction into the next year if needed.
Pro Tip: Communicate clearly with employees about the tax implications of their bonuses, especially if you’re withholding taxes at the flat 22% rate, as this may differ from their normal withholding.
3. Maximize Deductions for Employee Benefits (Healthcare, Retirement Plans)
One of the most effective ways to reduce your firm’s taxable income is by maximizing deductions for employee benefits, such as healthcare plans and retirement contributions. These expenses are not only a great tool for attracting and retaining top talent but also provide significant tax savings for your firm.
Strategies to implement:
- Healthcare benefits: Contributions your firm makes toward employee healthcare plans are fully deductible. Review your healthcare plan payments to ensure all eligible contributions are accounted for in this tax year.
- Retirement plans: Contributions to 401(k) plans or SEP IRAs for employees are tax-deductible for your firm. Ensure you’ve maximized your contributions before year-end to claim the deduction.
- Health Savings Accounts (HSAs): If your firm offers HSAs, ensure that both employer and employee contributions are made before December 31 to take full advantage of the tax benefits.
Pro Tip: If your firm doesn’t currently offer a retirement plan, now may be the time to establish one. Law firms that set up a new retirement plan can qualify for a tax credit of up to $5,000 to cover the startup costs.
4. Prepay 2025 Salaries or Bonuses to Claim the Deduction Now
If your firm has experienced strong profitability this year, you might want to consider prepaying salaries or bonuses for 2025 in December. By doing so, you can accelerate the deduction for these payments into the current tax year, reducing your taxable income for 2024.
What to know about prepaying:
- Salaries: Prepaying a portion of your employees’ 2025 salaries before year-end allows you to claim the deduction on your 2024 taxes. Make sure these payments are processed and recorded properly for tax purposes.
- Bonuses: Similarly, if your firm has planned year-end bonuses, prepaying a portion of next year’s bonus can also help you maximize deductions this year.
Pro Tip: To qualify for the 2024 deduction, the prepayment must be made in cash or check before December 31 and must be for services that will be provided within the first three months of 2025.
5. Review W-2s, 1099s, and Payroll Tax Forms for Accuracy
As the year ends, it’s time to ensure that your W-2s and 1099s are accurate and ready for distribution to employees and contractors. Accuracy is critical because errors on these forms can lead to delays, fines, and complications with the IRS.
Key steps to take:
- Review W-2s: Ensure that all employees’ wages, bonuses, and withholdings are accurately reported on their W-2 forms. These forms must be distributed to employees and filed with the IRS by January 31, 2025.
- Prepare 1099s: If your firm paid independent contractors more than $600 this year, you must issue a 1099-NEC form. Double-check the amounts paid to contractors and ensure their tax identification numbers are correct.
- Payroll tax forms: Review all quarterly payroll tax filings (Forms 941) and ensure they align with your year-end payroll totals. Any discrepancies should be addressed before submitting year-end reports.
Pro Tip: Use payroll software that automatically generates W-2s and 1099s for you. This reduces the chance of human error and ensures compliance with IRS deadlines.
Why End-of-Year Payroll and Benefit Strategies Matter for Law Firms
For law firms with employees, payroll and benefits represent a significant portion of your expenses. By reviewing payroll tax payments, maximizing employee benefit deductions, and prepaying salaries, you can make strategic moves that will lower your tax liability and improve your financial outlook for 2025.
The bottom line: Thoughtful payroll and benefit planning isn’t just about compliance—it’s about making the most of your tax-saving opportunities and ensuring that your firm is in the best financial position possible as you head into the new year.
Optimize Employee-Related Tax Deductions—Reach Out Today!
At Prestige Accounting and Consulting, we specialize in helping law firms navigate the complexities of payroll and employee benefits. From reviewing tax payments to maximizing deductions, our team of experts is here to help you optimize your year-end tax strategy.
Contact us today to schedule a consultation and ensure your payroll and benefits are working to your firm’s advantage before the year ends.
