The Hidden Tax Opportunity Most Law Firm Partners Miss

If your firm is still operating under a traditional setup, you may be paying more in self-employment taxes than you need to—and missing out on a range of advantages that could meaningfully improve your after-tax income.

At Gelt, we’ve been working closely with small law firms and solo practitioners, uncovering patterns in how firm structure impacts taxes, cash flow, and long-term wealth building. Here’s what we’ve found—and why it may be time to take a closer look at your own setup.

The Typical Law Firm Structure Problem

Most small firms (typically six partners or fewer) operate under the same structure they started with. It’s familiar, simple, and easy to maintain—but that simplicity often comes with an overlooked cost.

In many cases, the way profits are distributed means partners end up paying a substantial self-employment tax bill—sometimes five figures—on income that could potentially be treated more efficiently.

Larger national firms can absorb this inefficiency due to scale and complexity. But for small and mid-sized practices, the flexibility exists to modernize how income flows through the business—and the difference can be meaningful.

The Three Big Misses for Law Firm Partners

Through conversations with hundreds of attorneys and firm owners, three common blind spots appear again and again.

1. Paying More Tax Than Necessary

Partners often assume the way they’ve always filed is simply “how it’s done.” But when you dig into how income is categorized and taxed, there are smarter ways to structure it. The right setup can make a surprising impact on what you actually keep each year.

2. Not Taking Full Advantage of Business Benefits

Many lawyers don’t think of themselves as entrepreneurs—but from a tax perspective, they are. Certain structures allow you to capture more of the legitimate costs of running your professional life, from workspace and operations to other mixed-use areas that often go underutilized.

3. Overlooking State-Level Opportunities

Recent changes at the state level have created new ways for small professional firms to offset certain taxes that were previously limited. Yet most law firms don’t realize these programs exist—or that their current entity structure prevents them from qualifying.

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The Smarter Alternative

The most successful firms we’ve worked with share one thing in common: they’ve modernized how income flows between the firm and its partners.

The approach isn’t complicated, but it does require a shift in thinking—from “this is how we’ve always done it” to “what’s the most efficient way to operate as a partner today?”

With the right structure, partners can:

• Create more flexibility in how their income is treated
  
  
• Streamline deductions and professional expenses
  
  
• Potentially reduce exposure to certain taxes each year
  
  
• Build a cleaner foundation for retirement and reinvestment planning
  
  

For many small firms, this can translate to five figures in potential annual savings—without changing how the firm actually practices law.

Here's an Example

Let’s say Rachel, a partner in a five-attorney firm, earns $200,000 in income from her share of the firm.

Under the status quo, she pays a flat percentage in taxes on the entire amount—no nuance, no optimization.

But with a more strategic setup, that same $200,000 can flow differently, in a way that creates more control, less tax drag, and a better overall balance between income and expenses.

The outcome? Rachel keeps significantly more of what she earns—and gains flexibility in how she manages her professional finances going forward.

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Most law firm partners aren’t missing the work. They’re missing the structure.

If your firm has fewer than ten partners and you haven’t revisited your setup in the past few years, it might be time to. The potential impact could surprise you.

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