This week in Things I Wish I Knew, Joleena Louis discusses her strategies for making tax season less stressful for solo attorneys.
It’s that least favorite time of the year for many solos: tax season.
One thing I wish I knew when I started my solo practice was the importance of being organized and prepared for tax season all year long. This year, tax season was a lot more stressful (and time consuming) because I wasn’t fully prepared.
I recently worked with a new tax advisor who helped me develop a better system for next year. Here are a few tips I got for making tax season less stressful for solo attorneys:
1. Regularly Set Funds Aside to Pay Taxes
Sounds obvious, right? But you’d be surprised at how many attorneys I speak with who are lax about setting funds aside throughout the year to pay taxes, and then are surprised at how much money they made at year end. Often they are forced to pay their tax liability with a credit card.
After about a year in practice, you should, with a reasonable degree of certainty, know what percentage of your revenue that you must set aside for taxes. Put that money in a segregated bank account and forget that it’s there. Be as off-hands with those funds as you would be with client funds in your IOLA account.
You’ll be thankful that you did when tax season comes around again.
2. Business Structure
I started my practice as a sole proprietor, mostly because it was simple to get started and was inexpensive. I intended to eventually switch to a PLLC, but didn’t quite get to that during my first year of practice.
However, after discussing my goals, income and insurance coverage with my accountant, we decided that, tax wise, it would be better for me to remain a sole proprietor at least until I hired a full time employee.
The corporate entity wouldn’t protect me from malpractice liability anyway (I have PLI for that), and I don’t have enough in the way of vendor liability to justify the expense of maintaining the PLLC.
3. Track & Manage Business Expenses
One of the best parts of being self employed are the expenditures you make for the business that can be deducted from your income. But there were so many deductions that I didn’t even realize I could take, and I really wish I would have done a better job of tracking these expenses.
Last year I attended so many networking lunches, and purchased many thank you gifts, that I did not track.
Part of the problem for me is that even though I used my operating account for most business expenses, I still occasionally used cash or my debit card for things that could have been deducted.
Going forward I will exclusively use my business credit or debit card so I can track these expenses in my accounting software.
4. Keep Receipts Organized
In my defense, I started off doing a great job with this, but towards the end of the year most my receipts ended up in a giant envelope. Most of my purchases and expenses are tracked on my accounting software, but my accountant warned me that I would regret the giant envelope system if I ever got audited since I would need to produce the receipts.
My plan going forward is to keep all of my receipts in Evernote. Evernote is a cloud based note keeping system where you can use to archive photos, text, audio, etc. With the app I can immediately take a picture of the receipt with my phone and tag it with the month, year, and type of expense. I can also forward any emailed receipts to the app.
5. Don’t Forget About Retirement
I have an IRA but I am not contributing nearly as much as I should. Its hard to worry about retirement when I am worried about paying next month’s rent. Based on my income last year, my accountant and I came up with reasonable monthly contribution that I have to consider a fixed expense to ensure I am adequately preparing for the future. When you are self-employed, always pay yourself first!
What about you? Do you have any hacks to be better prepared for tax season?
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Joleena Louis is a matrimonial and family law attorney at Joleena Louis Law, a firm she founded after leaving a boutique matrimonial firm in Brooklyn. Joleena is a client in Law Firm Suites’ start-up program in Downtown, New York. Her weekly blog series Things I Wish I Knew… explores her thought process and experiences in her transition from small law firm employee to successful solo practice entrepreneur.
