Tax planning for attorneys and law firm owners looks different from tax planning for most small businesses. Trust account rules, contingency fee timing, and entity elections all interact with the tax code in ways unique to the legal profession. With several federal tax provisions changing for 2026, now is a good time to revisit your firm’s tax strategy.
Why Tax Planning Looks Different for Law Firm Owners
Most small-business tax guidance assumes even cash flow and straightforward revenue recognition. Law firms rarely work that way. Contingency fees can arrive in large, unpredictable lump sums. Client funds held in IOLTA or trust accounts must stay separate from firm income. And referral fee arrangements between attorneys raise their own reporting questions. A tax plan built for a typical small business can miss all of this.
Choosing the Right Entity Structure
Entity choice is usually the first planning decision, and the right answer depends on income level, malpractice insurance considerations, and whether you plan to add partners or employees.
PLLC vs. S-Corp Election
Many solo and small-firm attorneys start as a professional limited liability company (PLLC) for liability protection and administrative simplicity. Once profits reach a level where self-employment tax savings become meaningful, an S-corp election is worth modeling. The election requires paying yourself a reasonable salary through payroll, so it adds complexity that only makes sense once the numbers justify it.
What Changed for 2026: QBI and SALT Cap Updates
Recent federal tax legislation made the 20% qualified business income (QBI) deduction a permanent fixture of the tax code rather than a provision set to expire, and it raised the cap on state and local tax (SALT) deductions. Both changes matter for law firm owners operating as pass-through entities, though attorneys should remember that specified service trades or businesses, including many legal practices, still face income-based phase-outs on the QBI deduction. Running updated projections against your 2026 income is the only reliable way to know how these changes affect your specific return.
Keeping IOLTA and Trust Funds Separate from Taxable Income
Client trust funds held in IOLTA accounts are not firm income and should never be commingled with operating funds or reported as revenue. Clean bookkeeping that separates trust activity from firm income makes tax filing simpler and protects you from the ethics and licensing issues that come with commingling. This is one of the most common areas where we see attorneys run into avoidable problems, often because their bookkeeping software wasn’t set up with a separate ledger for trust activity from day one.
The same logic applies to referral fees between firms. Referral income is taxable to the receiving attorney, and fee-splitting arrangements should be documented in writing and reflected consistently in both firms’ books to avoid mismatched reporting if either practice is ever reviewed.
Retirement Planning Moves for Solo and Small Firm Attorneys
Solo 401(k) plans, SEP-IRAs, and defined benefit plans can all reduce current taxable income while building long-term savings, and the right vehicle depends on whether you have employees and how variable your income is. Attorneys with lumpy contingency fee income often benefit from plans that allow flexible annual contributions rather than fixed monthly deposits.
Quarterly Estimated Taxes and Cash Flow
Because contingency fees and referral income can arrive unevenly, quarterly estimated tax payments deserve more attention from attorneys than from businesses with steady revenue. Setting aside a percentage of every incoming fee, rather than waiting until a payment lands to calculate what’s owed, helps avoid an underpayment penalty and a stressful April.
Petry Tax & Advisory works with attorneys and law firm owners in Houston, the Woodlands, and Denver on entity structure, tax planning, and IRS resolution matters. If your firm’s tax strategy hasn’t been reviewed recently, we invite you to schedule a consultation to go over your specific situation.
This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.
lucy.petry@petrylawfirm.com
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