There are many advantages to being the owner of a small or solo law firm. In fact, for most, the advantages far outweigh the disadvantages. However, if you asked someone who is a solo what’s one thing they don’t like about calling the shots is that income is unpredictable. Unlike an employee at a law firm where a check is waiting for you every couple of weeks when you’re self employed it’s usually the exact opposite. You could be feasting one week and starving the next.
Budgeting for a Solo Law Firm
Even if your income is unpredictable you should still create a budget. This budget should be done for the whole year and should be an estimate of what your income and expenses will be. This doesn’t mean one line for income and another line for expenses. You should have a breakdown of the types of client income streams you have as well as the types of expenses.
This is where good bookkeeping comes in. If you are keeping good books you’ll know what services clients need most and what to focus on. On the flip side you’ll know where your money is going. If you are tracking the health of your practice you’ll find that there is more predictability than you might expect.
Taxes for the Solo Law Firm Owner
Another benefit to staying on top of your bookkeeping is that you’ll know what to expect when taxes are due. There is nothing worse than finding out that taxes are due but there is no money to pay them. A recent survey found that running out of money was the second most common reason why small businesses fail.
As the owner of a small law firm income taxes are a little different than if you were an employee. Instead of getting tax taken out of your paycheck you are expected to pay your taxes, also known as estimated taxes, on what is basically a quarterly schedule.
Then there are self employment taxes to deal with also. Self employment taxes are payments for Social Security and Medicare.
You may also be responsible for sales tax. Most states don’t require that law firms collect sales tax but there are a few states that do. Sales tax is not your money. It’s the government’s money and as a business owner you get the privilege of collecting the tax for them. They do not care that the income from your small or solo law firm is unpredictable. They still expect those taxes to be collected and paid.
Ways to Plan for Small Law Firm Income
There are some ways that you can make your income more predictable. Consider offering incentives to your clients pay on time or regularly. This will allow you to plan more efficiently and also provide working capital to pay bills. You can do the same thing on the flip side with expenses. Instead of waiting for the due date to pay a large bill paying it over installments will allow you to budget for those items.
Running a small law firm sounds like a lot but with good bookkeeping and a sound budget you won’t be blindsided by it all. You can do this!