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Tax Advice for Structuring Your Fees

Here is the missing tax advice when structuring fees.

Structuring fees makes sense and increases your wealth.  But you must document now your plans to structure fees next year.  Attorneys being encouraged to structure their fees are not given the following tax advice.  These four issues are vital for a successful fee structure.  Follow these steps and call us to structure your fee.

  1. Amend you contingent-fee agreement.

If your contingent fee agreement is not amended to provide for a structured fee, then it needs to be.  You cannot defer you fee if you are entitled to the lump-sum fee.  You must amend the agreement before you have earned the fee.  This, of course, requires that you determine when you have earned your fee.  If you earn it upon receipt by the client, then there is no problem.  If you earn it earlier on a quantum meruit basis, then there is a problem.

  1. The deferred-compensation agreement requirement.

Lawyers are not given proper advice about deferred-compensation agreements.  Unless you are a sole practitioner, you must have a deferred-compensation agreement in place before structuring your fee.  Even if you are a sole practitioner, you must have a deferred-compensation agreement in place if you practice using a professional corporation.  This tax requirement exists because the fee is earned by the entity through which you practice, but you want the periodic fee payments to be directed to you individually.

If you fail to have a deferred-compensation agreement in place prior to structuring your fees and practice through a professional “C” corporation, then you risk paying income tax twice . . . once at the entity level and a second time on your individual return.  If you practice through a professional “S” corporation, or a partnership or limited liability company, then the risks are different but nevertheless substantial.  The most dangerous combination or tax risk without such an agreement is practicing through a corporation that is a shareholder in another corporation.

  1. The extra payroll and self-employment taxes.

Lawyers are not informed about payroll and self-employment taxes on fee structures.  If you receive your fee as a single lump sum or in a structure, then you pay payroll tax only once.  As tax lawyers, we can do those pro forma returns for you.

  1. The increasing federal income-tax rates.

Lawyers are not warned about increasing future income tax rates.  Our current income tax rates are at historic lows.  The federal rate is 39.6% on joint income over $466,950.  State rates add to that burden.  Given the national debt, the only probable direction is up.  We can illustrate the effect of increasing rates on your structure to help you decide if it makes sense for you.

You need sound tax advice to decide whether to structure a fee.

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