Law Firm Estimated Taxes: Guaranteed Payments With Nothing Withheld, the Settlement That Lands in September, and the Pass-Through Entity Tax

Law firm partners meet the estimated tax system with gross draws and a docket, and the setup depends on which one the firm's income follows. The rules (the contractor estimated-tax guide covers the mechanics): quarterly installments on April 15, June 15, September 15, and January 15; a quarter-by-quarter underpayment penalty; avoided by the prior-year safe harbor (100% of last year's tax, 110% above US$150,000 of prior-year adjusted gross income — nearly every partner is above it) in equal installments, 90% of the current year's tax in equal installments, or the annualized method. The partner's position — nothing withheld: a partner in a PLLC or LLP receives guaranteed payments (monthly draws) and a distributive share of profit (allocated at year-end, distributed as the firm's cash allows) — all of it gross, with no withholding, and all of it subject to self-employment tax (15.3 percent to the wage base, 2.9 percent above, plus 0.9 percent Additional Medicare Tax above the threshold) and income tax; the partner's estimates cover both (the omitted third is the self-employment tax — a partner with a US$300,000 share owes roughly US$31,000 of it beyond the income tax); the firm circulates a projection of each partner's share in the fall for the fourth installment, and the K-1 arrives in the spring. The reserve — the partner's discipline: a percentage of every draw and every distribution moved to the partner's tax account the day it lands — for a partner at a 35 percent effective rate on income tax plus the self-employment tax on the draw, about 38 to 40 percent of each guaranteed payment and 38 percent of each distribution (the distributive share carries self-employment tax too) — so the installments are transfers; a firm that helps its partners (some firms make the partners' estimated payments from the firm's account as distributions, charging each partner's capital account — a service, not a firm tax obligation). Two income shapes. The steady firm (hourly billing, monthly invoicing, a transactional or estate practice with retainers): fees earned and transferred from trust monthly, collections lagging billings by 30 to 60 days, a December push (year-end matters, retainers replenished) and a January–February lull — equal installments under the prior-year safe harbor with the reserve fit, and the fall recompute adjusts for the year's actual profit and the retirement plan contribution. The contingency firm (personal injury, mass tort, class action, employment): fees arrive when cases resolve — a US$900,000 settlement in September on a case begun three years ago, nothing in the first two quarters — and the year's income is the resolutions, which the firm projects from its docket (the matters expected to settle or try, the ranges, the timing — with the caveat that settlements slip) and revises quarterly; the annualized method fits — installments on year-to-date income through each cutoff (near zero for the quarters before the settlement, large after it) — with Form 2210 Schedule AI at filing; and the prior-year safe harbor is the alternative for a partner whose prior year was small (a building year's small tax makes the safe harbor cheap and penalty-proof, with the settlement year's tax landing in April from the reserve — which has to be taken from the settlement's distribution the day it lands, before the firm's line of credit is repaid and the partners' draws are caught up); the reverse — a partner whose prior year had a large settlement and whose current year is a building year — uses the current-year method or the annualized method to avoid overpaying on the prior year's number. The S corporation shareholder-lawyer (the law firm entity guide): the salary withholding covers the tax on salary and projected distributions — deemed paid evenly across the year regardless of when withheld — through the firm's payroll (associates and staff, always in place), with a fall W-4 adjustment for the year's actual profit (and, for a contingency firm organized as an S corporation, a heavily withheld bonus payroll in the month the settlement lands — the mechanism that makes the lumpy year a W-4 event); the December payroll cures the year. The pass-through entity tax election — the state-level planning: since the federal cap on the state and local tax deduction (the individual's SALT deduction — capped at US$10,000 from 2018 through 2024; the 2025 legislation, P.L. 119-21, raised the cap to US$40,000 for 2025 and US$40,400 for 2026 (half for married filing separately), rising 1 percent a year through 2029 before reverting to US$10,000 in 2030, and reduces it by 30 percent of modified AGI above US$505,000 for 2026 (US$500,000 for 2025), but never below US$10,000), most states with an income tax have enacted a pass-through entity tax: the partnership or S corporation elects to pay the state income tax at the entity level (deductible by the firm as a business expense, without the individual SALT cap), and the partners or shareholders receive a credit (or an exclusion) on their own state returns for their share — the net effect is a full federal deduction for state tax that would otherwise be capped — most valuable for partners whose modified AGI pushes the cap back toward US$10,000; the election has its own estimated-payment schedule at the entity level (the firm pays quarterly, and the partners' own state estimates fall correspondingly), its own deadlines and forms, and state-specific mechanics (some states require the election annually; some make it binding; the credit's treatment for nonresident partners varies); for a law firm with high-earning partners in a high-tax state, the pass-through entity tax election is often worth more than every other estimated-tax decision combined, and it is a firm-level decision made before the first entity-level payment is due. What the estimate includes: federal income tax on the projected guaranteed payment and share (or salary and distribution); self-employment tax on the partner's total (or payroll tax on the shareholder's salary — through payroll); the state's estimates (reduced by the pass-through entity tax credit where elected; the firm's entity-level payments on their own schedule); the retirement plan contribution (the partner's share of the cash balance and profit-sharing contributions — the largest adjustment; the dental estimated-tax guide's fall-decision point applies); the QBI deduction — zero for most partners above the range; the Additional Medicare Tax (on self-employment income above the threshold, or on the salary — Form 8959); and the health insurance deduction for the partner (the guaranteed payment for health premiums, deducted above the line). The quarterly check: the firm's fees earned and collected against projection (the steady firm) or the docket's resolutions against the projected timing (the contingency firm); the partner's draws and distributions; the reserve balance against the next installment; the retirement plan's expected contribution; the pass-through entity tax payments made by the firm; profit through the quarter (annualized for the contingency partner) against installments or withholding; and the adjustment. The failure modes: the partner who estimates on the draws alone and forgets the distributive share (the K-1's profit above the guaranteed payments is income too); the self-employment tax omitted; the settlement's distribution spent on catching up the line and the draws before the reserve is taken (the April balance with no cash); the prior-year safe harbor paid through a building year after a settlement year (overpaying, refunded in May); the pass-through entity tax election missed (the SALT deduction capped for another year); and the partner in two states (the firm's office state and the partner's residence) with the nonresident return and the credit unreconciled. The calendar: January — last year's K-1 projection reconciled to the firm's close, the safe harbor computed (110 percent), the reserve percentage set on the partner's effective rate plus self-employment tax (or the S corporation W-4), the docket's expected resolutions noted, the pass-through entity tax election made or confirmed for the year; each draw and distribution — the reserve transfer; quarterly — the check (the firm's projection of each partner's share); the four installment dates (equal, or annualized for the contingency partner); the firm's entity-level payments on the state's schedule; fall — the recompute (the year's fees or resolutions, the retirement plan's actuarial figure, the pass-through entity tax paid, the K-1 projection to each partner); filing — Form 2210 Schedule AI if annualized, Form 8959, the K-1 and the state credit.

Key takeaways

• Partners receive guaranteed payments and distributive shares gross — self-employment tax and income tax on all of it, nothing withheld — so the reserve on every draw and distribution (38–40 percent of guaranteed payments, 38 percent of distributions) is the whole method.
• The steady firm uses equal installments under the safe harbor with the reserve; the contingency firm annualizes on the docket's actual resolutions — or pays a cheap prior-year safe harbor after a building year and reserves the settlement's tax the day it lands.
• S corporation shareholder-lawyers run withholding through the firm's payroll, deemed paid evenly, with a heavily withheld bonus payroll the month a settlement lands.
• The pass-through entity tax election moves the state payment to the firm's level and restores the federal deduction the SALT cap takes — often worth more than every other estimated-tax decision, made before the first entity-level payment.
• Include the distributive share above the draws, self-employment tax, the retirement plan's fall figure, the Additional Medicare Tax, and the nonresident-state credit for partners who live outside the office state.
• Never repay the line and catch up the draws from a settlement before the reserve is taken.

The law partner's estimated-tax routine

January: K-1 projection reconciled; safe harbor (110 percent); reserve percentage (effective rate + SE tax on draws) or W-4; docket resolutions noted; PTE election made. Each draw and distribution: reserve transfer. Quarterly: firm's projection of each partner's share; docket vs timing; reserve balance; PTE payments; annualize if contingency. Four dates (equal or annualized). Fall: recompute — fees or resolutions, actuary's figure, PTE paid, K-1 projection. Filing: Schedule AI if annualized; Form 8959; K-1 and state credit. The reserve on the settlement's distribution is the line contingency partners miss.

Worked example

A four-partner firm in a high-tax state. Partner A (transactional, steady): US$420,000 projected — US$240,000 of guaranteed payments and a US$180,000 share; last year's tax US$135,000; she pays four installments of US$37,000 under the 110 percent safe harbor, reserves 39 percent of each monthly draw and 38 percent of each distribution, and the fall recompute adds her US$110,000 cash balance contribution and the pass-through entity tax credit; the April balance is a transfer. Partner B (the contingency docket): US$40,000 of guaranteed payments and a share that depends on resolutions — the firm's docket projected two settlements, one in September (US$1.4 million of fees) and one that slipped to next year; he annualizes: near-zero April, June, and September installments (the September installment's annualization period closes August 31), and a large January installment carrying the September settlement — and the day the settlement's distribution lands, 36 percent of his share moves to his tax account before the firm's litigation line is repaid or his draws are caught up. The firm: elected the state's pass-through entity tax in March — US$310,000 of state tax paid at the firm level on its own quarterly schedule, deductible federally in full, with each partner's state return claiming the credit — restoring a deduction the individual SALT cap (US$40,400 for 2026, cut toward US$10,000 above US$505,000 of modified AGI) would have limited to a fraction. The associates and staff on payroll have withholding; the partners have the reserve. The two-partner firm across the hall, in the same state: no pass-through entity tax election (the SALT deduction capped for both partners — a federal cost that grows as income pushes the cap back toward US$10,000), and the contingency partner who repaid the line and took a vacation from the settlement's distribution met April with a home equity draw.

Official sources

The IRS states: “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” — Internal Revenue Service, Estimated taxes, https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

The IRS states: “The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).” — Internal Revenue Service, Self-employment tax (Social Security and Medicare taxes), https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

Practitioner note

A law partner's estimated taxes have no withholding behind them — guaranteed payments and distributive shares arrive gross with self-employment tax on all of it — and the contingency partner's income arrives when the docket resolves, on no calendar. Our law firm routine puts a reserve on every draw and on the settlement's distribution the day it lands (before the line is repaid), annualizes the contingency partner's year, runs the S corporation shareholder's withholding through the firm's payroll — and makes the pass-through entity tax election in the first quarter, because in a high-tax state that one firm-level decision restores a federal deduction worth more than every installment decision combined.

See also: For related guidance, see retirement plans for an independent professional: the SEP, the Solo 401(k), and the defined benefit plan; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles estimated-tax planning for law firms — partner reserve rules on guaranteed payments and distributions, annualized-method setups for contingency dockets, S corporation shareholder withholding with settlement-month bonus payrolls, pass-through entity tax elections and entity-level schedules, retirement plan timing, and multistate partner credits. See pricing or book a call.