Happy new year and welcome to 2015! Hopefully you’re ready to make this a more profitable year for your firm. I decided to start off the year with a few posts on how to better your firm’s finances, and increase your bottom line, so you can go full speed ahead.
I noticed quite a few issues which I consider to be business mistakes made by attorneys during this past year. These mistakes are common and wind up costing law firms quite a bit of cash. If you’re making any of the four mistakes discussed below then you might as well be doing this:
The good news is that after making these changes you’ll start to look more like this ol’ boy:
I’m guessing you’d rather be sitting on a pile of cash as opposed to burning it. Let’s take a look at what you can do to start off this fine new year.
Attorneys often err by not setting up their practice as an S-Corp
I dealt with many attorneys last year who had structured their practice as a sole proprietorship, a basic partnership, or an LLC without an s-corp election (more on this in a second). Big, big, big, big, big (rather big) mistake. Not using the s-corp structure means you’re likely donating money to the government. Let’s look at why.
If you’re an employee then you pay a portion of your salary to the government for social security and medicare taxes. These amounts are matched by the employer. If you’re self-employed, however, then you don’t receive a paycheck. The government still collects these social security and medicare taxes in the form of self-employment taxes. If you’re running a sole proprietorship, and you earn $150,000, then you’ll pay self-employment taxes equal to the social security/medicare taxes you would pay on a $150,000 salary. Many attorneys are doing this and making a mistake by doing so.
An s-corp allows you to save a ton of ‘da money on these self-employment taxes. An s-corp owner must classify themselves as an employee and pay themselves a reasonable salary. Social security and medicare will be taken out of that salary. Additional earnings, above your salary, however will not be subject to self-employment taxes (you only pay the federal income tax on it). Here’s the simple math on how this breaks down – if you’re not an s-corp and you earn $150,000 then you pay self-employment taxes on the entire $150k. Say, however, that a reasonable salary for an attorney in your area is $90,000 (hypothetically) then you way pay yourself the $90k and you could take the remaining $60k ($150,000 – your $90,000 salary) as a distribution from the firm. You would only pay the social security/medicare (which is the same as self-employment taxes) on the salary and you would not be hit with self-employment taxes on the remaining $60k. Treating yourself as an s-corp, in other words, prevents you from paying excess self-employment tax. This is a savings strategy that many attorneys don’t know about/don’t utilize.
If you’re starting a new firm then you can do so as an LLC or a regular C-Corp. Filing IRS form 2553 allows you to tax the entity as an S-Corp. Form 2553 has to be filed within two months and fifteen days after the company starts1. If you already have your company, and have not taken the election, then you may still do so for 2015 going forward (assuming you’re on a calendar tax year that ends December 31st). You can file form 2553 within two months and 15 days of the tax year where you want the election to start. So you can file the form now (since it’s January) and your firm will begin begin receiving the S-Corp status. This means you can save substantial money on self-employment taxes in 2015. For obvious reasons, consult with your accountant on the effects and benefits of taking the election before doing so.
Law Firms Waste Money By Not Exploring Different Options For Credit Card Merchants
Many law firms simply sign up for the credit card processing services through their bank without pricing around or they go straight to a known brand such as Square. Not all credit card processing options are the same. You may be surprised to learn that you can pay a lower percentage of your revenues to your credit card processor. Square, for example, currently charges 2.75% every time you swipe a card and 3.5% for keyed in transactions2. Intuit Merchant Services, by contrast, only charges 2.4% and 3.4%3. If you swipe $150,000 worth of transactions this year with Square then you’re paying $525 more in fees than you would with through Intuit. One of your new-year tasks should be to take a look at the rates your paying to your credit card processor and see if you can find a better deal.
If you enjoy donating extra money to financial institutions then simply keep using your current provider without pricing around.
Attorneys should stop keying in credit card transactions when they don’t need to
I spoke with a few different law firms last year that actually didn’t have a credit card swiper. Did you notice in the above discussion that credit card processors charge more for transactions when they are keyed in as opposed to swiping the card. If your client is in your office, and has their card available, then you’re simply throwing money away by keying in the transaction. Enough said on this one – BUY A SWIPER!
Law firms should reduce their overhead by utilizing a credit rewards program
Do you have a company credit card for your law firm? If not then you should and make sure it has a “cash back” rewards program. If you put your firm’s expenses on a card, which provides one percent cash back, then you’re essentially knocking one percent off of your firm’s overhead. This adds up, in a big way, over the course of the year. The big things here are 1) don’t spend money you wouldn’t otherwise spend and 2) pay the card off once a week in order to avoid interest. The reason I suggest paying the card off once a week is that many credit cards calculate your interest by looking at your average daily balance. Paying it off every few days will keep the average daily balance low and save you these interest charges.
Are you following these four steps in your firm? If not then you may want to whip out the handy dandy calculator and determine how much money you’re throwing away each month.
1 – Instructions for IRS Form 2553. Accessed at: http://www.irs.gov/pub/irs-pdf/i2553.pdf
2 – Square Pricing. Accessed at: https://squareup.com/pricing
3 – Intuit Merchant Services Pricing. Accessed at: http://payments.intuit.com/mobile-credit-card-processing/