8 Tax and Financial Planning Mistakes to Avoid When Becoming a Freelance Lawyer

Smart financial planning for freelance lawyers helps you deal with inevitable fluctuations in income, insurance costs, and the self-employment tax hit.

Financial Planning for Freelance Lawyers

As a certified financial planning professional with a unique focus on financial planning for lawyers, I’ve seen how more attorneys are welcoming freelance work as independent contractors. While other articles talk about why the freelance lawyer trend is growing, I want to focus on the potential money and tax problems that lawyers face when they make this switch. I often deal with these questions in my practice, where I work in coordination with tax and legal experts to give the best advice around this transition.

Problem 1: You Handle Your Own Taxes as a Freelance Lawyer

When you switch from a regular job to freelance work, your employer no longer takes taxes out of your paycheck automatically. This can result in an unexpected tax bill for many freelance lawyers, especially in their first year of self-employment.

As a starting point, I tell my clients to save 25%–35% of what they earn for taxes by putting this money in a separate tax account. This covers federal taxes, state taxes and self-employment taxes. You’ll also need to make tax payments four times a year (more on that below). Working with a tax professional such as a CPA can help you figure out exactly how much to save based on how much money you expect to make.

Problem 2: Self-Employment Tax Hits Hard

When you work for yourself, you have to pay both the employee and employer share of Social Security and Medicare taxes. This adds up to a total of 15.3% of your earnings.

The good news is that you can lower this tax by claiming business expenses. Every dollar you spend on your business reduces your profit, which means you pay less in self-employment tax. Don’t go overboard here with reducing business expenses in the name of saving on taxes. After all, profit is the goal! Keeping good records of your expenses is key. Which leads us to our next pitfall …

Problem 3: Missing Out on Tax Deductions

Many freelance lawyers forget to claim all the business expenses they can deduct. You can typically write off things like:

• Home office expenses (if you qualify)
• Required lawyer training courses (CLE)
• Malpractice insurance
• Computer software and equipment
• Professional association fees
• Travel for work
• Office supplies

A tax professional who understands legal services can make sure you claim all the deductions you’re allowed while following IRS rules.

Problem 4: Forgetting About Retirement Savings

Without a company retirement plan, many independent lawyers put off saving for retirement. This can really hurt your future financial security. Since lawyers have the potential for high income, saving more for retirement can also help with taxes.

You have several options. These are the most common:

• Solo 401(k) for lawyers with no employees (can save up to $70,000 in 2025, higher limits for ages 50-plus)
• SEP IRA with simpler paperwork and administration (easy to establish, although contributions are limited by your earnings)
• Traditional and Roth IRAs for personal wealth accumulation and tax savings

A financial planner can help you choose the best plan for your situation.

Problem 5: Dealing with Unpredictable Income

Legal work often comes in waves — sometimes you’re very busy and earning a lot, other times it’s slow. This makes it hard to budget your money.

I suggest keeping a business savings account with enough money to cover three to six months of expenses. Also, pay yourself the same amount each month from your business account, like a regular salary. Put extra earnings toward taxes, retirement and business needs.

Problem 6: Choosing the Right Business Structure

Financial planning for freelance lawyers is tied to your business structure. Starting as a sole proprietor might seem easiest, but it can expose you to more legal risk and higher taxes. Setting up an LLC provides legal protection, while filing as an S Corporation might save you money on taxes if you earn enough.

Each option has different benefits and requirements. A business lawyer can help you choose what’s best for your practice.

Problem 7: Losing Job Benefits

When you leave traditional employment, you lose company-provided benefits. Health insurance becomes very important, and so does disability insurance to protect your income if you can’t work. Life insurance needs may also change.

Look into options through lawyer associations, health insurance marketplaces or private insurance companies. Compare what you get for what you pay.

Problem 8: Staying on Top of Quarterly Taxes

You must pay taxes four times a year — by April 15, June 15, September 15 and January 15. If you underpay, you might face penalties.

Keep good financial records all year-round. This makes it easier to estimate your taxes accurately. Consider using accounting software made for small businesses to track your income and expenses or even outsourcing this important task as your freelance opportunities grow.

Remember, Correct Planning Is a Must

Becoming a freelance lawyer can give attorneys more freedom and even be a great way to segway into retirement, but it requires careful planning. By understanding these common problems and using the right strategies, lawyers can make this transition successfully while making the most of their money and legal expertise.

Handling all of this alone can be stressful and expensive if you make mistakes. Remember, the money you spend on professional tax and financial advice usually saves you much more in the long run and gives you peace of mind that your finances are handled correctly.

More Tips for Freelance Lawyers

• What You Need to Know About Becoming a Freelance Lawyer
• Smart Growth: Tapping Into the Freelance Lawyer Ecosystem
• Disability Insurance Explained

Image © iStockPhoto.com.

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