The Joy of Mid-April

I’m always in a terrible mood around the 15th of April. It’s the time of year when I get to think about just how much money the state and federal governments take from me and my business. I get to remember that, not only do I get to pay taxes, but I also get to pay people to help me pay taxes. I have to answer questions, make calls, send emails, send faxes, and write checks. It’s a waste of time I could devote to more important things, like my clients.

I saw Obama on the television giving a speech yesterday. He was short on details, but his message seemed to be that Americans don’t have to make any sacrifices. We don’t have to cut entitlements or defense spending. We’ll just tax the rich, do some other things I’m apparently not smart enough to understand, and we’ll reduce our debt by fifty-gazillion dollars. Like I said, he was a little short on details. I got the point though.

Before becoming a lawyer, I would’ve probably been fine with taxing the rich to death. I didn’t really know who they were. I didn’t even know what made someone rich in the eyes of the government. I assumed they’d be vacationing in the Hamptons all summer and Aspen all winter, so I’d never meet any of them anyway. They were people in suits and ties, like lawyers. Damn rich lawyers.

I really had no idea how little lawyers, even the ones the government calls rich, actually made. I know better now. They may be rich by some measure, but after taxes, they look a lot worse than pretty much anyone I know who works for the government or gets a W-2.

When starting a firm, most lawyers put themselves in the exact same crappy situation. The money isn’t going to be steady for a while, so they don’t put themselves on payroll. They form a business entity with pass-through taxation. Those aren’t bad things, but they can be dangerous.

Let’s say the business pays $2000 a month for every single necessity, like an office, malpractice, health, and other insurance, office supplies, and all marketing or advertising. Not bad, right? Lean and mean. On the personal side, let’s say the new solo has monthly personal expenses totaling about $2000. About half of that is student loans, and the rest is rent and food and everything else. If anything, that’s less than most new lawyers have in the way of monthly expenses.

Using those numbers, if the business struggles and only makes exactly $4000 each month for the first year, April 15th will be a terrible day. Your accountant will probably tell you that you need to cough up thousands. That’s thousands you don’t have because you spent everything you earned trying not to starve. You’ll have barely made it from a financial standpoint, as every cent went to some necessary expense. You took no vacations and saved no money. You couldn’t make quarterly payments because most of your money went to student loans. Those are the student loans the government made so easy for you to get when you were a dumb teenager and now won’t let you discharge in bankruptcy.

The government doesn’t care that you didn’t actually make any money. There’s no deduction for the hundreds of hours of pro bono or reduced-rate work that tend to accumulate in the first year. Some of your essential business expenses, like bigger office items that must be capitalized and meals with other lawyers, are also not fully deductible. It doesn’t matter that you took some of Brian Tannebaum’s good advice and spent your last $20 not eating alone by taking a master in your field out for a cheese crisp. You spent it on the best (and perhaps most tasty) business investment there is, but only half of that is deductible. You should have saved enough to cover the self-employment tax on the taxable half.

Welcome to the world of a new solo or small firm. It’s living paycheck to paycheck professional-style, and there’s no guarantee you’ll ever get another fee to write another paycheck. The only financial consolation is that you will hopefully grow your business so quickly that you can soon put yourself on payroll, make huge quarterly payments when times are extra good, and pay a smaller percentage of what you tried to save the year before each April 15th. It sure feels great. You’ll being forking over more cash both as a total and as a percentage of your business’s income, but at least you’ll be losing it gradually. You’ll only truly realize just how much Uncle Sam takes every mid-April. It’s easier that way, trust me. If you’re lucky, one day, probably a day when you still feel like you don’t have an extra cent to spare anywhere, you’ll realize you’re one of the rich people Obama wants to tax. Congratulations!

There’s a purpose to this story, and it isn’t just to demonstrate that I’m an irritable jerk when the middle of April rolls around each year. The moral of the story is that you really should want to be a lawyer before you make the jump. Most lawyers are solos or small firms. You probably won’t get rich and famous hanging out a shingle. You’ll probably have a fulfilling, interesting career. That has to be enough. Just because you’re a lawyer, and even if you’re a rich lawyer according to the internal revenue code, you’re probably not that rich. More lawyers live like my example than live like the lawyers you see on television. It’s something to think about before becoming a lawyer, even if you’ll only really have to stop and think about it every April 15th if you do decide to do it.