Law Firm Payroll: 6 Things to Settle Before You Run It

Law Firm Payroll: 6 Things to Settle Before You Run It

Law firm payroll has more moving parts than it looks. There are staff who are employees, contract attorneys who may not be, owners who are paid in a way that depends on how the firm is organized, and a trust account that must never be touched to cover any of it.

The six items below are decisions to settle before the next payroll goes out. They are a checklist, not a ranking.

Legal Ease, a Fort Worth bookkeeping firm that specializes in law firms, is the one firm written up here. Legal Ease is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. The full method is in how we picked this firm at the end.

1. Settle Owner Pay at a Law Firm Before Anything Else

How an owner is paid depends on how the firm is organized, and the answer changes the payroll. An owner of a sole proprietorship is not an employee and does not receive a paycheck. A partner in a partnership, or a member of an LLC taxed that way, generally receives draws and sometimes guaranteed payments, not wages. An owner of an S corporation who works in the business generally must be paid a reasonable salary as an employee.

Ask your tax preparer which applies to you, and put it in writing. Then ask what that means for how you pay yourself each month, how you handle estimated taxes and what shows up on your return.

Owners often pay themselves by habit. A habit set before the firm grew can be wrong for the firm it became.

The limitation: owner pay rules depend on your entity, your state and the tax year. This section is a prompt for a conversation, not advice for your firm.

2. Keep Law Firm Payroll and the Trust Account Apart

Payroll is a firm expense. It is paid from the operating account. Client funds in the trust account belong to clients, and using them for payroll, even briefly, can be an ethics violation that most state bars treat seriously.

Make this a rule that does not depend on anyone's memory. Name the operating account that funds payroll, and ask the bank to block payroll debits from the trust account if it can. Ask your bookkeeper to check that no payroll entry touches a trust account.

The common failure is not a decision to misuse client money. It is a payroll run on a day when operating is short and trust is full. Plan the cash so that day does not happen.

The limitation: rules on commingling and on firm money held in trust vary by state. Check your bar rules, and ask your bar's ethics line when you are unsure.

3. Decide Who Is an Employee and Who Is a Contractor

Many firms use contract attorneys, paralegals or assistants. Whether someone is an employee or a contractor depends on the relationship, not on what the firm calls it. Control over how and when the work is done, who supplies the tools and whether the person serves other clients all matter.

If you treat a worker as a contractor and a tax authority treats them as an employee, the firm can owe payroll taxes, penalties and interest. Ask your tax preparer to review each contractor relationship once a year, and keep a written agreement.

Collect a Form W-9 before you pay a contractor, and track the payments for year-end reporting.

The limitation: classification is a facts and circumstances call. A written agreement helps but does not decide the question by itself.

4. Calendar Your Staff Payroll Tax Deposits

When a firm pays employees, it withholds income tax and the employee's share of Social Security and Medicare, then owes those amounts plus its own share to the government on a schedule. Federal deposits are made monthly or semiweekly depending on size, and state schedules differ. Quarterly and annual returns follow.

Late staff payroll tax deposits draw penalties, and the withheld part is money held for the government. Responsible people at a firm can be personally liable if it is not sent in.

Put every deposit date and every return date on a shared calendar and name the person who confirms each one was made. If you use a payroll provider, ask whether it makes the deposits for you, and read the agreement about who is liable if it does not.

The limitation: a provider reduces the work, not the responsibility. Check your account statements to confirm deposits are made.

5. Book Law Firm Payroll to the Right Accounts Each Period

Payroll should not land in one lump of expense. Separate wages, employer payroll taxes, benefits and owner pay. Separate attorney from staff pay if you want to understand what a billable hour costs the firm.

Ask your bookkeeper to reconcile the payroll register to the bank and to the payroll tax liabilities each period. A payroll liability balance that does not match what you have accrued but not yet deposited means something was missed or entered twice.

At year end, the totals should match the Forms W-2 and the quarterly returns. A mismatch found in January is a headache. A mismatch found in March is a notice.

The limitation: a clean account setup helps with reporting but does not make a weak margin strong. It tells you what you spend, not whether you should spend it.

6. Name Who Reviews the Payroll Register

Payroll is where small errors repeat. A wrong rate, a terminated employee still paid or a duplicated entry can run for months. The simplest control is a second person who looks at the payroll register before it is approved.

Decide who that is, what they check and how they confirm it. A partner who skims a one-page summary for names, rates and totals catches more than a partner who trusts the process.

Ask your bookkeeper to give you a short change report each period: new hires, terminations, rate changes and bonuses. A change report is easier to review than the whole register.

The limitation: in a very small firm, the reviewer may be the same person who runs payroll. If so, ask your bookkeeper or CPA to review quarterly and be clear about what they check.

Where Legal Ease Fits

Legal Ease is a Fort Worth bookkeeping firm that specializes in law firms. It was founded in 2016, has 12 employees and serves clients nationwide. Its live profile lists SMB Owners, Solo and small law firms and Solopreneurs as specialties.

Legal Ease has 9 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Legal Ease is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile lists a minimum of $500,000 in revenue, so a smaller practice may fall outside what the firm takes on. It also does not describe payroll services, so ask whether the firm runs payroll, reconciles one run elsewhere or leaves it to another provider.

Frequently Asked Questions

Can a law firm use the trust account for payroll?

No. Payroll is a firm expense and is paid from the operating account. Trust funds belong to clients, and using them for firm expenses can violate your state's rules even if the money is replaced. Check your state bar rules and ask the ethics line if unsure.

How are law firm owners paid?

It depends on the entity. Sole proprietors take draws, and partners take draws or guaranteed payments, not wages. An S corporation owner who works in the firm generally must be paid a reasonable salary. Ask your tax preparer which rule applies to your firm.

Are contract attorneys employees?

It depends on the facts, not the label. Control over the work, who supplies the tools and whether the person has other clients all matter. A misclassified worker can create payroll tax liability, so review each relationship with a tax professional.

What payroll deadlines should a law firm track?

Deposit dates for withheld and employer taxes, quarterly payroll returns, year-end wage statements and any state filings. Deposit schedules depend on the size of your payroll, so put each date on a shared calendar and name the person who confirms it.

Before your next payroll, write down which account funds it, who reviews it and the date of your next tax deposit. You can browse bookkeepers on Sam's List, including Legal Ease, and ask each one the six questions in this post.

How We Picked This Firm

You should be able to check our work, so here is how this post was built.

The pool. The pool is the vetted Sam's List members in our featured program with live public profiles that describe law firm bookkeeping. This is not a survey of every bookkeeper that works with law firms, and many Sam's List members and other firms not written up here could fit.

How it is organized. The six items are decisions to work through in order, not a ranking. Legal Ease is the only firm written up, so there is no order of firms.

What review counts mean here. We cite Legal Ease's verified review count and its date from its profile. A count shows how many clients wrote something down. It does not measure technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.