How Much Tax Should Law Firm Owners Set Aside?
- Mar 11
- 3 min read
Updated: Mar 17
Running a law firm means juggling client work, staff, compliance and finances. One question many firm owners ask is: “How much should I be setting aside for tax?”
But an equally important question is: "Are you doing the right tax planning
to reduce how much you need to pay in the first place?"
The answer depends on your business structure, profit level and obligations such as GST, PAYG instalments and superannuation. However, having a clear strategy for setting aside tax can prevent cash flow stress when lodgement time arrives.
Why Setting Aside Tax Matters
Unlike employees who have tax automatically withheld from their wages, law firm owners are responsible for managing their own tax obligations.
Without planning ahead, it’s easy to spend revenue that will later be owed to the ATO. This can lead to unexpected tax bills, cash flow pressure or even ATO debt.
Setting aside tax regularly ensures you:
Avoid large unexpected liabilities
Maintain consistent cash flow
Stay compliant with ATO obligations
Reduce financial stress at BAS and tax time
How Much Should You Set Aside?
While every situation is different, a general rule of thumb many professional service firms use is:
25 - 35% of net profit
However, the exact percentage depends on your structure.
Sole Trader Law Firms
If you operate as a sole trader, profits are taxed at individual income tax rates.
This means:
Tax rates can range from 0% up to 45%
Medicare levy of 2% also applies
You may have PAYG instalments
Because personal tax rates can reach 45% at higher income levels, most sole trader lawyers should aim to set aside 30 - 40% of profit.
Partnership Law Firms
Partnerships don’t pay tax directly. Instead, profits are distributed to partners who then pay tax personally.
Partners typically set aside 30 - 40% of their profit share, depending on their individual tax bracket.
Incorporated Law Firms (Companies)
Companies pay tax at a corporate tax rate, currently:
25% for base rate entities
In this case, setting aside 25 - 30% of profit usually covers company tax, though additional planning may be required if profits are later distributed as dividends.
Don’t Forget GST
If your firm is registered for GST, 10% of most fees collected does not belong to your business. It must be remitted to the ATO.
A common strategy is to move GST into a separate bank account immediately, so it isn’t accidentally spent.
What Bank Accounts To Have
Many law firm owners benefit from using separate accounts for tax planning.
For example:
Revenue account - where client payments are received
Operating account - for business expenses
Tax account - where a percentage of revenue or profit is transferred regularly
By moving tax funds weekly or monthly, you avoid scrambling to find cash when BAS or income tax is due.
When to Review Your Tax Strategy
Your tax planning should evolve as your firm grows.
You may need to review your tax strategy when:
Profit increases significantly
You hire staff
You move from sole trader to company structure
Your PAYG instalments change
Other Tax Obligations Law Firms Should Plan For
Tax planning for law firms doesn’t stop at income tax.
You may also need to account for:
PAYG Withholding - If you have employees, you must withhold tax from wages and remit it to the ATO.
Superannuation - Employers must contribute super for eligible employees.
PAYG Instalments - The ATO may require you to prepay tax quarterly based on expected income.
All these obligations should be factored into your cash flow planning.
How Tax Planning with Rise Accountants Can Help Reduce Taxes
While setting aside the right amount for tax is important, proactive tax planning can also help reduce the total tax you pay. Strategies such as choosing the right business structure, claiming all eligible deductions and planning the timing of income and expenses can improve your overall tax position. For law firm owners, reviewing your tax strategy regularly can ensure your structure and finances are working as efficiently as possible.