How to Calculate Your Tax Reserve in 10 Seconds
Quick Answer: To calculate your law firm tax reserve, multiply your non-operating expense percentage by your effective tax rate. For most law firms: (100 - Operating Expenses %) × 35% = Your Tax Reserve Percentage. Example: If 55% goes to operating expenses, set aside 16% of revenue for taxes (45% × 35% = 15.75%, rounded to 16%).
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Let's be honest about how most law firm owners handle taxes:
Option A: Scramble at tax time because you didn't set aside enough, then panic-transfer money from wherever you can find it (or worse, put it on a credit card).
Option B: Massively over-save "just to be safe," tying up cash that could be working for your business, paying down debt, or actually ending up in your pocket.
Option C: Wing it completely with no systematic approach and just hope the money magically appears when the IRS comes knocking.
Sound familiar?
Here's the good news: You can calculate exactly how much to set aside for taxes in about 60 seconds. And once you know the formula, you'll never have to guess again.
The Law Firm Tax Reserve Formula (Step-by-Step)
Here's the complete calculation for determining how much to set aside for taxes:
1. What percentage of revenue goes to operating expenses? (Usually 40-60%)
Let's say 55% for this example
2. Subtract from 100 to get your non-operating percentage
100 - 55 = 45%
3. What's your effective tax rate? (Average for US businesses is 35%)
Use 35% as a starting point, or calculate your own (see below)
4. Multiply them together
45% × 35% = 15.75%
You should set aside 16% of revenue for taxes (round up for safety)
That's it. Seriously.
Why the Tax Reserve Formula Works for Law Firms
The core principle: You're only taxed on your non-operating income, not your total revenue.
If 55% of every dollar goes to operating expenses (rent, salaries, software, malpractice insurance, that Westlaw subscription you can't live without), then only 45% is potentially taxable profit.
That 45% gets distributed among three buckets:
Profit
Your compensation as an owner
Taxes
So you need to set aside enough to cover taxes on that 45%—not on your full revenue. That's the key insight most people miss.
How to Find YOUR Numbers
Your Operating Expense Percentage
This is simple:
Pull up last year's Profit & Loss statement
Add up all operating expenses (rent, salaries, software, etc.)
Divide by total revenue
That's your current operating percentage
Example: $220,000 in operating expenses ÷ $400,000 revenue = 55%
Your Effective Tax Rate
You have three options here, ranging from "I just want a number right now" to "I want this to be precise":
Option 1: The Lazy Method
Just use 35% (the US average for small businesses).
Is it perfect? No. Will it get you 80% of the way there? Absolutely.
Option 2: The Accurate Method
Pull last year's personal and business tax returns
Add up total taxes paid (business taxes + your personal income tax)
Divide by total income
That's your effective rate
This accounts for your actual tax situation—your deductions, your bracket, your state taxes, everything.
Option 3: The Forward-Looking Method
Ask your CPA for your quarterly estimated tax payment amounts
Multiply by 4 to get your annual estimate
Divide by your projected revenue
That's your estimated rate for this year
This is the most accurate if your business is changing significantly year over year.
Real Examples: Tax Reserves by Law Firm Type (2026)
Example 1: Solo Personal Injury Attorney (2026)
Operating expenses: 60% of revenue
Non-operating: 40%
Tax rate: 35%
Set aside: 40% × 35% = 14% of revenue
If you bring in $500,000 in 2026, you're setting aside $70,000 for taxes. Done.
Note: With contingency fee cases, apply this percentage to actual collected revenue, not potential settlements.
Example 2: Small Family Law Firm
Operating expenses: 45% of revenue
Non-operating: 55%
Tax rate: 38% (high-tax state like California, New York, or New Jersey)
Set aside: 55% × 38% = 21% of revenue
$300,000 in revenue = $63,000 tax reserve.
Example 3: Lean Estate Planning Practice
Operating expenses: 35% of revenue (very lean, mostly solo)
Non-operating: 65%
Tax rate: 32%
Set aside: 65% × 32% = 21% of revenue
$200,000 revenue = $42,000 for taxes.
Notice how the lean practice and the family law firm both set aside 21%, but for completely different reasons? That's the beauty of this formula—it adapts to YOUR business.
Important: This Covers BOTH Business and Personal Taxes
If you’re using the Profit First system, the tax reserve isn't just for business taxes. It's designed to cover:
Your business tax liabilities (if any)
Your personal income taxes (since law firm income flows through to you personally)
Quarterly estimated payments
Year-end tax bills
Everything
For S-Corps and PLLCs:
You'll make quarterly estimated payments to yourself from this reserve to cover your personal tax obligations. Then you send those payments to the IRS.
What About Payroll Taxes?
Already built in:
Taxes withheld from your paycheck: Pay yourself back from the tax reserve
Employer portion of payroll taxes: Pay from the tax reserve
It's all part of the formula
Where to Actually Keep This Money
Here's where most people screw this up: They calculate the right amount but leave it sitting in their operating account.
Three months later: "Where did all my tax money go?"
Don't do this.
The moment money hits your account, move your tax percentage to a separate account. Make it slightly annoying to access so you're not tempted to "borrow" from your tax fund.
Best options for 2026:
Separate savings account at your current ban
Pros: Easy to set up, instant transfe
Cons: Lower interest rates (typically 0.5-1
Best for: Firms just getting started with tax reserves
High-yield savings account at an online ban
Options: Marcus by Goldman Sachs, Ally Bank, American Express Personal Saving
Pros: Currently earning 3-5%, takes 1-2 days to transfer (good friction
Cons: Another login to manage, hard to find business friendly options
Best for: Most law firms (sweet spot of accessibility and returns)
Money market fund through a brokerage
Options: Fidelity, Vanguard (funds like SNVXX, VMFXX)
Pros: Competitive yields (3-5%), feels more "locked away"
Cons: Slightly more complex to set up, may have minimum balances
Best for: Firms with larger tax reserves ($50K+)
Pro tip: If you're setting aside $3,000/month for taxes in a high-yield account at 4.5%, that's an extra $1,600+ per year in interest just for parking your money in the right place.
Pick one. Set it up this week. Automate the transfers if possible.
How to Adjust Over Time
Start conservative, then dial it in:
First Quarter: Use the formula above. Better to over-save than under-save.
After You File Taxes: See how close you were.
Too much left over?
Reduce your percentage next quarter
Move the excess to profit/savings (bonus!)
Pat yourself on the back
Came up short?
Increase your percentage
Make a one-time transfer from savings to cover the gap
Adjust going forward
Most people nail it within 2-3 quarters. And even if you're off by a few percentage points, you're doing infinitely better than the "hope and pray" method.
Your 5-Minute Action Plan
Here's what to do right now:
Calculate your operating expense percentage from last year
Pull your P&L, do the math (5 minutes max)
Subtract from 100
Get your non-operating percentage
Multiply by 35% (or your calculated rate)
That's your magic number
Set aside that percentage from every deposit
Starting today, not next month
Move it to a separate account IMMEDIATELY
Out of sight, out of mind
Review quarterly
Adjust based on actual results
That's it. Six steps between you and never panicking about taxes again.
The Real Bottom Line
You just learned in 60 seconds what most law firm owners agonize over for months (or avoid entirely until April).
Now you have a systematic approach that:
Is based on YOUR actual numbers, not generic advice
Accounts for both business and personal taxes
Adjusts as your business changes
Is simple enough to actually implement (this is key)
No more panic at tax time. No more scrambling to find cash for quarterly payments. No more wondering if you're setting aside too much or too little.
Just a simple system that works.
One Last Thing
If you're looking at this formula and thinking, "Wait, my operating expenses are 80% of revenue and I'm barely scraping by"—that's a different problem. The tax reserve formula will work, but you've got bigger fish to fry around profitability and pricing.
But that's where we can help.
Frequently Asked Questions About Law Firm Tax Reserves
How much should a law firm set aside for taxes?
Most law firms should set aside 14-21% of revenue for taxes, depending on their operating expense ratio and effective tax rate. Use the formula: (100 - Operating Expenses %) × Your Tax Rate = Tax Reserve %.
What is the average tax rate for small law firms?
The average effective tax rate for US-based small law firms is approximately 35%, though this varies by state, entity structure (S-Corp vs. LLC), and individual circumstances.
Should I set aside taxes for my law firm quarterly or annually?
Set aside taxes from every deposit immediately, but make actual tax payments quarterly. This ensures you always have enough reserves and avoid underpayment penalties.
Where should I keep my law firm tax reserve?
Keep your tax reserve in a separate high-yield savings account or money market fund, not your operating account. This prevents accidentally spending tax money on business expenses.
How do I calculate my effective tax rate as a law firm owner?
Add your total business and personal taxes paid last year, then divide by your total income. Alternatively, ask your CPA for your quarterly estimated tax amounts and extrapolate annually.
Need Help Getting Your Law Firm Finances Under Control?
Calculating your tax reserve is just the beginning. If you're struggling with cash flow, profitability, or wondering why you're working so hard but not keeping more money, you're not alone.
Book a Complimentary Strategy Session
In your 45-minute strategy session, we'll:
✓ Analyze your current financial situation – Get a clear picture of where your money is actually going
✓ Identify hidden profit leaks – Discover the 3-5 places you're losing money without realizing it
✓ Calculate your profit potential – See what your firm should actually be netting
✓ Create your custom roadmap – Walk away with specific next steps tailored to your firm
✓ Answer your burning questions – No topic is off-limits (tax strategy, partner comp, pricing, systems)
This session is perfect for:
Solo attorneys doing $200K-$2M in revenue
Small firms (2-10 attorneys) struggling with cash flow despite good revenue
Partners who want to take consistent distributions without fear
Any law firm owner tired of living "revenue rich, cash poor"
Schedule Your Free Strategy Session Now →
The Bottom Line on Law Firm Tax Reserves
For now: Calculate your number. Set up your account. Start setting money aside.
Future you (specifically, April 15th future you) will be incredibly grateful.
And if you want personalized guidance on implementing this system in your firm, we're here to help.
About Lawyer Millionaire: We help law firm owners build profitable, sustainable practices through proven financial systems and strategic guidance. Our team specializes in helping attorneys master cash flow, increase profitability, and create real wealth from their practice. Based on the Profit First methodology adapted specifically for law firms.