How Much Should a Law Firm Owner Pay Themselves? (Ep. 184(

Sep 15

Your law firm should pay you. And not just whatever happens to be left over.

One of the most common questions law firm owners face is deceptively simple: How much should I pay myself?

For many lawyers, the answer is whatever remains after the firm has paid its employees, rent, software, marketing, and other expenses. If there is money left in the operating account, the owner takes it home.

The problem? That approach can make a struggling business look profitable and a growing business look healthier than it really is.

If you are the lowest-paid attorney in your own firm, you may not actually be experiencing business growth. You may simply be funding that growth with your own unpaid wages.

You Are an Employee of Your Own Business

If you actively work in your law firm, you have two different roles.

First, you're an attorney. You handle matters, draft documents, appear in court, bill clients, and perform legal work.

Second, you're the owner and leader. You manage people, make hiring decisions, oversee finances, handle escalations, manage marketing, and carry responsibility for the business.

Both roles have economic value.

Your legal work has a market rate. Your leadership and management work have a market rate, too.

So your compensation should reflect the value of both.

This is why simply taking whatever is left over at the end of the month is dangerous. You are effectively treating yourself as the last creditor of your own company when you should be properly compensated for the work you're doing.

The Owner Pay Problem

The numbers discussed in the episode illustrate how serious this issue can be.

A Martindale-Hubbell study cited in the episode found that solo and small-firm lawyers had an average income of $198,000, but the median was only $148,000. In other words, the average was being pulled upward by a smaller group of high earners.

At the same time, the episode points to a 2025 NALP survey showing a median first-year associate salary of $150,000 at firms with 250 or fewer lawyers.

Think about what that means.

A law firm owner with years of experience, significant financial risk, malpractice exposure, employees, overhead, and business responsibilities could potentially be earning about the same amount as a lawyer in their first year of practice.

And sometimes the problem becomes even worse as the firm grows.

An owner may hire associates at market salaries while continuing to pay themselves a relatively low amount because they believe they're "investing in the business."

But if you have to continually underpay yourself to make the business work, the business may not actually be as profitable as you think.

Your Market Wage Is the Measuring Stick

A useful way to think about owner compensation is to separate it into two categories:

1. Your Market Wage

Your market wage is what the firm would have to pay someone else to perform the work you currently perform.

This includes your role as an attorney and your role as an owner/operator.

The number should be paid regularly and consistently—ideally as a predictable monthly amount.

This is the income you should build your household budget around.

2. Your Profit Distribution

Profit distributions are different.

Once the firm has covered its overhead and your market wage, the remaining profit can either stay in the business as retained earnings and working capital or be distributed to you as the owner.

That distribution is your return on ownership.

It's compensation for taking the financial risks associated with owning the firm, including putting your capital at risk, guaranteeing obligations, and carrying the responsibility that comes with ownership.

The important distinction is this:

Your salary pays you for your work. Your distribution rewards you for owning the business.

You shouldn't have to depend on distributions to pay your mortgage or cover your family's basic living expenses because distributions can fluctuate.

Don't Confuse Revenue With Wealth

Law firm owners can become obsessed with revenue.

Seven-figure revenue sounds impressive. Eight-figure revenue sounds even better.

But revenue alone doesn't tell you whether owning the business is worthwhile.

If you're generating millions of dollars in revenue but taking home less than you could earn working somewhere else—with substantially less stress and responsibility, you need to ask a difficult question:

Is the business actually serving you?

The goal isn't simply to build a bigger law firm.

The goal is to build a profitable law firm that creates financial freedom and supports the life you want.

More revenue without meaningful owner compensation can simply mean more responsibility, more employees, more complexity, and more stress.

What About Taxes?

For many law firms, Darren explains that an S-corporation tax structure may provide an opportunity to separate compensation into salary and distributions.

Under an S-corp structure, some owner compensation is paid as W-2 wages while other money can be distributed as profit.

The potential tax advantage comes from the fact that the salary component is subject to Social Security and Medicare taxes, while qualifying distributions generally aren't subject to those employment taxes in the same way.

But there is an important warning:

You cannot simply make your salary artificially low to minimize taxes.

The IRS requires an S-corp owner-employee to receive reasonable compensation.

That means your salary needs to be defensible based on factors such as your responsibilities, hours, experience, and what the market would pay for the work you perform.

A reasonable compensation analysis can help establish that number.

The goal isn't to pay yourself the lowest possible salary.

The goal is to find a compensation structure that is both tax-efficient and defensible.

Stop Treating Yourself as an Expense You Can Ignore

One of the most powerful lessons from the episode is that owner compensation is more than a bookkeeping issue.

It's a reality check.

If your business only appears profitable because you're willing to work for less than market value, you need to know that.

Otherwise, you may spend years telling yourself that you're building a successful business when you're actually buying yourself a stressful job.

The solution isn't necessarily to stop investing in growth.

It's to make sure that growth doesn't come at the expense of your own financial future.

At some point, paying yourself appropriately needs to become just as important as reinvesting in the business.

Your Business Should Serve Your Life

The ultimate purpose of building a law firm isn't to create a business that consumes your life.

It's to create something that provides value to clients, generates meaningful profit, pays you fairly, and helps you achieve your personal financial goals.

Your firm should create wealth not simply revenue.

And your compensation should tell you whether that is actually happening.

So ask yourself:

What would I have to pay someone else to do my legal work?
What would I have to pay someone else to perform my management responsibilities?
Am I paying myself a market wage?
Is my firm's reported profit still healthy after accounting for my true compensation?
Am I relying on unpredictable distributions to fund my lifestyle?
If I stopped underpaying myself, would my business still be profitable?
Is the business creating the financial freedom I built it to create?

If you don't know the answers, that's an important signal.

Your law firm should not be the lowest-paying job you've ever had.

Pay yourself for the work you do. Reward yourself for the risks you take. And most importantly, build a firm that gives you both wealth and freedom.

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Transcript:

Darren Wurz (00:00.578)

Just how much should you pay yourself as the law firm owner and how should you structure it? It's one of the most common questions we get, and it directly impacts your profitability. Stay tuned for the answers. If you're the lowest paid attorney in your firm, the firm is not growing. It's being funded by your unpaid wages. Today we're talking about how much you, the law firm owner, should pay yourself.

I'll explain today why it's so important to get this right and why not getting it right means you really don't know if your business is truly making any money, or more critically, if it's even worth your effort. I'll break down the two kinds of money your firm should produce for you and what they're meant for and how to structure them. And be sure to listen to the end, where I'll explain the most tax efficient way to structure your take home pay, and I'll be giving away a free tool.

To help you structure your pay properly. Now, why should you care about this? Well, it's your firm and it should pay you. And because the way you pay yourself is not just a bookkeeping detail, it's a reality check on whether or not you're really running a real business and whether or not it's really worth it. Let's be honest, most law firm owners are paying themselves what's left over.

You cover the payroll, the rent, the software, the marketing, and whatever's left over in the operating account is what you pay yourself. While you're hoping there's a ton of money left over in the operating account so you can get a great windfall, the reality is that sometimes there's not much left at all. And you have no real idea whether you're truly profitable as a business. The key question you should be asking is: what am I being paid for? Believe it or not.

And I have had people push back on this, you are an employee in your business. If you go to work every day, whether you're working in the business or on the business, whether you own it or you're an employee, you are an employee. The only time you're not an employee is if you sit at home with your feet propped up and just collect checks. That is being an owner who just gets a dividend on his investment. But you're actively working in the business.

Darren Wurz (02:21.004)

And if you're listening to the show, that's probably you. If you're just paying yourself what's left over, you're the last creditor of your own firm when you should be the first. And here's what's at stake: a Martindale Hubble study found that solo and small firm lawyers earn an average of $198,000 a year. That sounds fine. However, the median was only $148,000.

Half of everyone surveyed made less than that. 28% of solo practitioners reported income below $100,000. Those are 2022 figures, so adjust a little bit for inflation, but the shape hasn't changed much. The average is being pulled up by a small group at the top. And the reality is the typical owner is making far less than the headline. Now, contrast that $148,000 to this.

NALPS 2025 survey found the median first year associate salary at firms of 250 or fewer lawyers was $150,000. Come again, the median income of solo and small firm owners is the same as the median first year associate's salary. And outside the mar the major markets in the South and Midwest.

The median first year salary was 160,000. Those are first-year numbers. A lawyer who has never handled a matter alone, never signed a lease, never made payroll, and never personally guaranteed a line of credit. Wow. So the typical solo owner with 10 or 15 years of experience and all the risk is making about what a brand new associate makes at a small firm in Ohio. Damn, that is the impact. And it gets worse.

When you grow, because the way most owners grow is by hiring attorneys at market rate and keeping their own salary low so they can continue to fund growth and make payroll. I've seen it too many times. The owner hires two associates at $150,000 apiece, takes $120,000 for themselves for now, and becomes the lowest paid attorney in the building. They tell themselves they're investing in growth. Let me say something to you right now, if this is you.

Darren Wurz (04:47.904)

You should be the highest paid person in your business. Period, full stop, end of story. You need to invest in yourself. And I get it. You're building something, every dollar you don't take is a dollar the firm can use. But at a certain point, friend, you have to start paying yourself what you are worth. An investment that pays the investor less than it pays the employees isn't a great investment. Bloomberg's law is.

Bloomberg Law's most recent survey found that only 46% of attorneys expect to remain with their current employer over the next five years. This only makes things worse because the associate you underpaid yourself to hire has better than even odds of leaving before the investment pays back. You, as the owner, should be the highest paid person in your business. If you're not, then the growth you see isn't real growth.

It's being funded by your wages, and you're just paying yourself a low rate to be busier. The day you stop underpaying yourself is the day it stops. The real impact here is whether all this is really worth it. If you could make more money doing something else with a lot less stress than running your own law firm, we've got a huge problem. If you could make the same amount of money with

10% the stress load, there's a big problem here. And I've talked to I've talked to law firm owners who are in this situation a lot. I have seen this exact issue. I've seen firm owners running large shops boasting about seven figures in revenue, eight figures in revenue. Let me tell you something. It is not all it's cracked up to be. Because I've seen owners of firms these sizes who could be making the same amount of money doing a much simpler job.

With none of the stress of being a law firm owner. If you could go get a job at Home Depot and make more money than you're making right now running your law practice, we've got a problem. You have got to pay yourself what you deserve. So let's break down the two kinds of owner pay. Number one, the wage. The wage or owner's comp, we could call it. Your your what you are paid, your salary, right? Your salary is what the firm would have to pay someone else to do your job, to do what you do.

Darren Wurz (07:14.134)

Now, there are multiple roles that you may fill. You have at least two. First, you're a lawyer, you handle matters, you bill, you appear, you draft. That role has a market price. And it's probably roughly what a senior associate in your practice area and in your state would cost. But the second area is the owner operator, the leader. You manage people, you review the books, you make hiring decisions, you handle intake escalations, you run the marketing.

That role has a market price too, and it's high. You deserve to be paid for being the leader. Being a leader means getting paid. That's why the CEO of Apple makes millions of dollars a year. There's a lot riding on the decisions that that one person makes, the leadership of that one person. He is responsible for many, many people's livelihoods. And the more people you're responsible for, the more you should make for being.

The leader. There's a cost and a price to bearing that responsibility. And if anyone ever questions how much you make, that's your response. You're the leader. You took the risk. You get paid. Say it with me now. I deserve to get paid for being the leader. And those two together, bring those two together, and you have your market wage. That's the number you should be getting as your salary. And that's the number that you should live on.

That's the number your household budget should be built around. Now let's talk about the second thing. And by the way, that first number should be paid to you on a regular frequency, an automated, regular, same exact amount every single month. We'll talk about how you structure it later. Second is the distribution. This is the amount that fluctuates. Everything the firm earns above overhead and above your market wage is then profit.

Some of that profit you may leave in the firm as retained earnings and working capital. The rest you take as a distribution. It's your reward. Now, a distribution is not pay. It is your return on the money you put in. It's the return for the risk that you have borne in being the guarantor of the law firm and carrying the malpractice exposure. And the fact that in a bad quarter, it's your money and your livelihood on the line. You should not budget.

Darren Wurz (09:37.922)

Your mortgage around this amount because this is the amount that's at risk, right? So we don't live on the distribution. The distribution is your reward. This money you don't depend on, you don't live on it. It's your bonus money. Why is this a profitability test? Well, let's say your firm bills a million dollars a year, overhead runs $600,000. You take $120,000 in salary. So the PL shows $280,000 in profit.

And you feel pretty great, 28% profit margin. Woo-hoo. Well, let's say a senior associate doing your caseload in your market would really cost $180,000. And a competent administrator doing all the management work you're doing on the nights and weekends would cost another $70,000. Let's say, you know, for being the leader and being the lead attorney in your firm, your market wage really should be closer to $250,000, not $120,000.

Now let's restate the PL honestly. Take the $280,000 in reported profit, add back the $120,000 you should have paid yourself, subtract the $250,000 you should have paid yourself, and your true profit is really closer to $150. This is why it's so important to really get this right. Now that's still real profit, and it's nothing to be ashamed of. However, it's not as much as you thought it was.

You can see how this equation could really change things for you, make it a smaller firm or a higher value practice area where the associate benchmark is higher, and that profit evaporates pretty quickly. This is why I keep saying you can't know whether you're profitable until you pay yourself a market wage. The market wage is the measuring stick. Without it, profit is whatever you want it to be. Now let's talk about structure. Because

The wage distribution thing is a a a a fuzzy area and we want to break it down. We want to break down how to do this in the most tax efficient way possible. It's not just about you how you pay yourself, it's also about how you manage things in the most tax efficient manner. A lot of law firms in most jurisdictions it makes sense for them to be what's called an S-corp or to elect to be f to be taxed as an S-corp.

Darren Wurz (11:59.512)

Now, what I've just mentioned with wages and distributions is not necessarily the same thing as how you're going to structure things, how we would refer to wages and distributions under an S Corp. Let me explain. An S-Corp, being taxed as an S-corp, allows you to divide what you take out of the firm into two buckets. Part of it is salary reported on a W2, part of it is distributions reported on a K1. The reason this matters is

Really, really powerful. Only the salary portion is subject to Social Security and Medicare taxes. Now, as a business owner, you pay both halves. Normal employee only pays half, and the employer pays the other half. But you pay both. Whether you're a solo or owner of a large firm, adds up to about 15%. And so you can essentially shield part of your take home pay.

From that 15% self-employment tax, which is your Social Security and Medicare taxes. Sounds great, right? Wow. Well, let's make my salary as low as possible. That's the temptation, right? But the IRS requires you to pay yourself what's called a reasonable salary. Now, of course, they don't give us any definition as to what a reasonable salary is, but the best way to establish it is to run what's called a reasonable compensation test.

Which looks at your roles, your hours, your experience, and what the market would pay for that work. A qualified CPA can do this, and we have a great one on our team. So now let's say you're using the S Corp strategy, and let's say you really should be paying yourself $250,000 a year. That's what we want to be paying you. That's what your wage should be. Now we don't have to make all of it W-2. We could make part of it W-2 and part of it.

A regular monthly owner's draw so that the two add up to $250,000. That way we can reduce potentially the amount of Social Security and Medicare taxes that you're having to pay. One caution: the word that matters is defensible. The W-2 portion has to stand on its own against the reasonable comp test.

Darren Wurz (14:18.176)

If it says your work is worth $250,000 and your W-2 says $60,000, the monthly draws could be recategorized as W-2. So whatever you pay yourself, you need to make sure you want to be as low as possible for the salary portion, right? But you want to make sure that you can defend it and have some documentation to defend it. Now, here's the one thing I want you to do, and you can do it before this episode is over. Go to

Audit.lawyermillionaire.com/owner-pay . And we'll put the link in the show notes. I know that's a lot to remember. It's the owner pay reality check. Go down in the show notes, find the owner pay reality check. You can plug in eight numbers: your revenue, your total comp, your hours per week, your weeks per year, and a few optional details about your firm. Best guesses are fine. It only takes about two minutes, and it's going to give you a free.

Three-page report that will tell you what you're currently paying yourself versus what you should be paying yourself, your effective hourly rate versus the senior associate rate in your state and practice area, and key areas that you could fix in your firm to be able to pay yourself what you truly deserve. Go take that assessment now and see what you could really be paying yourself. Now, I love this topic, and I've talked about this a number of times on the podcast.

Because I got it wrong myself for so many years. When I started my business, I paid myself out of what was left. And for a couple of years, that wasn't much. I told myself I was investing in the business. But you know what? It's so easy to spend money in your business and then not have anything left over. What I was actually doing was hiding the fact that the business was not yet profitable and hiding it from the one person who really needed to know.

Me. I also love this topic because it's as much about confidence in your personal financial health as it is about business. I see a lot of lawyers who undercharge for their services. You deserve to get paid. Your family needs for you to get paid. Your future self is depending on you to get paid. At a certain point, friend, you've got to make paying yourself just as important as reinvesting in the business.

Darren Wurz (16:43.33)

Future depends on it. Here at the Lawyer Millionaire, this is one of the first things that we look at with every new client. And there's a reason for that. Our team works across both sides of your life, the business and the personal, and connects the two. We want to help you grow your firm, but not just for the sake of growing your firm, you know, reaching a certain revenue point. That's great. We're all about profit. We want to help you grow it so you can pay yourself more.

And reach your financial goals, build the financial independence that you are striving for, and that you and your family deserve. And when you work with us, you don't just get one advisor, you get a whole team, a business advisor, a CPA, and a certified financial planner, all working together, all collaborating together. Our team is going to help you grow your business, make more money, and then make sure that money is actually doing.

What you built the firm to do. Your business should serve your life, not the other way around. That's something that we really believe. And it's something we can help you do. Now, go take that owner pay audit right now. The link is in the show notes. And if you're not yet paying yourself what you deserve to be paid and you want a team that's going to help you get there, book an intro call with our team right now.

Let's talk about how we can help you. The link is in the show notes. Well, that's it for today, friend. Thanks so much for being with me here on The Lawyer Millionaire. I'm your host, Darren Wurz. And remember, if your law firm isn't giving you wealth, how in the hell is it going to give you freedom? Can I get an amen out there? Now, go make it happen. Make the cash flow and make the profits grow. And I'll see you next time.

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