Tax Planning for Lawyers: Turning Profit Into Long-Term Growth, with Jayden Doye

Episode Notes

Transcript

Bernadette Harris:

Hi, I’m Bernadette.

Zack Glaser:

And I’m Zack, and this is episode 614 of The Lawyerist Podcast, part of the Legal Talk Network. Today, Bernadette talks with Jayden about law firm finances, and really I got to sit in on this one as they were doing it. And it is a kind of fun little peak behind the curtain of what you would think that law firm-specific finance people would talk about. It is a really fun one. So Bernadette, welcome to your first hosting episode.

Bernadette Harris:

Yeah, that was a lot of fun. It was very intuitive. It just happened naturally, right?

Zack Glaser:

Yeah. Yeah. Well, you’ve had a podcast for a while, so the podcasting portion is not new to you. The discussing legal finances is not new to you. Right, right. True. None of this is really new. It’s just kind of like putting things in a different order, really. Yeah.

Bernadette Harris:

A different package.

Zack Glaser:

Yeah. But thinking of things that are new to all of us and to some of us at different times, you and I were talking earlier. You’re located in Mexico. You’re in Merida. And I probably don’t pronounce that correctly. It was pretty

Bernadette Harris:

Close. Pretty close.

Zack Glaser:

All right.

Bernadette Harris:

Yeah.

Zack Glaser:

All right. But that’s over in the Eastern side and kind of the Yucatan, right?

Bernadette Harris:

Correct. Well, I’m in the Yucatan Peninsula. Yep.

Zack Glaser:

Nice. Oh man, that is very cool. Well, you’ve been learning Spanish for the past little bit, and I’m going to go ahead and say this is probably an immersive experience.

Bernadette Harris:

For sure. I was thinking … Zack, I took Spanish in high school and I think I was conversant as a teenager. In fact, it was my cold language. My girlfriend and I, we both took Spanish and when we were around our parents and we didn’t want them to know what we’re talking about, we spoke in Spanish.

Zack Glaser:

How fun is that?

Bernadette Harris:

Yeah. But one of the things about language is if you don’t use it, you lose it. So high school was a few days ago for me.

Zack Glaser:

Same.

Bernadette Harris:

Same. So I lost a lot of it. So when I moved here to Mexico, I thought I knew Spanish and I realized very quickly how much Spanish I didn’t know when I actually moved here.

Zack Glaser:

And then we have, if you moved to New York, you’re speaking a different English than here in Memphis- Absolutely. … or over in Chicago or in Kansas. And so there’s that aspect of it too. So not only are you learning Spanish, but you’re learning probably at the very least regional accents, if not regional dialects too.

Bernadette Harris:

That’s very fun. And I also realized the Spanish that I learned in high school was probably Spain Spanish, not Mexican Spanish, which is very different. But yeah, being immersed in it is I’m learning it in a very different way and it’s challenging me because I kind of have my little set way of learning stuff. And so this is forcing me to learn things in a very different way. And I notice in learning it, a lot of my personality flaws, character flaws are showing up because perfectionism is one of the things that I struggle with. And a lot of times I won’t speak because I’m afraid that I won’t say it perfectly.

Zack Glaser:

So I love that as kind of a corollary to lawyers in their offices kind of learning new things because you’ve worked with lawyers for a lot of times. They too are a lot of times perfectionists and won’t put something out there without it being perfect. But yet speaking as a lawyer, I think of myself as somebody who loves to learn and can learn and knows how to learn. So how do you approach learning this new and frankly scary thing? I mean, a different language is, I feel like you’re walking into something a little blind. And so that’s a tough thing to learn. So how do you approach learning this new thing, little scary, and you’re not going to be perfect at it?

Bernadette Harris:

Never. I don’t think

Zack Glaser:

I ever- I’m not perfect at speaking English.

Bernadette Harris:

Exactly. Exactly. So two things that have really come up with this. One of the things that I realized, and I think this is something that will definitely apply to lawyers, is a lot of times our expectations of other people is not what we think. And so I had this in my mind, I have to say this sentence perfectly, I have to pronounce these words perfectly, and the person on the other end is just impressed with the fact that I’m trying or the fact that I’m at least giving it a shot. And so that’s one of the things that’s kind of come up for me when it comes to learning a new language. And I also have realized in learning a second language, it has made me more cognizant of how I speak my first language.

Zack Glaser:

Oh, I love that. Say a little bit more about that. I love that concept.

Bernadette Harris:

And so you think about it, like you said, if you spoke to someone from New York versus someone from the South, I’m from the South. We have very different accents. We have different dialects. We have different ways that we describe certain things, and sometimes we don’t always enunciate or we may shorten words and things like that. I do. Yeah. And so

Zack Glaser:

I- Listen to how I say lawyerist.

Bernadette Harris:

And so it’s made me more mindful because a lot of times I’m speaking with Spanish speakers and they are practicing their English. And so I have to be mindful of the way that I speak English to them so that I’m not giving them wrong words or wrong pronunciations. And yeah, it’s just made me more cognizant of those two things. And I’ve definitely become more compassionate for people who are learning another language because it’s not easy.

Zack Glaser:

Oh, it’s not. It is not. And I always try to keep that in mind when I’m in my day-to-day communicating with somebody in their second language. I always think of the thing where it’s like we’re talking in English because it’s the only one that I know. We’re talking in English because it’s the only one that I know. They’re talking in English because it’s the only one that I know. I’m the problem here. But I love that, getting out and going, okay, well, I’m going to do this thing and I’m not going to let not knowing a language stop me from moving to Mexico. And I see the pictures of where you are in Mexico and it’s gorgeous. I couldn’t imagine missing out on that by being like, “I don’t speak the language yet.”

Bernadette Harris:

Yet. Yeah. And I’m getting there. I am getting there.

Zack Glaser:

That is awesome. Well, that is very cool, Bernadette. Well, let’s go ahead and go into you speaking English, but still potentially a foreign language to some of us, which is finance talk with-

Bernadette Harris:

Yeah, absolutely. But also speaking it with being cognizant of the fact that everyone doesn’t speak it.

Zack Glaser:

I love that. An unintended corollary here. Awesome. Well, let’s hop right into that conversation with Jayden.

Jayden Doye:

Hello, hello, hello. My name is Jayden Doye, and I help law firm owners pay less to the IRS.

Bernadette Harris:

Oh, that is the perfect introduction. I think that all of our listeners are interested in more of that, right? So welcome to The Lawyers Podcast. And today we really want to talk about some of the things, some of the mistakes that we all see. I am a retired accountant, but you are still practicing, but some of the mistakes that we see law firms make and how it kind of impacts their business as far as tax time, patterns, all of that kind of good stuff. I think I want to start with somewhat of a heavy question, but more so from your perspective, what are some of the patterns that you see over and over again with law firm owners when it comes to their taxes?

Jayden Doye:

Well, I see people that are just so intelligent when it comes to practicing law and being so proactive with these criminal defense strategies or estate planning strategies, but they don’t use that same energy to be proactive in tax planning. And they put tax planning on the bottom of the totem pole and they let everything else that is going on in their life take precedent and take priority over making sure that their financial and their taxes are prioritized. So I think the lack of proactiveness is the main thing that I see. Calling me in December and you’ve been not booking your calls all year. I mean, there’s only but so much we can do. At this point, the 401k option’s not even on the table.

So that’s one of the biggest things. And then the other thing is for people that maybe claim that they’re not ready to work with me, I see them, they are DIYers. And a lot of people have been culturally led to believe that you have to do everything yourself. I’ll give you an example. I pay somebody a few hundred dollars a month to clean my house twice a month, do my laundry, all of that. Most people I grew up with, they said they would never do that because they can clean by themselves. But when you delegate something, it feels so much better and it frees you up to make more money. So people are literally who don’t have an accounting background doing their own books and doing their own taxes and they didn’t go to school for tax law. So they think that they’re saving, doing it themselves when in actuality they’re actually doing more damage and they usually end up overpaying.

They pay the IRS and the state government so much more that it would’ve cost less to retain a CPA to take care of it for you.

Bernadette Harris:

Yeah. I’m with you. I believe that delegation is so important and it is just certain things that we should not be doing. And I’m with you, Jaden. I am not above cleaning my own house, but I just feel like there’s somebody out there that actually loves to clean and they are going to do it a lot better than I am because I’m going to be complaining the whole time that I’m cleaning my house. And I’m also not going to be doing something that I enjoy doing or something that I’m really good at. So I agree DIYing it, that’s not the thing to do, especially when you’re growing a law firm, right?

Jayden Doye:

Yep.

Bernadette Harris:

Yeah.

Jayden Doye:

Absolutely.

Bernadette Harris:

Yeah. Not a good use of your time. What else? What are some of the other things that they’re not doing? Like you said, one of the things that you said was tax planning. And I think a lot of times people don’t realize that there is a distinct difference between tax preparation, bookkeeping, and tax planning. So let’s back up a little bit and just kind of talk about the difference between those three things so that they understand what you’re saying when you say they’re not proactive about tax planning.

Jayden Doye:

Absolutely. So in a contract terms is like up at the top, right? So this should work for them, right? Okay. So bookkeeping essentially is your accountant categorizing your income and your expenses. So as activity comes through your bank account and your credit card accounts, they are categorizing it to income or expense or liability or asset, et cetera. So at the end of that, you have what’s called a profit and loss statement that shows your income and expenses, and your balance sheet, which shows your assets, liability and equity. We then take that to go to the next phase, which is tax preparation. That is where we enter all the data into the business and/or personal tax returns. And then after that, the client reviews and they sign. That’s where tax preparation ends. The next phase is tax planning. This is where we say, okay, based off of what you did this year, these are the changes that I recommend that you implement in 2026.

So last year, you didn’t have any retirement plans. So I’m going to recommend that you get a 401k started, and I’m going to recommend that you contribute the maximum and you of course offer to your employees. Now, caveat to that, you’ll have to pay, you’ll have to do a match, but when you look at it, if you do a 3% match on a 401k, if you match up to 3% of wages, it’s such a little expense and that small expense can be make or break when people are making employment decisions as to which company to work for. So

Bernadette Harris:

In addition to it being a tax planning strategy, it is also a hiring retention strategy. Yeah.

Jayden Doye:

Correct. Yes. So yeah, we go into those different strategies and then every quarter. So let’s say in January, I told you that you need to open up a 401k and contribute the max. We’ll have another meeting in April. We’ll have another meeting in July. When we have that meeting in July, if you did not open up your 401k account, we’re going to have a problem. Actually, we’re not getting off this call until you go ahead and open it up right now. Yeah, here’s the link. Open it up right now. Yes, I’m so serious. Yes, you’re going to do it right now.That’s the type of tax planning that I do because what you’re not going to do is tell people that you worked with me and you didn’t get the benefit. Okay? I need you to brag about how much I saved you on taxes. So that’s how serious I am.

But tax planning, we talk at least three to four times a year to make sure that you’re on track with the original plan. But also as your income fluctuates up and down, we’re actually calculating your quarterly estimated tax payment for you because that’s going to change. A lot of firms that are the churn and burn firms, what they do is when you do your tax return, they give you four vouchers and they say, “Oh, you made 500,000 this year. We think you’re going to make 550 next year. Here are your four vouchers. I’ll talk to you next year when it’s time to file taxes.” But that’s not appropriate because what if a big life event happens and income fluctuates up high, real high or goes down low, real low, we need to make changes for those life changes.

Bernadette Harris:

Yeah. Yeah, that’s a good point. So not being proactive with tax planning is one of the patterns that you see. Is there anything else that you see that happens a lot with small firms?

Jayden Doye:

I would say hiring actually, I know that’s on the consulting side, but also on the tax side, not hiring appropriately can mess you up tax-wise. And so I’ll give you an example. So let’s say someone hires someone, there’s two different issues that come up. There’s like a unemployment tax issue, but then there’s also the not being able to use certain benefits issue. So give you an example. The law firm hires somebody as a contractor when technically they’re an employee. If and when the relationship is severed, if they get mad, they will go and file an unemployment claim. The unemployment office will say, “I’m sorry, Jane Doe, but your name is not listed as an employee of this company. Are you sure that you’re employed at this company?” “Yes, I’m sure. Here’s the proof. “So then they’re going to do a check that’s going to cause them to do an audit on that law firm, and then that’s going to create a whole can of worms, a whole … The issue is going to be way worse than if they just had them as an employee and paid them appropriately.

So the second issue is that when we have programs like the PPP program, for instance, people that did not have people set up as employees correctly could not take advantage of that. Also, when we look at different retirement plans, people that are not employees cannot be a part of that. So there are different tax deductions that you have available to you when people are actual employees that also, to your point, serve as a retention strategy that people they’re not capable of using if they do not classify their employees appropriately as employees, and instead they classify them as contractors.

Bernadette Harris:

Yeah. Misclassification of workers is one of the things that I saw a lot when I was practicing with small businesses, small firms, because a lot of times you think that you’re going to save money. And we’re kind of back to this whole, are you truly saving money thing because you think you’re going to save money by just making them a contractor. And I use air quotes when I say that because you can’t make someone a contractor. They actually have to qualify to be a contractor. And so when you misclassified as worker, the money that you think you saved with payroll taxes, you could end up having to pay that when the Department of Labor comes back and says, Hey, you misclassified this worker. Now you got to go and amend your payroll returns, add them to the payroll returns, pay the taxes, pay the penalties.

And so this is something that, yeah, I’ve seen that as well. It is not pretty. So what are some of the things that you wish law firm owners understood before they even sat down with you?

Jayden Doye:

One thing I wish they understood, which I have to explain almost to all new clients, are the different ways to take money out of the business and how that’s taxed. So people, I’ll say,” Okay, so you’ve put yourself on payroll already? “And they say,” Yeah. “And I’m like, ” Okay, what payroll program are you using? “They say,” What you mean? “I’m like, ” Gusto, ADP, paycheck, something like that. “And they said,” No, I just take money out and that’s my payroll. “So that is a profit distribution that is not owner’s salary. If you were owner’s salary, then that means you would pay payroll taxes, it would be taxed, there will be 941 returns, state tax returns. So understanding that and how that affects the P&L and the balance sheet and your taxes is a big thing that I wish that people understood that there’s a difference between just taking out draws or distributions.

I use those terms interchangeably versus actually owner’s salary. The other thing is I think a lot of people are so … They’re so infatuated with having a certain revenue number that they forget that the profit is actually more important and that’s what the tax liability is based off of. And so not just only chasing revenue so much that you forget that how profit is and you forget to set money aside for taxes, I wish everyone would have a tax savings account and would set aside a portion of gross revenue for taxes.That would just be wonderful.

Bernadette Harris:

It sounds like a utopia, but I think that there are some firms who really want to be that way. And I’ve worked with some, and maybe you’ve worked with some who actually do this. And so it’s really important to make sure that you understand that. I think one of the things that you said that really got my ears perked up is when you said understanding how taking money out is tax because I’ve had people say,” Oh, this is an owner’s draw. I don’t have to pay taxes on that. “And so I think that there is a lot of times a misunderstanding about the taxable treatment of how you take money out of the company.

Jayden Doye:

So yeah, I’ll talk about that. I think most people at this point, most people listening are probably S corp. You would agree, right?

Bernadette Harris:

Yes.

Jayden Doye:

Okay. So that means that your business return is filed, but it’s an informational return and through that return, there’s a form called K1 that’s generated. And you think of your K1 like you would a W2. It has numbers on it and you put on your personal tax return and that’s what you pay taxes on. So essentially, you’re paying taxes on the net income, net profitable income of the business. So if hypothetically you had gross revenue of 500,000 and then you had 400,000 of expenses, that leaves you, for example, purposes with a profit of 100,000.

So you pay taxes, ordinary taxes on that 100,000. When people say that you don’t pay taxes on that, on distributions, what they mean is that you’re not paying a self-employment tax on top of that, but you still have to keep in mind before you take out any profit distributions that you are paying ordinary taxes on that profit. Now, most people at S Corp are probably going to have a W2 and a K1. So in this same example, let’s just say of that 500,000, you paid yourself a salary of 200. When you work with a payroll company, they will take out the withholdings that’s appropriate for you. So the 200,000, if you filled out your paperwork correctly, we already know that the taxes on that 200,000 has already been paid, and we now just need to worry about this extra 100,000. And that’s where the planning comes in.

Do we prepay for expenses or do we just leave it in there and then make sure that we’re paying on taxes quarterly? Because the IRS does require, if you’re self-employed for you to be psychic, have a crystal ball, know what your taxes are and pay that amount quarterly.

Bernadette Harris:

Yeah. Yeah. And I think that when you have the bookkeeping in place and you’re able to look at your numbers in real time and actually see what’s going on, it makes it a little bit easier to be psychic and have that crystal ball. But when you don’t have the bookkeeping, you really are playing against and game when it comes to that stuff.

Jayden Doye:

And honestly, for the people, after somebody is my client for about two to three years and I’ve seen that they’re pretty stable, what we honestly like to do is just have them on a monthly autopay. So we get them set up on the IRS system to, if we can know that their tax liability for the year, for the past three years, has been about the same. The profit has been about the same. We go ahead and we just have, let’s just say we know it’s going to be 120,000 for the year, we have $10,000 pulled out of their account every month so that they don’t have to worry about it. Because at that point, when you’re paying $120,000 in taxes, to them, it might seem like a lot, but it’s money in a bucket. It’s pennies in a bucket to them. So at that point, they don’t want to think about it.

They just want it done for them and we like to make it convenient for them.

Bernadette Harris:

And monthly is a lot less painful than making that big quarterly payment too. So that’s another thing. One question that I was also thinking about was when, let’s say it’s a new client of yours, because it sounds like the clients who work with you on a regular basis, they kind of have a system. So you have a new client and they get surprised, their tax bill surprises them. What are some of the things that you tell them? Where do they start to not be surprised next year?

Jayden Doye:

Well, yeah, that is one of the not so great parts of what I do is that sometimes if someone comes to me now and the whole year of 2025 is over, there’s only but so much that we can do, right? So at that point, what I do tell them is, this is what it is. We can either pay it upfront or you can work out a payment plan. Either way, I’m going to hold your hand through this process. However, going forward, this is the plan that we can help you save anywhere from 15 to $75,000 in taxes. So yes, it sucks that you didn’t work with me before, and this is the tax liability. However, at least going forward, you won’t be in that predicament again.

Bernadette Harris:

Yeah. So it goes back to the first thing that you said. It’s about really being proactive and basically using the same strategies that you use to build your law firm to also build that financial side of your business.

Jayden Doye:

Yep.

Bernadette Harris:

So as we wrap up, is there anything that you would like to say to our listeners? Here’s what I want you to do. I want you to channel every CPA out there. And I want this last statement that you make to be a statement that every CPA says, yes, thank you. Thank you for telling them this. What is this final statement that is going to make law firm owners better clients to their CPAs?

Jayden Doye:

I’ll give you three. One, look at your numbers monthly, even if it’s just for 15 minutes. Two, start setting aside money, create that tax savings account right now and start setting aside a percentage to that account. And number three, have a strategic conversation with your CPA once a quarter, so at least four times a year to talk about tax planning.

Bernadette Harris:

I love it. I love that.

Jayden Doye:

If you could do those three things, it’ll change your life. And on top of that, it will make you feel a lot better about the situation. I think about it like this, like the people that want to lose weight, but they don’t look at the scale, the more and more you look at the scale, the less and less cringey that feeling gets to you. So if you go ahead and have those meetings now, it might be rough, but guess what? Get through it. Just like you got through passing the bar, you can get through this.

Bernadette Harris:

Yes, I love it. I love it. Awesome.

Jayden Doye:

Oh, and one more point. Start, make sure your business and your personal finances are separated.

Bernadette Harris:

Oh God, yes.

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