Tax Planning for Law Firms and Attorneys: SSTB Rules, Retirement Strategies, and Entity Structure Optimization

Legal services are classified as a specified service trade or business (SSTB) under IRC 199A, which means attorneys earning above the phase-out thresholds lose the 20% qualified business income deduction entirely. This puts law firms at a structural disadvantage compared to non-SSTB businesses (construction, manufacturing, real estate) that can claim the full QBI deduction regardless of income. For a solo attorney earning $800,000, the lost QBI deduction is worth approximately $59,200 in tax savings (20% of QBI x 37% tax rate). Because this deduction can’t be recaptured, attorneys must rely on other strategies to reduce their effective tax rate: maximizing retirement plan contributions (defined benefit and cash balance plans can shelter $200,000-$400,000+ per year for older attorneys), optimizing the S-Corp salary to minimize payroll taxes while remaining defensible, timing income and expenses across tax years, and electing the pass-through entity tax in states that offer it. For multi-partner firms, the partnership tax rules add another layer of complexity: guaranteed payments are ordinary income subject to self-employment tax, profit allocations must have substantial economic effect under IRC 704(b), and partner draws must be tracked against basis to avoid unexpected taxable events.

How do law firms minimize taxes?

Does an attorney’s S-Corp salary still matter for QBI?

It can, depending on where your taxable income lands. Reasonable compensation isn’t qualified business income, so salary shrinks QBI. Above the threshold, the deduction is also capped by W-2 wages, and your own salary should count toward them (an inference, since officers are employees). For a law practice, the SSTB phase-out the article describes runs over the same range, and above the top of it the practice gets no QBI deduction at all, so salary stops mattering for QBI.

The figures changed with P.L. 119-21:

• Thresholds: $197,300 single and $394,600 joint for 2025; $201,750 and $403,500 for 2026.
• From 2026 the phase-in range widens to $75,000 ($150,000 joint), so it ends at $276,750 single and $553,500 joint.
• Section 199A no longer expires after 2025.

What counts as reasonable pay stays the same either way. At a salary like the example’s $300,000, Social Security stops at the wage base ($176,100 for 2025, $184,500 for 2026), the 2.9% Medicare continues, and the employer has to withhold the employee’s 0.9% Additional Medicare once wages pass $200,000.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.