Taxation with Representation - Tax Lessons From a Criminal Lawyer
I actually took tax law in my third year of law school because I had already taken all the courses that I was interested in and because people told me I should take tax law for the bar exam. I remember exactly two things that my tax professor said in that class. The first was “sometimes people call me and tell me they have a simple issue and ask how much it will cost. I tell them that I don’t deal with simple issues. I deal with complicated issues. And I bill at a complicated rate.”
The other was a very important lesson for young lawyers everywhere: “It doesn’t matter how much you make. It matters how much you keep.”
Going out on my own was a very interesting lesson to internalize this very important truth. When you are an entrepreneur and you are able to deduct expenses that go towards your work output, you realize how utterly punitive the tax code is to employees. Lawyers tend to be very competitive and very type A personalities. It matters to a lot of them how much their peers are earning at the various firms. But almost none of them consider the key question – how much do I keep from my earnings?
I always describe my first year on my own as a criminal lawyer as the best year of my life to anyone that will listen because it taught me so many valuable lessons about life and happiness that I simply did not know before and would not have learned unless I did. Before I went out on my own, I was making a salary of $90,000. During my first year as a criminal lawyer, my firm grossed approximately half of that, but I felt my quality of life did not go down noticeably at all. Originally I thought it was just because I was enjoying life so much more that I didn’t notice that my standard of living had gone down. But later I thought back to what my professor had said and actually ran the numbers and factored in taxes and realized that $90,000 as an employee and $45,000 as an entrepreneur are not that different in terms of standard of living. The difference can likely be made up by switching from Starbucks to Tim Horton’s and it is hard to justify not making that sacrifice to be your own boss and live life on your own terms.
If you don’t believe me, I would encourage you to run the numbers yourself. A salaried employee earning $90,000.00 will net approximately $66,000.00. An entrepreneur that makes $45,000.00 will likely pay no taxes when expenses and net income is factored in. Those two numbers are not very different, but the comparison should not end there. From the $66,000.00 you should deduct employment related expenses that you deduct as an entrepreneur, but not as an employee, like transportation costs and your phone costs. I am convinced that my standard of living did not go down in any way that affected me because $90,000.00 as an employee and $45,000.00 as an entrepreneur are actually very similar.
I would also argue that that should not end the comparison either. You have to put a monetary value – whatever it means to you – on the other benefits of being an entrepreneur like freedom, autonomy and job security. These are almost never factored in by the people that are choosing between alternatives, but they are worth more to me with each passing year.
Lawyers have a bad habit of being competitive and comparing themselves to others. My best advice is not to compare yourself to others. However, if you are going to compare yourself to others, at least do a proper analysis factoring in what my tax professor said and the non-monetary benefits of being an entrepreneur.