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New nonequity partners are sometimes stuck paying more health and tax costs

By Debra Cassens Weiss

November 12, 2024, 3:40 pm CST

Take-home pay is only slightly higher for some newly promoted nonequity partners because their law firms treat them as equity partners for tax purposes.

Many nonequity partners are stuck paying thousands of dollars in health and tax costs that they didn’t have to pay as associates because they are classified as self-employed, Bloomberg Law reports.

These nonequity partners receive the same IRS K-1 schedule as partners do, which means that they have to pay full Social Security and Medicare taxes, Bloomberg Law explains. As associates, these lawyers paid only half those costs. In addition, some of these nonequity partners pay all the premiums for health insurance—a cost that is often subsidized for associates.

“Some nonequity partners get extra compensation in recognition of the costs, while others persuade firms to change their tax classification because of the expenses,” Bloomberg Law reports. “Still others get used to the change, enjoying the status of being called ‘partner’ and realizing there are other tax deductions they can take” for unreimbursed business expenses.

The percentage of partners in the nonequity tier is increasing, Bloomberg Law reports, citing American Lawyer data. Almost half of the partners in the nation’s top 200 grossing firms had nonequity status in 2023, compared to 40% in 2013.

One firm that changed its treatment of nonequity partners is McDermott Will & Emery, Ira Coleman, the firm’s chair, told Bloomberg Law.

“We talked to our income partners and our income partner committee, and they said there’s got to be a better way to do this,” Coleman said.

McDermott switched back to W-2s for nonequity partners in 2020, he said.

Lawsuits filed against Duane Morris and Thompson Hine take issue with the treatment of nonequity partners, the article says.

The plaintiff in the Thompson Hine suit said her status as an income partner was “a meaningless title more akin to an albatross.”

The plaintiff in the Duane Morris suit said after her promotion to nonequity partner, her effective pay decreased. The suit alleged that Duane Morris withheld part of her compensation for a capital contribution and firm operating expenses and also required her to pay a share of partnership taxes owed to states in which the firm practices.

Neither Duane Morris nor Thompson Hine commented specifically on the allegations concerning nonequity partners when the suits were filed, although Duane Morris previously said it strongly disagreed with the plaintiff’s allegations.

The Duane Morris case has been transferred to the U.S. District Court for the Southern District of California. Duane Morris filed a motion to dismiss several claims in the case in August.

“In time,” the motion said, Duane Morris will demonstrate that the plaintiff “is a genuine partner whom the firm has always compensated and otherwise treated fairly and well within the bounds of the law.”

Thompson Hine filed a motion to dismiss in July. When the plaintiff’s 668-paragraph amended complaint is “stripped of all conclusory, argumentative and nonfactual allegations,” it fails to state plausible claims, the motion said.