Can Partners of Law Firms be Treated as Employees for Employment Tax Purposes?

Partners of law firms are typically treated as independent contractors for income tax purposes because they are considered self-employed owners of the firm, not employees. For federal income tax purposes, some partners of law firms may prefer to be classified as independent contractors rather than employees. The basic incentive to prefer independent contractor status lies in the rules that govern federal income tax and employment tax withholding. If a partner of a law firm is an independent contractor rather than an employee, the law firm is not required to withhold taxes on the partner’s wages. The independent contractor can be paid a lump sum of money without having any federal income tax or employment tax withholdings. In contrast, wages paid to lawyers classified as employees are subject to federal income tax and employment tax withholding.

From a law firm’s perspective, there is an advantage in treating a partner as an independent contractor instead of an employee. By treating a partner as an independent contractor, the law firm avoids financial obligations such as having to match contributions to Social Security, or 7.65 percent of wages up to a ceiling of $184,500 (for the 2026 calendar year), Federal Unemployment Tax of 6.0 percent on the first $7,000 of wages. The law firm may also avoid having to pay a number of applicable state taxes.

Federal law determines whether an individual should be classified as an independent contractor or employee for federal income tax purposes. Under federal law, there is no single statutory test for determining whether a worker should be characterized as an employee or an independent contractor. However, the Internal Revenue Service (“IRS”) often utilizes a common law right-to-control standard for purposes of determining whether a person is an employee or an independent contractor. Although the IRS typically utilizes a common law right-to-control standard to determine the classification of a worker, historically the IRS has treated law firm partners as independent contractors. See Rev. Rul. 69-184.

Although the IRS historically treated law firm partners as employees for federal income tax purposes, a compelling argument can be made that some partners in larger law firms can easily be classified as employees under the common law right-to-control standard. Law firm partnerships are not typically flat hierarchies at the partnership level: managing partners sit on the top of the pyramid; followed by practice group leaders, or even leaders of smaller teams. Apart from management titles, some partners may carry greater management responsibilities due to their seniority within the firm or due to other external factors. Some partners exert greater influence than others. Some form controlling factions. Others, despite their best efforts, are more often in the minority. There may be differences in the apportionment of partnership shares. There are the inescapable realities whenever people assemble in groups or elect to form organizations. See Lemon v. Myers Bigel, P.A., 985 F.3d 392, 396 (4th Cir. 2021).

Hierarchies in the management at the partnership level may result in many law firm partners, particularly so-called junior partners being treated more like an employee rather than an actual partner. The issue of whether a law partner in a law firm may be treated as an “employee” under federal law often requires a fact intensive inquiry that is highly dependent on the circumstances. In Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003) considered whether a “partner” can be classified as an “employee” under federal law. The Court held in Clackamas, whether a partner is an “employee” “depends on all of the incidents of the relationship with no one factor being decisive.” The Court seemed to adopt the common law right-to-control standard to determine if a partner of a law firm can be classified as an employee.

The Supreme Court also recognized that partners at many professional organizations, such as law firms, may often qualify as employees by stating as follows: “today there are partnerships that include hundreds of members, some of whom may well qualify as ‘employees’ because control is concentrated in a small number of managing partners.” See Clackamas 538 U.S. at 446. The Seventh Circuit Court of Appeals echoed the Clackamas holding in Sidley Austin Brown and Wood, 315 F.3d 696 (7th Cir. 2002). In Sidley, the Seventh Circuit recognized that large, modern law firms may be more akin to corporate banks than conventional partnerships. Sidley postulated that ordinary partners could often be characterized as “employees” of the firm, with centralized management committees exercising control over the business and acting as the true “employers.”

A Sample of a “Policy Manual” Used by Law Firms to Govern Partners

Generally, partners of large law firms are required to conform to the requirements of a “policy manuals.” Law firm policy manuals are comprehensive documents that detail a law firm’s rules, procedures, and standards for employees, partners, and operations. Under these policy manuals, partners are typically required to:

1. Attend firm sponsored continuing legal education courses;
2. Follow firm billing policies, perform certain non-billing activities at the discretion of the firm;
3. Follow written standard of conduct, follow the firm’s procedures regarding sexual harassment;
4. Obey the firm’s motion and litigation practice;
5. Work full-time;
6. Perform work on the premises of the firm;
7. Not use efficiency improving software, such as generative intelligence software;
8. Have supervisory partners sign off on external communication and litigation papers approved by a supervising partner;
9. Submit written reports to the firm;
10. Devote all professional time, skill, and attention to the firm;

Not work for another business as a lawyer.

In addition, policy manuals often provide partners with a reimbursement policy for business development expenses, client travel expenses, overtime meals and overtime travel.

Application of the Requirements Contained in a Typical Law Firm Policy Manual to the Common Law Right-to-Control Standard

Treasury Regulation Section 31.3121(d)-1(c)(1) has adapted the common-law right-to-control standard in determining whether an individual should be treated as an independent contractor or an employee. The common-law right-to-control standard is also discussed in Revenue Ruling 87-41, 1987 CB 298. The common-law right-to-control standard contains a 20 factor test to determine employee status. The IRS uses the 20 factor test as a guideline to determine an individual’s employment status. Not every factor of the 20 part test is applicable in every situation, and the degree of importance or “weight” of each factor will vary depending on the particular circumstance. However, as a general rule, an employment relationship will exist when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing the right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services.

The article will next analyze the 20 factor common law right-to-control standard in the context of a typical policy manual used by law firms to govern partners.

1. Instructions

A worker required to comply with other persons’ instructions about when, where, and how work is to be performed is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions. See Rev. Rul. 68-598, 1968-2 C.B. 464; Rev. Rul. 66-381, 1966-2 C.B. 449. Many law form policy manuals require partners to attend firm-sponsored continuing legal education courses, use the Firm approved generative artificial intelligence, follow the firm’s published written standard of conduct, follow the firm’s procedures regarding sexual harassment, follow firm’s billing policies, perform certain non-billable activities at the direction of the Firm, and obey the firm’s motion and litigation practice. In some cases, firms impose guidelines on a partner’s use of social media and the manner of dress while performing his or her duties and meeting with clients. By providing detailed written instructions as to how a partner may perform his or her work, act publicly, and dress, it establishes that many law firms provide partners with “instructions” under the 20 factor common law right-to-control test.

2. Training

When the employer requires an experienced employee to help train a worker, corresponds with the worker, or requires the worker to attend meetings, it indicates that the person for whom the services are performed wants them performed in a particular method or manner. See Rev. Rul. 70-630, 1970-2 C.B. 229. Many law firm partners are required to attend firm sponsored training in the form of continuing legal education courses. The fact that many law firms required the partners to attend training in continuing legal education satisfies the second part of the common law right-to-control standard.

3. Integration

Integration of the worker’s services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the business. If the work constitutes an integral part of the employer’s business this tends to support employee classification for the service providers. Conversely, if the work is only tangential to the employer’s business, the service providers are more likely to be classified as independent contractors.
See United States v. Silk, 334 U.S. 704 (1947). Most law firm’s policy manuals require some partners, in particular, junior partners to perform work at the direction or control of a senior or equity partner. In these cases, the partner’s services are integrated into the business operation of the firm and the third part of the common law right-to-control  standard is satisfied.

4. Services Rendered Personally

If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as in the results. See Rev. Rul. 55-695, 1955-2 C.B. 410.  This tends to support employee classification. If the person providing the services has the right to delegate all or a portion of the work to others, independent contractor status may be indicated. Conversely, the lack of a right to delegate duties may support employee classification. In order to be a practicing attorney and a partner of a law firm, the partner must be licensed by one or more state bars. As a licensed attorney, partners of law firms must either perform services on behalf of a law firm personally. Even if a partner can somehow delegate his or her work performed on behalf of the firm that employs them, the partner must closely supervise these individuals and cannot ethically delegate his or her obligations to others. Since a partner must personally provide his or her services on behalf of the firm that employs them, this prong of the common law right-to-control standard is typically satisfied in partner law firm relationships.

5. Hiring, Supervising, and Paying Assistants

If the entity for which the services are performed hires, supervises, and pays assistants, that factor generally shows control over workers. Most law firms make available to partners its administrative staff such as a receptionist and mailroom clerks. This tends to show control over the partner and establish an employee classification.

6. Continuing Relationship

A continuing relationship between the worker and the employer indicates an employer-employee relationship. A continuing relationship may exist if work is performed at frequent although irregular intervals. See United States v. Silk, 331 U.S. 704 (1947). The duration of the engagement will also be considered. A long-term engagement is more consistent with employee classification, while a short-term or one-time engagement is more consistent with independent contractor classification. In most cases, partners associate with a law firm for a number of years. Such a continuing relationship between a partner and a law firm indicates an employer-employee relationship.

7. Set Hours of Work

The establishment of set hours of work by the person or persons for whom the services are performed indicates control. See Rev. Rul. 73-591. Most partners are not only required to perform cases or work assigned to them, they are also required to attend firm-sponsored continuing legal education courses and perform certain non-billable activities at the direction of the firm. In many cases, these types of arrangements tend to establish an employer-employee relation.

8. Full-Time Required

If the worker must devote substantially full-time attention to the business of the employer, the employer has control over the amount of time the worker spends working and implicitly restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to set hours and seek other work. See Rev. Rul.  56-694, 1956-2 C.B. 694. Lawyers and partners of law firms often work long hours. As a matter of fact, most partners greatly exceed the standard 40-hour work week. This element of the common law right-to-control standard is easily satisfied in most cases when it comes to partners of law firms.

9. Performing Work on Employer’s Premises

If the work is performed on the premises of the employer, this suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the employer, such as at an independent office of the worker, indicates some freedom from control. See Rev. Rul. 56-20, 1956-2 C.B. 496. Many partners are not only required to perform their work on the premises of the firm, they are also required to perform certain non-billable activities at the direction of the firm at the firm’s offices such as: (1) participating or assisting in lectures or publications; (2) supporting Firm training; (3) advising or representing the Firm itself as a client; (4) creating or maintaining area precedent; and (5) interviewing potential hires. This type of requirement for partners to perform duties on behalf of the firm on premises tends to establish an employer-employee relationship.

10. Order or Sequence Set

If a worker must perform in the order or sequence set by the employer, the worker is not free to follow the worker’s own pattern of work. Often, because of the nature of an occupation, employers do not set the order of the services or they set the order infrequently. It is sufficient to show control, however, if the employer retains the right to do so. Many partners of law firms must perform his or her duties in the order and sequence established by the firm. For example, a firm may oversee a litigation attorney’s work and have sole discretion to prohibit the partner from filing certain motions in ongoing litigation, specifically those seeking sanctions to recover fees, or motions involving attorney misconduct. The law firm may also prohibit the partner from using efficiency improving software, such as generative intelligence except where approved by the firm. The law firm may also prohibit a partner from failing to accept direction of a senior partner or equity partner. In other cases, a partner must have a superior partner sign off on all external communications and/or litigation papers may be filed with a senior or equity partner’s approval. The fact that partners are often required to follow a detailed set of instructions from the firm they have associated with establishes that the partner must perform in an order or sequence set by the firm and that the partner is not free to follow the partner’s own work pattern. Consequently, partners of law firms, in particular junior partners, can often be classified as employees under the common law right-to-control standard.

11. Oral or Written Reports

Most law firm partners must submit oral or written reports to the firm that they associate with. A requirement that a partner submit regular or written reports to the law firm that he or she associates with indicates a degree of control and an employee-employer relationship. See Rev. Rul. 70-309, 1970-1 C.B. 199; Rev. Rul. 68-248, 1968-1.

12. Payment by Hour, Week, or Month

Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor. See Rev. Rul. 56-15, 1956-1 C.B. 451. Law firm partners are often paid one or twice a month. This type of payment method is indicative of an employer-employee relationship.

13. Payment of Business or Travel Expenses

If the employer ordinarily pays the worker’s business or travel expenses, the worker is ordinarily an employee. To control expenses, an employer generally retains the right to regulate and direct the worker’s business activities. See Rev. Rul. 55-144, 1955-1 C.B. 483.  Law firms often provide partners with a reimbursement policy for business expenses that includes business development expenses, client travel expenses, overtime meals and overtime travel. Many firms even provided restrictions in the manner in which a partner may travel for business purposes. The payment of a partner’s business and travel expenses establishes an employer-employee relationship.

14. Furnishing of Tools and Materials

If the employer furnishes significant tools, materials and other equipment, it tends to show the existence of an employer/employee relationship. See Rev. Rul. 71-524, 1971-2 C.B. 346. A worker who provides equipment is more likely to be characterized as an independent contractor. Most law firms provide their partners with a phone, desk, stationary, supplies, equipment, messenger services, and copy machines. When law firms furnish this type of equipment satisfies another element of the common law right-to-control standard.

15. Significant Investment

If the worker invests in facilities used in performing services that are not typically maintained by employees (such as an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. Typically lower tier partners such as junior partners are not required to invest in the facilities used in performing legal services.

16. Realization of Profit or Loss

A worker who can realize a profit or suffer a loss in addition to the profits or losses ordinarily realized by employees is generally an independent contractor. The worker who cannot is an employee. See Rev. Rul. 70-309, 1970-1 C.B. 199. For example, if the worker risks economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. Many partners, particularly junior partners are paid monthly or semi-monthly on a fixed rate of compensation. These individuals do not participate in the firm’s profits during the year. Instead, junior partners may receive a bonus at the end of the year which would reflect the firm’s profits. These partners cannot realize a profit or loss through the firm they have associated with or through any other venture. This type of arrangement tends to establish the existence of an employer-employee relationship.

17. Working for More than One Firm at a Time

If a worker performs more than de minimis services for more than one entity at the same time, that factor generally indicates that the worker is an independent contractor. See Rev. Rul. 70-572, 1970-2 C.B. 221. However, a worker who performs services for more than one person may be an employee of each of the persons, especially if such persons are part of the service arrangement. Consequently, if a worker is free to offer services to the general public and to accept as many assignments as possible from others, this supports an independent contractor characterization. Generally, partners are prohibited from working for more than one law firm under the terms of a policy manual or other written arrangement. The fact that partners are generally not permitted to perform services for other law firms or businesses further establishes an employer-employee relationship with the firm they associate with.

18. Making Services Available to General Public

When workers make their services available to the general public on a regular and consistent basis, it indicates independent contractor status. See Rev. Rul. 56-660, 1956-2 C.B. 693. As discussed above, partners typically cannot make their services available to the general public which further establishes an employer-employee relationship under the common law right-to-control standard.

19. Right to Discharge

The right to discharge a worker indicates that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the thread of dismissal, which causes the worker to obey the employer’s instructions. An independent contractor, on the other hand, cannot be fired as long as the independent contractor produces a result that meets the contract specifications. See Rev. Rul. 75-41, 1975-1 C.B. 323. Many law firms have the absolute right to discharge a partner for failing “to accept direction.” Discharge from law firm partners is typically done by a majority of votes of a firm committee. The fact that the law firms can discharge the partner at any time for failing to “accept direction” or other reasons establishes control and an employer-employee relationship for purposes of the common law right-to-control standard.

20. Right to Terminate

If workers have the right to end their relationship with the employer at any time they wish without incurring liability, that factor indicates an employer-employee relationship. See Rev. Rul. 70-309, 1970-1 C.B. 199. Most law firm partners are permitted to resign as long as they provide proper notice without incurring liability.

Analysis of the 20-Factor Test

Particularly in the case of junior partners, many law firms are treating these individuals as employees under the common law right-to-control standard. Law firms may treat partners as employees by instructing them where to perform their duties and how to perform their duties. Law firms can also exert control over a partner and treat the partner as an employee by instructing the individual what to wear and what he or she may post on social media. In order to avoid employment tax audit and litigation, law firms should carefully review the written and verbal instructions provided to partners, in particular, lower-tier partners.

Conclusion

This article is intended to provide a discussion as to when a partner of a law firm could be misclassified for employment tax purposes under the common law right-to-control standard or test. Although persons engaged in the profession of law as a partner in private practice are classified as independent contractors, in some situations, partners of a law firm have been held to be employees. In order to determine if a partner of a law firm can be classified as an employee, a careful review of the facts and circumstances of that individual’s situation must be examined. Any individual challenging their worker classification should not only analyze federal law, the individual should also make a determination if they have been misclassified for employment purposes under applicable state law.

Anthony Diosdi is a partner at Diosdi & Liu, LLP. Anthony maintains a national and international tax practice. He has litigated a number of employment tax disputes with the IRS.

Anthony has written numerous articles and spoken on a number of tax planning and tax compliance matters. Anthony has advised hundreds clients, litigants, law, and accounting firms.

Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.