Why do we lawyers charge what we charge? Well, the short answer is that we have to cover our expenses and hopefully still have enough left over for a salary of some sort. What’s the long answer? This post is.
The Billable Hour Calculated
In order to determine the correct hourly rate at which to bill, a lawyer first needs to know what his or her fixed expenses are. Those are the expenses which must be paid every month regardless of whether the attorney makes any money or not. As a new attorney, I had to do a lot of guessing about what my expenses would be. Now that I have been in private practice for many years, I have pretty solid data to use. These numbers are actual numbers, and I believe these numbers are average for most attorneys, at least in this area. Before publishing this post, I showed my data to several other solo attorneys. Each of them commented that they spent slightly more on one category or another but it averaged out with increases or decreases in other categories. They agreed that overall these were average numbers for attorneys in our neck of the woods.
With the economy in the state that it is in, many solo practitioners try to get by without any staff. It largely depends on the practice area whether that is possible. Because my clients expect quick response times and ready answers, I need someone in the office full-time while I am out practicing law at the courthouse. Since I am the one paying the salaries and benefits and taxes on employees, I know to the penny what staff costs are. Nevertheless, let me begin by analyzing the fixed expenses for those attorneys without any staff. Here they are:
|Receptionist service (CallRuby.com)||779.60||9,355.20|
|Health Insurance (Scott & White, $1,000 deductible)||672.19||8,066.28|
|Malpractice insurance (Daniels Head)||408.00||4,896.00|
|Legal research (Lexis)||298.27||3,579.24|
|Office utilities (electricity, gas, water, etc.)||290.58||3,486.96|
|Cell phone service (AT&T)||256.28||3,075.36|
|Telephone service (RingCentral.com)||219.51||2,634.12|
|Office supplies (toner, paper, staples, etc.)||175.35||2,104.16|
|Xerox copier lease||171.10||2,053.20|
|Computer software (ProDoc)||140.00||1,680.00|
|Kinko’s & FedEx delivery service||94.58||1,134.96|
|Legal books from O’Connor’s (Jones McClure)||90.17||1,082.00|
|Required continuing legal education (CLE)||86.25||1,035.00|
|Case management software (MyCaseInc.com)||78.00||936.00|
|Computer software (QuickBooks)||63.16||757.92|
|Office premises liability insurance||51.15||613.80|
|Computer software (Microsoft Office 365)||40.00||480.00|
|USPS box rental||12.17||146.00|
|Webhosting service (HostGator.com)||11.96||143.52|
I realize that the first thing on the list might seem to some folks to be a personal expense. I count it as a business expense, though, because a legal education is a requirement to one becoming an attorney. If it were not for that requirement, then I would not have gone to law school and acquired such massive debt. However, since a legal education is required to become an attorney, I count it as a work expense and not a personal expense. In the end, since I work for myself, it doesn’t make a difference anyway (as you’ll see).
Another calculation which is left out of those numbers is federal income tax. The current graduated tax rate in this country is 10% on the first $17,400 earned each year; 15% from there to $70,000; 25% from there to $142,700; and 28% from there to $217,450. Since the expenses are $82,840.80 per year, an attorney will need to bill enough over that amount so that he or she has that amount left after paying federal taxes. In this case, that means one must bill $99,867.73 each year just to cover the fixed expenses. That amount allows for a federal tax expense of $17,026.93 (which subtracted from $99,867.73 leaves exactly $82,840.80).
Calculating Available Hours
Now, how many hours each year do we have with which to earn $99,867.73? To determine that, let’s calculate how many days are work days each year:
|Total Number of Work Days in A Year||261||261|
|- Subtract legal holidays||-14||247|
|- Subtract Continuing Legal Education (CLE) days||-10||237|
|- Subtract vacation days||-10||227|
|- Subtract sick days||-2||225|
The next calculation is the available number of hours in each of those available work days:
|Total Number of Work Hours in a Work Day||9||9|
|- Subtract lunch hour||-1||8|
|- Subtract travel time to/from courthouse||-1||7|
|- Subtract administrative tasks||-1||6|
That leaves 225 days multiplied by 6 billable hours per day, for a total of 1,350 billable hours per year.
When you divide fixed expenses of $99,867.73 by 1,350 hours, you get $73.98 per hour.
Now, keep in mind, that amount is just the break-even amount. If an attorney were to agree to work for $73.98 an hour, that attorney would be making no profit (i.e. no salary). I would also point out that this calculation assumes 100% of those billable hours are actually paid. If even one hour per year goes unpaid, that would increase the amount an attorney would have to collect from all of the remaining hours just to cover expenses.
Believe it or not, just because an attorney bills someone for work performed, it does not always mean that person pays the attorney every single time. Normally I would argue that the only bill guaranteed to be paid 100% of the time is one submitted to the government (such as for court-appointed work). Of course, with certain judges routinely cutting court-appointed bills by up to 50% here in Bell County, one can see why I no longer accept such court-appointed cases. Even if 100% of my bill was paid, I and most of my colleagues would still lose money, though.
The reason is because the fixed expenses are $73.98 per hour, but the court-appointed rate here in Bell County, Texas is just $70 per hour. If I still took such court-appointments, it would mean that not only am I making no profit, I would actually be losing $3.98 every hour that I would have worked on a court-appointed case. For appeals (the highest paying type of court-appointed case), the hourly rate is $75 per hour. So, I might theoretically make an incredible $1.02 per hour in profit on appellate cases, but that would only happen if 100% of my bill was paid—something that I suspect will never happen with at least one of the judges we have in Bell County.
Since I know collection rates are not 100%, I decided to go back and see exactly what my collection rate has been on retained and court-appointed cases. Not surprisingly, my collection rate on retained cases is pretty impressive (because, of course, I can withdraw from a case if I am not paid by my client). My court-appointed rate, though, drags the average way down. In fact, overall, I did not collect exactly 23.79% of my billed fees since January 1st of last year. If you understand that this means that for almost one out of every four hours which I worked I was not paid, then that obviously means that there were less paid hours available to cover my fixed expenses. You can see now why I got off the court-appointed list earlier this year, right?
Let’s see how that affects the calculation: instead of 1,350 billable hours each year, you have to take away 23.79% (or 321 non-collectable hours each year) from that number and we are left with only 1,029 billable hours that are actually paid each year. If we divide the fixed expenses of $99,867.73 by 1,029 collectable billable hours, we are now left with a $97.07 minimum hourly rate.
Now, what about an employee? Well, that changes a few things. It saves the expense of the receptionist service but it adds salary, health insurance, employment taxes, and a few other minor expenses. The salary is only $1,733.33 a month for $10 an hour; but taxes, worker’s compensation, unemployment, and payroll expenses have been costing me an extra $468.53 per month. The biggest increase would be health insurance. If I provide an employer plan for myself and my one employee, the rate is $2,151 per month (Aetna, $1k deductible). That’s $1,371.40 more than my personal health care plan with Scott & White. However, the big benefit is that the employer-based plan would provide maternity coverage. Shockingly, there is currently not a single personal health care plan in Texas which provides maternity insurance. That is only available with a more expensive employer-based plan. I realize that I could pass some of the increased health insurance cost along to my employee (but then I’d just have to raise the salary to compensate for it anyway).
All-in-all, an employee adds $16,457 annual health insurance expense ($25,812 policy cost minus the $9,355 savings from dropping personal insurance policy); plus $20,800 in salary at $10 an hour; plus $5,622.32 in employee taxes and fees; and an extra $641 in extra software expenses, annually. That’s a total of $35,453.84 per year extra. However, don’t forget the federal taxes owed on that extra amount!
In the end, adding just one employee means that an attorney has to collect an extra $47,404.97 per year to cover the increased expenses and federal taxes. With the same collection rate used above, that would represent a minimum billable rate of $143.15 per hour. Of course, having an employee would mean more billable hours could potentially be performed (but at $10 an hour, the employee is likely not going to be a legal assistant but rather a legal secretary with no independently billable hour capability). A true legal assistant easily costs between $15 to $20 an hour in this area.
So there you have it. It costs $97.07 per hour for an attorney without an employee just to stay in business, and $143.15 per hour with an employee. What about salary though? Shouldn’t the attorney be compensated for all of his or her hard work?
Attorney Salary (a/k/a Profit)
According to the Bureau of Labor Statistics, the average employed attorney earns $130,490 per year in gross pay. Employed attorneys have to pay their own student loans, of course, so I’ll reduce that annual salary of $130,490 by my annual student loan payments included above ($17,953) if we are going to calculate my hourly rate. That leaves an adjusted annual salary of $112,537. If we divide that amount by the number of collectable billable hours (1,029), we end up with $109.39 per hour in salary.
What should my total hourly billable rate be, then? If we add $97.07 per hour in expenses to $109.39 per hour in salary, that equals a combined billing rate of $206.46 per hour without an employee, and $252.54 per hour with an employee. But let’s not use averages, let’s see what my actual needs are.
I am not going to list out all of my personal expenses line-by-line like I did for my business, but there are (naturally) quite a few. Like everyone else, I have housing expenses, insurance, utilities, and household costs; child-care expenses; groceries; automobile payments, insurance, and maintenance; credit card payments; recreation and vacation expenses; clothing expenses; charitable and tithing expenses, and if I’m lucky, even some money for savings and that retirement I would like to have.
None of the calculations thus far have included retirement expenses. That is because they say attorneys never retire, they die at their desks! Well, many average employees (and certainly almost all employed attorneys along with all government attorneys and judges have great retirement packages). I would like to retire someday, too.
So, let’s say I contribute just 12% of my income towards a retirement account. Using online retirement calculators, I see that investment would mean that I could retire with 80% of my current income at the age of 70 (that is, if there is any Social Security left to add to my retirement account). Let’s count that retirement contribution out of my personal expenses since we’ve already calculated fixed expenses above. Now, if I save for retirement, and I have all of my other personal expenses, what is the minimum amount I need to bill per hour for my own salary?
When I add up my total annual expenditures over the last several years and average them out, I can see that I must make a minimum of $107,409.46 each year just to cover my personal obligations and the federal taxes required on that salary. That is less than the average attorney income of $130,490 per year in salary. If we assume that I am willing to work for less than the average attorney’s salary and that I am willing to just bill the bare minimum needed to meet my financial obligations, what do we get?
Dividing my required salary number by the billable hours available to make that income equals $104.40 per hour needed to cover my salary. Thus, adding in the fixed expenses calculated above results in a final billable rate of $201.47 per hour without an employee and $247.55 per hour with an employee.
I, and most attorneys in Central Texas, must bill at a rate of $143.15 per hour just to cover fixed operating expenses. However, just covering expenses is not enough, though. I have a family who needs my financial support. Adding my minimum salary requirements of $104.40 per hour to my fixed expenses results in a final hourly billing rate of $247.55 per hour. This is why my hourly rate begins at $250 per hour. That is also why the average attorney in this area bills at least $250 per hour.
Does this mean that an attorney will never work for less than $250 per hour? Of course not. Fixed expenses have to be paid no matter what. So, if an attorney has little or no work and is desperate just to cover his or her expenses, he or she may be willing to work for as little as $143.15 per hour. Of course, the attorney is making no profit at that rate–but maybe the attorney figures it is better to temporarily forgo profit rather than to have to pay his or her own expenses out of his or her own savings.
Does this mean that an attorney will never charge more than $250 per hour? Of course not. If the attorney’s bills are being paid, an attorney is very unlikely to work for free. In fact, if an attorney’s services are in sufficient demand, an attorney can afford to, and often will, charge more than the minimum hourly rate. Also, if a potential client or the type of case appears to be particularly difficult or unpleasant, an attorney will often charge more. As a matter of fact, there is a wide-range of cases for which I routinely charge $300 per hour. My attitude is that I do not particularly like dealing with certain attorneys, and in order to entice me to put up with them I have to have an extra-incentive. That incentive is higher pay.
NOTE: I realized after writing this post that I forgot to include the Attorney Occupation Tax and mandatory State Bar Dues we lawyers must pay every year. I am not going to go back and recalculate everything, though. So, let’s pretend the State of Texas doesn’t charge me $555 each year just for the privilege of being a lawyer.