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Template10 min readFocus · October

Owner-Comp Framework

Salary, distributions, and reasonable comp without the guesswork.

Focus for October

Plan next year's framework

October: the comp framework should evolve before the new year, not after.

Refreshes on the 1st of every month

Decide if base, rule, or cadence change next year. Make the change deliberately, write the new policy down, and circulate before December close.

  • Draft updated framework for next year
  • Stress-test against the cash model
  • Run by CPA and spouse
  • Effective date: January 1, in writing
01

Reasonable comp, defined

For S-corp owners, the IRS expects 'reasonable compensation' for the work you do — paid as W-2 salary, with payroll taxes — before you take distributions. Get this wrong and the IRS reclassifies distributions as wages, with penalties.

  • Document the role(s) you actually perform
  • Benchmark each role against external comp data (BLS, Robert Half, industry surveys)
  • Weight by % of your time spent in each role
  • Save the analysis annually — this is your audit defense
02

Salary vs. distribution split

A workable rule of thumb: in a profitable services business, W-2 salary tends to land between 30-60% of total owner take. Lower share at higher revenue, never below documented reasonable comp.

Worked example
Worked example: $1.2M services business

Owner functions as GM (60% of time, market = $130k) and senior producer (40% of time, market = $90k). Blended reasonable comp = $114k. Business generates $300k available for owner. Pay $114k as W-2, $186k as distribution. Payroll tax savings vs. all-W-2: ~$28k/year.

03

Distributions and cash buffer

Tie your distribution policy to a minimum operating cash threshold, not last quarter's profit. Profit doesn't pay payroll — cash does.

  • Set a minimum operating cash floor (target: 8 weeks of fixed costs)
  • Distribute only above the floor
  • Make distributions quarterly, not monthly (forces a real review)
  • Set aside owner tax distributions in a separate account before any discretionary distribution
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