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Template10 min readFocus · August

Owner-Comp Framework

Salary, distributions, and reasonable comp without the guesswork.

Focus for August

Slow-season distribution restraint

August: the strongest move is sometimes to skip a distribution.

Refreshes on the 1st of every month

If trailing-90 net is soft, the rule says skip or shrink the August draw. The framework protects you from yourself in the soft month exactly so the strong months feel earned.

  • Recompute the trailing-90 number honestly
  • Apply the rule, even if the answer is zero
  • Communicate the skip to your spouse and CPA
  • Don't borrow against the next quarter
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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