How Much Can the Business Pay You?

A covered draw: a fixed monthly amount the company pays you every month whether the quarter is good or bad, funded only from cash the business can replace. A surplus draw: an annual payment, paid once, only if the 13-week forecast still holds after it. One number that flexes is not a policy, it is a negotiation you have with yourself every month.

The formula for the covered draw is cash above the operating floor, plus collections you can actually count in the next 13 weeks, minus payroll and payroll taxes, minus debt service, divided by 12. If the answer is lower than what you have been taking, that gap is not a cash flow problem. It is a decision you have not made yet.

The operating floor is what the business needs to be holding 90 days from now if a customer pays late: one payroll cycle including payroll taxes, the next debt service date, the next tax payment, and the cost of delivering the work already sold. The floor is not a target. It is a line you do not cross, and it belongs to the company rather than to you.

Three kinds of number on this page, and each one is labelled.

Sourced. The self-employment tax figures — 15.3 percent in total, 12.4 percent for Social Security and 2.9 percent for Medicare, applied to 92.35 percent of net earnings from self-employment — are the IRS's, from Topic 554. The transactions the IRS may recharacterize as a distribution despite the paperwork, and the rule that a shareholder loan has to be one the shareholder could actually have funded, are from IRS Publication 542 and the IRS's S corporation stock and debt basis page.

Ours. The 90-day operating floor and the 13-week forecast are Eagle Rock standards. The IRS does not set them and we are not claiming it does. The reason for the 90 days is how long it takes money to come back: a receivable you collect inside 90 days is one you can fund a bad month with, and one you collect in 150 is not.

A date that depends on your entity and your fiscal year. April is the estimate-tax date for calendar-year individual filers using Form 1040-ES. A company on a fiscal year, or an owner paying estimated tax on a different schedule, pays on different dates. Fund the reserve against your actual payment dates, not against April.

Where a figure used to sit on this page and we could not source it, we removed it rather than leave an unsourced number in place.

A distribution from an S corporation is not a business expense, which is why a salary and a distribution are not interchangeable. The mechanics are in owner compensation. What catches owners out is the basis rule. The IRS states that a loss, deduction, or distribution decreases stock basis, that only non-dividend distributions reduce stock basis, and that a non-dividend distribution in excess of stock basis is taxed as a capital gain on your personal return (IRS, S corporation stock and debt basis, page last reviewed June 7, 2026). Take out more than your basis and the tax you thought you had avoided is waiting for you.

The second trap is timing. Your share of the entity's taxable income is reported to you whether or not the company pays you a dollar. A distribution moves cash; it does not create the tax. If the tax is due in April and the distribution is in December, the money left the company in the wrong order and you are financing the federal government out of your own pocket. The reserve account exists for exactly this.

If you operate as a sole proprietor rather than an S corporation, the arithmetic differs but the cash problem is identical. Self-employment tax is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare, and it applies to 92.35 percent of your net earnings from self-employment (IRS Topic 554, page last reviewed November 9, 2026). There is no distribution mechanism that avoids it. Set the reserve against the actual tax, not against a guess from two years ago.

It is the most common workaround and the most expensive one. When the company cannot cover a distribution, you lend it money, take the distribution instead, and call the difference a loan. The IRS keeps a list of transactions it may treat as distributions no matter what the paperwork says: below-market loans where the interest is not charged or is charged below the applicable federal rate, cancellation of a shareholder's debt, and transfers of property to a shareholder for less than fair market value (IRS Publication 542, page last reviewed April 30, 2026).

Under the below-market rule the lender is treated as having made two things: a loan to the borrower in exchange for a note that requires interest at the applicable federal rate, and an additional payment equal to the forgone interest. What that additional payment amounts to depends on the relationship between the parties, and it can be a gift, an investment, compensation, or something else entirely (IRS Publication 550, page last reviewed April 30, 2026). In a family company the substance is usually the problem: the money went to pay the owner's personal bills, which is none of those things, which is exactly why the character of the payment is decided by facts rather than by the note you signed.

The IRS also applies a simple test when it looks at a claimed shareholder loan: consideration should be given to whether the shareholder had the financial means to make the contribution or loan (IRS, S corporation stock and debt basis, page last reviewed June 7, 2026). A loan you cannot fund is not a loan. If the schedule depends on the company having a good year, you have a distribution with extra paperwork attached.

Seven jobs, in order. None of them needs a consultant to start.

IRS Topic 554 — Self-Employment Tax is the source of the self-employment tax rate, the split between Social Security and Medicare, and the 92.35 percent net-earnings factor. Last reviewed November 9, 2026.

IRS Publication 542 — S Corporations is the source of the transactions the IRS may treat as distributions whatever the paperwork says: below-market loans, cancellation of a shareholder's debt, and property transferred to a shareholder for less than fair market value. Last reviewed April 30, 2026.

IRS Publication 550 — Investment Income and Expenses is the source of what the borrower does with the imputed payment on a below-market loan: it is treated as a gift, an investment, compensation, or something else, depending on the substance of the transaction. Last reviewed April 30, 2026.

IRS — S corporation stock and debt basis is the source of the basis rule and of the financial means test on a shareholder loan. Last reviewed June 7, 2026.

IRS Form 1040-ES — Estimated Tax for Self-Employment Income is the form an individual uses to figure and pay estimated tax on income that is not subject to withholding, which is what the reserve account is built around.

What is ours rather than published. The 90-day operating floor, the 13-week forecast, and the covered draw formula are Eagle Rock operating standards. No source above sets them, and we are not claiming one does.