By now, you know Profit First is about allocating revenue before it gets spent. But even with the right target percentages, this is where most owners go sideways.
They overcomplicate it. Delay it. Or they set up accounts and expect behavior to change automatically.
This chapter shows you how to actually run allocations the right way. How often to move the money. What accounts to use. And how to keep things simple enough that you’ll actually stick with it.
If you want Profit First to work, this is the part that makes or breaks the system.
Why S Corps Create Confusion
If you’re running an S Corporation or planning to make the switch you’ve likely heard things like:
“You can’t just transfer money to yourself anymore.”
“You need to be on payroll.”
“Distributions are different now.”
All true. S Corps introduce a layer of tax compliance that can confuse how Profit First functions.
Many owners feel like they’re suddenly navigating a financial maze with new rules, new paperwork, and no clear map.
But Profit First doesn’t break under this pressure. It simply shifts. The principles stay the same. The structure adjusts slightly to match the realities of payroll, taxes, and owner compensation.
This chapter shows you exactly how to implement Profit First in your S Corp without losing clarity, control, or compliance.
What Stays the Same
The overall structure of Profit First remains unchanged:
- Income still lands in the Income Account
- You still allocate to Profit, Owner’s Pay, Tax, Operating Expenses, and the Opportunity Account
- Allocations still happen consistently (typically twice per month)
The mindset is identical: structure your business to protect profit, pay yourself intentionally, and operate with visibility.
What changes is how you treat Owner’s Pay, and how payroll and taxes are split between accounts.
The Key Shift: Owner’s Pay Uses Two Buckets
In an S Corp, you’re legally required to pay yourself a “reasonable salary” through formal payroll (W-2). That salary and the related payroll taxes must run through your business operating expenses.
Here’s how we handle it within Profit First:
- The portion of your Owner’s Pay that covers your salary and payroll taxes goes to your Operating Expenses (OPEX) account
- The remainder your draw or distribution goes to your Owner’s Draw account
We base this split on a percentage of your 12-month average revenue.
Let’s look at a concrete example.
Suppose your average revenue over the past 12 months is $1,000,000, and your total Owner’s Pay target is 15%. That gives you $150,000 annually in Owner’s Pay.
That splits like this:
- $100,000 (10%) → sent to the OPEX account to cover your salary and payroll taxes
- $50,000 (5%) → sent to your Owner’s Draw account for distributions
This structure ensures you’re:
- IRS-compliant (reasonable W-2 salary through proper payroll)
- Following Profit First allocations without losing clarity
- Separating compensation from operating overhead in a strategic way
While this is necessary for IRS compliance, it’s also beneficial for you. A regular salary makes personal budgeting easier, helps with loan applications or mortgages, and brings consistency to your life outside the business.
What About Taxes?
The Tax Account stays in place and we do not reduce or modify the percentage during the year.
Instead, we:
- Allocate a fixed percentage of all income to the Tax Account (typically 15%)
- Use those funds to pay quarterly estimates or year-end personal tax bills tied to the S Corp’s pass-through income
- At year-end, if we’ve reduced your actual tax burden through strategic planning, we transfer any excess funds from the Tax Account into the Opportunity Account
This keeps the system simple, consistent, and behaviorally sound. The Tax Account always gets funded. If you don’t need all of it, that surplus becomes future investment capital not a refund you mentally spend before it arrives.
Updated Allocation Example: S Corp at $1.5M Revenue
Let’s say you run a service-based S Corp with $1.5M in revenue and your total Owner’s Pay target is 15%. Here’s how that breaks down:
Allocations:
- 5% → Profit
- 15% → Owner’s Pay
- 10% → OPEX (funds W-2 salary and payroll taxes)
- 5% → Owner’s Draw (for distributions)
- 15% → Tax
- 5% → Opportunity Account
- 60% → Operating Expenses
Your OPEX account now includes two major line items: team payroll and your own salary. But because you’ve pre-allocated for both, the rest of your cash flow stays under control.
Your Owner’s Draw account gives you visibility into what’s available for distributions without draining your operating funds.
Profit First Troubleshooter: S Corp Edition
Problem: “Where do I fund my payroll from now?”
Solution:
Use the OPEX account to fund your W-2 salary and payroll taxes. If you’re allocating 10% of revenue toward salary (based on a 12-month average), that portion should live entirely in OPEX. Your payroll provider should pull directly from that account.
Problem: “How do I know how much should go to salary vs. distributions?”
Solution:
Base it on your 12-month average revenue and use your CPA to determine a “reasonable salary.” Then fund that amount through OPEX. The remainder of your Owner’s Pay allocation goes to your Draw account and can be distributed quarterly or on a schedule that matches your tax plan.
Problem: “My Tax Account has too much money at year-end.”
Solution:
Good. That means your tax strategy worked. At the end of the year, sweep the unused funds into your Opportunity Account. This rewards the business for planning well and gives you capital for growth.
Problem: “My accountant says this system is unnecessary now that I’m incorporated.”
Solution:
Accounting software tracks your past. Profit First controls your present. While your CPA focuses on reporting and compliance, Profit First gives you real-time cash clarity and decision-making power. Don’t confuse tax compliance with cash control they serve different purposes, and both matter.
Strategic Insight: Why This Still Works
S Corps exist to optimize taxes, but they often create complexity and confusion.
Profit First cuts through that by keeping your system behaviorally consistent and operationally compliant.
You still allocate. You still separate. You still see exactly what your business is doing in real time.
And by adding discipline to your salary through the OPEX account, plus visibility to your distributions through the Owner’s Draw account, you’re leading your business with control not just spreadsheets.
Your First Step
If you’re already operating as an S Corp:
- Determine your total Owner’s Pay percentage based on 12-month average revenue
- Allocate the salary portion to your OPEX account (for payroll)
- Allocate the remaining portion to your Owner’s Draw account (for distributions)
- Continue funding your Tax Account at a consistent 15%
- At year-end, transfer any excess tax reserve to the Opportunity Account
If you’re not an S Corp yet but planning to become one:
- Start using this structure now so you’re not scrambling later and read our S-corp tax secrets book to understand tax planning and when to make the transition
- Build the habit and clarity now, and your transition will be seamless
Ready to Set Up Profit First the Right Way?
We’ll walk you through the accounts, get your allocations dialed in, and make sure your cash flow stays predictable from day one. Talk to a Profit First Professional to get started.
This was chapter six from the upcoming ebook Profit First, Unofficial: A CFO’s Playbook for Owners.
In the next chapter, we’ll show you the most common way Profit First falls apart, and what to do instead.
In the previous chapter, we looked at how to choose the right Profit First TAPS allocation percentages based on your revenue range.