If you’ve ever caught yourself asking, “How much should I be paying myself?” you’re not alone.
Upsourced Partners Ryan Watson and Craig Baldwin break down partner compensation in a way that’s practical, realistic, and centered on how agencies actually operate - uneven cash flow, big client swings, taxes that don’t wait, and partner dynamics that can get messy fast.
Here’s the framework they recommend for paying yourself as an equity-owning partner (the “real” partner: K-1, on the tax return, true owner).
First: What do we mean by “partner compensation”?
“Partner” can mean a lot of things in agencies - profit shares, phantom equity, titles, and directors with a bonus plan.
This conversation is about equity holders - owners who participate in profits and are ultimately responsible for the financial and tax consequences of the business.
The core principle: pay yourself the maximum amount possible… after reserves
Pay yourself as much as you can - but with one critical qualifier: your business needs enough cash reserves to survive the ups and downs. For project-based and retainer-light agencies, cash flow volatility is normal - so reserves aren’t optional.
A good baseline is a cash reserve target (often a few months of operating expenses), adjusted upward when you have known timing issues - like fronting media, hard costs, or seasonal swings.
Once reserves are covered, Ryan’s view is:
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Every additional dollar should go to owners (salary and/or distributions)
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If you’re sitting on piles of cash and asking what the business should invest in, you’re probably asking the wrong question - because investing is a personal decision, not a business function for most agencies.
Salary vs. distributions: it depends on entity structure
How much should be “regular paycheck” vs. “profit distributions”?
The mechanics change depending on whether you’re taxed as a partnership or an S-Corp.
If you’re a partnership:
It doesn't matter from a tax standpoint - income is taxed the same either way.
So the real question becomes a cash-flow management issue:
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Pay yourself regularly, but
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Don’t push it so hard early in the year that you risk a clawback later (the dreaded “I took too much in Q1 and now Q2 is brutal” situation)
If you’re an S-corp:
This is where the “salary” matters more.
The classic S-corp incentive:
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Salary is subject to payroll/self-employment taxes
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Distributions are not (for those payroll taxes)
So the strategy becomes:
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Set salary at the lowest reasonable market-based number
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Take the rest as distributions
The IRS expects S-corp owners to pay themselves a reasonable wage. Ask yourself, "What would it cost to replace my role with someone else?"
Find a supportable market range, then choose the smallest reasonable number.
Sometimes owners slightly increase salary for lifestyle simplicity (steady paycheck), but the overall approach stays the same.
Should you “set” an owner's salary to prepare for a future sale?
If I plan to sell someday, should I show an owner's salary so buyers have a baseline?
Ryan’s answer: Don’t let that tail wag the dog.
In a sale process, buyers normalize earnings anyway:
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Personal expenses get added back
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Owner compensation gets normalized to the market
Whether you paid yourself $300k, $150k, or nothing, the deal process will still land on a market-based adjustment.
How often should you take distributions?
Quarterly, in most cases.
Monthly profitability can be noisy and misleading. Quarterly gives enough time for trends to emerge and reduces the odds of having to “give money back.”
If your agency has high volatility, you may need to be more conservative. The guiding idea is confidence:
Don’t distribute cash you’re not reasonably sure will still be excess cash next period.
A big warning: cash in the bank doesn’t always mean profit
Craig highlights a common trap: owners see cash and assume it’s distributable - when it may actually be:
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Client prepayments / unearned revenue
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Money earmarked for pass-through hard costs
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Borrowed funds from a line of credit or a loan
Ryan ties this to the basis (your capital account), and the danger of going negative - but his bigger point is even more practical:
If it’s customer money or bank money, treat it like it’s not yours.
Because it isn’t.
Distributing borrowed money to owners is a fast track to financial distress - and in the worst cases, bankruptcy and lawsuits.
Actionable takeaway: segment it clearly in reporting so it’s visibly not “available” for owner comp decisions.
Taxes: the business shouldn’t be your “tax bailout plan.”
This part hits home for many partners.
In a pass-through entity, the business doesn’t owe income taxes - owners do.
So when the business pays owners’ estimated taxes directly, it can get messy fast, especially if partners have different personal tax situations.
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Distribute profits
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Each partner pays their own taxes
If the business is retaining profit for strategic reasons, then at a minimum, the operating agreement should require tax distributions, often based on a conservative assumed tax rate (e.g., top marginal rate) applied evenly to everyone’s share.
Key idea: Taxes shouldn’t become one partner’s problem because another partner forgot to plan.
The hard truth: when your business isn’t paying you enough
What if the business just isn’t generating enough profit to pay owners well?
Craig’s advice is direct:
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If you can’t reliably earn what you could earn on the open market,
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Put an “expiration date” on how long you’ll keep pushing,
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And recognize there’s no shame in choosing a job if the economics don’t work.
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Owners carry more risk, responsibility, and stress than employees. If the agency can’t create an outsized reward (or at least a competitive reward), it’s time to reassess.
Partner dynamics: Cap tables can wreck your future
One of the most costly agency mistakes:
Sloppy partnership agreements. Handshake equity. Unclear expectations.
You can recover from a lot of early-stage mistakes - except cap table problems.
Recommendations:
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Treat admitting an equity holder as a life-changing decision
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Put expectations into a real operating agreement
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Consider vesting to reduce risk if a partnership doesn’t work out
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Guard the front door - buyouts are common, expensive, and distracting
Quick checklist: how to pay yourself as a partner
If you want a simple starting framework:
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Set a cash reserve target (and adjust it for seasonality, media, or hard-cost timing)
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Distribute everything above that target
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If you’re an S-corp, set salary to the lowest reasonable market wage and distribute the rest
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Consider quarterly distributions, not monthly
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Never confuse cash with profit (prepayments/loans ≠ distributions)
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Ensure your operating agreement includes tax distributions
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If the business can’t pay you competitively over time, set a decision deadline
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Take partner agreements seriously - cap table mistakes are expensive
If you’re unsure whether your agency is paying owners appropriately - or you’re stuck between “pay myself more” and “leave cash in the business” - we help agencies build compensation and distribution systems that are clear, sustainable, and partner-friendly.
To listen to the full conversation Ryan and Craig had on Partner Compensation, click below: