Reasonable Compensation Requirements
The IRS has attacked S corporations it believes are being used to avoid FICA taxes (i.e., where shareholder/employees are being paid S corporation distributions, which are not subject to FICA, instead of wages). In these instances, it has reclassified distributions as wages, resulting in back taxes and penalties.
These instances were generally where no salary was paid to the shareholder/employee. Generally, shareholder/employees should be paid a reasonable salary before any distributions are made. Distributions should preferably be made on a quarterly or similar basis. DO NOT pay with same frequency as your regular payroll.