The employee withholding is not a deductible expense to the S Corporation, only the Corporation's share of the payroll taxes. The federal income withholding and employee FICA taxes are expenses of the employee, they are not business expenses.
With that said, you do get to deduct the gross pay of the employee before withholding and other deductions. For example, if you paid an employee $20,000 and withheld $5,000 for tax withholding and other deductions, and the Company paid an additional $1,600 in FICA and other payroll taxes (like FUI and SUI), you would deduct on your tax return the gross pay of $20,000 of wage expense and $1,600 of payroll taxes.
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