a) If I pay SE Tax on the 40,000 do I need to declare it as salary?
That's not the way it works. What's supposed to happen is you pay yourself a salary and file quarterly 941s for payroll taxes. You should see a tax pro if you haven't been doing that.
b) On my 1120-s if I say 20,000 of it was salary... what number do I put in the distributions. Should it be 20k or 40k?
The amount on Line 1 of your K-1 from your S corp is ordinary income and that number is taxed at ordinary income tax rates. The number on Line 1 of your K-1 does NOT include your salary. The salary you take will be deducted from your corp's ordinary business income.
