I think you are confusing S-corp. with C-corp. C-corp. do pay taxes at entity level and any cash distributed to shareholder will be reported as dividend income to shareholder. There is no k1 with C-corp.
S-corp. do not pay taxes but it still have to file a 1120-S tax return. Just like partnership, S-corp. is also a pass-thru entity that means, there will be k1 for each shareholder.
Let's take your example. S-corp. w2 wages are 50k (25k for each shareholder) and net income after w2 deduction is 50k. S-corp. will not pay any taxes to IRS. It will only report all income and expenses and k1 for each shareholder. On your k1, box 1 will have 25k income for each shareholder (Assuming each owns 50%). You will report w2 just like how you report any other w2, you will also report 25k income from k1 and pay taxes on that income. If each of you decided to take 25k distribution form S-corp., your k1 will have that reported on box 16. You will still report w2, box 1 as income and but money taken out from S-corp. will be reported as distribution. Please note K1 will be generated regardless of distribution.
Please reply if you still need any more clarification.
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