No. The only thing subject payroll tax is your salary. Your business has a profit of $160,000, less your salary of $50,000, so that's a profit of $110,000. You get a W-2 for $50,000 that goes on your personal tax return. You also get a K-1 with $110,000 of Ordinary Business Income, whether you take a distribution or not. If you take a distribution of $85,000 you still have a $110,000 of ordinary business income. If you take a distribution, it doesn't affect your income or what you pay in taxes. It affects your shareholder basis and your bank account. Let's say you pay yourself $50,000 and take a $10,000 distribution. You do the same thing for three years, and the business never spends the money. In year four, you lose money and you don't pay yourself a salary. You have $300,000 in cash earnings that you can take as a distribution. It's not taxable, you've already paid tax on it. Another option for earnings you don't take in distributions is for the business to use it. Let's say after three years instead of a loss, you're still making money and you decide to buy a building. You can use some or all of the $300,000 to buy a building.
And finally, the IRS doesn't define reasonable when it comes to a salary, but I would be skeptical of a salary for a single member S-Corp owner of $50,000 and distributions in excess of that.
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