will i have to pay personal in come tax on $60 W2 + $40 even if im only distributing $20 to myself? YES ... all profits are reported in the year they are earned even if you don't distribute them to the shareholder ... that is the way "pass thru" entities work.
I hear the shareholder distribution is not taxed? You can take "tax free" distributions anytime you want since you have already paid taxes on them in the year you had the profit.
or is it just not taxed at the Scorp level ? S-corps don't pay income taxes ... the profits are passed thru to the personal return where they are taxed.
If, indeed, the total net profit , all of $40, is taxed at the personal level, and i only distribute $20 this year. In later year when i distribute the rest it would not be taxed? Now you are getting the picture. In your bookkeeping you should track any "seed" money you put into the company since this is NOT income to the company and you can repay yourself without income tax issues at any time. And keep track of all non wage distributions again so you don't accidentally count them as expense deductions. Seek local professional help to get your books in order and/or get a good bookkeeping program to keep your records solid.