The net profit does get passed through to the shareholders as ordinary income and it is taxed as income tax. It is not also taxed as self-employment.
The shareholder working in the business must be paid a reasonable salary. This would require social security and Medicare taxes to be withheld and paid, as well as federal and state income taxes to be withheld and paid throughout the year.
Distributions to shareholders that are equal or less than the shareholder's portion of net income plus the shareholder's contribution to the company would be tax free distributions.
The shareholder portion is reported on Schedule K-1 and included in the shareholder's individual income tax return. The wages earned are reported as earned income on Line 1 of Form 1040.
For more information about paying tax on S-Corp income for the shareholder, see: Where do I enter a K-1 that I received? and How do I import or enter my W-2?
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