When a shareholder takes a distribution from the S corporation, no taxes are payable since income is already taxed to the shareholders as a pass-through. If the shareholder takes a salary, income tax consequences are essentially the same. The salary is taxable to the shareholder, but it reduces the income of the S corporation, so the net result is a wash.
If not for FICA (Federal Insurance Compensation Act), either of these scenarios would be essentially identical. This is an especially important consideration because the FICA hit increases every year. In 2008, the shareholder/employee pays 7.65% (employee’s share; the employer pays a like amount) on up to $102,000 of earnings (in 2007, FICA applied to $97,500 of earnings). Between the employee’s and employer’s share, the total is $15,606. The employer’s share is, of course, deductible, but even so, the net outlay may still be over $11,000.