Could you please clarify this: "She obviously did NOT understand that the distributions from the S-Corp (her only income all year) from Line 1 $5,960. are ordinary income"

Are you referring to Line 1 of the 1040? And a W2?

Because distributions are not a taxable event, unless they exceed basis. However, payroll (a W2) would be taxable for anyone, as this is their earned income. The other money from the success of the S Corp would be part of the pass through reporting via K-1.