It's a tough lesson for them to learn. I sure hope health insurance is not part of this mess, because that would be on the W2, as well.

"The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes."

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...