Here are two interconnected issues - as the situation is related to Social Security Disability and to Tax law and regulations.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
Having all profit reported on K1 and not having ANY wages - will most certainly trigger an audit - and self-employment taxes will be likely assessed on that income. As a result - SSA will be updated on fact of having earned income and the substantial gainful activity (SGA) - depending on circumstances that might disqualify from being a disabled.
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 amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate.
There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.
On the other hand - the Social Security Administration (SSA) to qualify the person as disabled - will examine the substantial gainful activity (SGA). A person who is earning more than a certain monthly amount (net of impairment-related work expenses) is ordinarily considered to be engaging in SGA. In 2017, the SGA amount is $1,170 per month.
The disabled person may own the business - that is not an issue - and may receive an income from that business. However in this case SSA will specifically determine if that profit related to SGA or not.
In such examination the SSA will apply “The Three Tests” - if you:
-- if the person provides significant services to the business and receive a substantial income from it
-- if the person performs work that's comparable to the work of persons without disability in your community engaged in the same or similar businesses, or
-- if the person performs work that's worth $1,040 per month in terms of its value to the business or what it saves you from having to pay an employee to do the work.
The fact of substantial income from S-corporation MIGHT affect eligibility for SS disability benefits.
However - if the person for instance will be able to proof that he personally do not work for the S-corporation and all work is done by others - family members or hired employees - most likely eligibility for SS disability benefits will not be affected.
If however - all work is done by the disabled person and income from that activity is above $1,170 per month (in 2017) - there risk is very high that SSA will consider the person as be engaging in SGA and SS disability benefits could be disallowed.
So far - as summary of the above:
- there is no yes-no answer.
- the situation might be affected by both SSA and IRS
- the eligibility depends of circumstances and SSA evaluation if a person is unable to engage in substantial gainful activity (SGA).