how a personal service corporation works
the services provided by a personal service corporation may include any activity performed in the following fields accounting engineering architecture consulting actuarial science law performing arts and health including veterinary services financial services activities are not considered qualified services which is why many financial advisers choose to organize as s corporations for c corporations to be considered a personal service corporation by the irs the employee owners must perform at least 20 of the personal services themselves the irs bases this requirement on the amount of time spent working for the corporation compared to the total time all services are performed for the operation for example if a corporation s total service hours for a year are 5 000 hours then the employee owners collectively need to have provided at least 1 000 of these service hours 1the employee owners must also own more than 10 of the outstanding stock of the personal service corporation on the last day of the initial one year testing period 2 this rule ensures that the employees who are actively involved in providing the personal services also have an investment in the corporation 3an income test requires that employees of personal services corporations must spend at least 95 of their work time on qualified services understanding personal service corporation taxespersonal service corporations are taxed by multiplying taxable income by 21 3 there are tax benefits that come with organizing as a c corporation which is why many high earning professionals use the structure for example a c corporation allows employee owners to leave some of their earnings in the corporation which means it will be taxed at a lower corporate rate than the marginal tax rates for individuals professionals may also take advantage of some tax free fringe benefits limited liability and may receive favorable treatment of business deductions such corporations have to comply with certain tax regulations such as employing a fiscal year that is based on the calendar year and adherence to specific passive activity regulations personal service corporations are not to be confused with professional corporations which are business entities made up of certain types of professionals under state law it s crucial to weigh the tax benefits against the administrative and compliance requirements of a personal service corporation while a flat 21 tax rate and potential for corporate deductions may sound appealing carefully consider the cost complexity of setting one up and maintaining compliance personal service corporation testaccording to the irs a person may be considered an employee owner of a personal service corporation if the following conditions are met 3if individual functions as the owner employee of a personal service corporation and their primary business is related to creative fine arts or photography any current expenses they incur pursuant to creative work are deductible for the corporation however either the owner employee or their family members must hold all or nearly all of the corporation s outstanding stock this rule does not apply to other types of personal service corporations 