What is a Personal Service Corporation?
According to the IRS
A corporation is a personal service corporation if it meets all of the following requirements.Its principal activity during the “testing period” is performing personal services (defined later). Generally, the testing period for any tax year is the prior tax year.
If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of:The last day of its tax year, or The last day of the calendar year in which its tax year begins.Its employee-owners substantially perform the services in (1) above. This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period.
Personal services.
Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.
Whats Important
The most important thing to note about Personal Service Corporations is that they are taxed at flat rate of 35% when you are filing your corporate taxes.
Double taxation also applies in this type of entity.
This means you want to avoid them as much as possible, if that means creating partnership with other entities or sharing your stock, or not actively participate in your business, do it! You should really consult your tax adviser for any alternatives or questions you may have about this.
