A personal service corporation is a company which, as the name suggests, provides personal services. These services span a wide variety of endeavors in many fields, and are specified for tax purposes in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

by the

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...

(IRS). This type of corporation has some tax advantages, such as a lower corporate rate, some tax-free fringe benefits, limited liability, and business deductions. For a corporation to be considered a personal service corporation by the IRS, the employee/owner must perform at least 20% of the personal services themselves, and must also own at least 10% of the outstanding stock in the testing period. An income test requires that employees must spend at least 95% of their work time on qualified services.

Details

United States tax law The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as v ...

, a

corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

is a personal service corporation if it meets all of the following requirements:IRS Publication 542 (02/2006) 1. Its principal activity during the “testing period” is performing

personal services ''Personal Services'' is a 1987 British comedy film directed by Terry Jones and written by David Leland, about the rise of a madam of a suburban brothel which caters to older men. The story is inspired by the real experiences of Cynthia Payne, ...

(defined later). Generally, the testing period for any

tax year A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...

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: :a. The last day of its tax year, or :b. The last day of the

calendar year Generally speaking, a calendar year begins on the New Year's Day of the given calendar system and ends on the day before the following New Year's Day, and thus consists of a whole number of days. A year can also be measured by starting on any o ...

in which its tax year begins. 2. Its employee-owners substantially perform the services in (1). 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. 3. Its employee-owners own more than 10% of the fair

market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...

of its outstanding stock on the last day of the testing period. Personal services include any activity performed in the fields of

accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

, actuarial science,

architecture Architecture is the art and technique of designing and building, as distinguished from the skills associated with construction. It is both the process and the product of sketching, conceiving, planning, designing, and constructing building ...

consulting A consultant (from la, consultare "to deliberate") is a professional (also known as ''expert'', ''specialist'', see variations of meaning below) who provides advice and other purposeful activities in an area of specialization. Consulting servic ...

engineering Engineering is the use of scientific method, scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The discipline of engineering encompasses a broad rang ...

health Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...

(including veterinary services),

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

, and the

performing arts The performing arts are arts such as music, dance, and drama which are performed for an audience. They are different from the visual arts, which are the use of paint, canvas or various materials to create physical or static art objects. Perform ...

. A person is an employee-owner of a personal service corporation if both of the following apply: 1. They are an

employee Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other ...

of the corporation or perform personal services for, or on behalf of, the corporation (even if they are an

independent contractor Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...

for other purposes) on any day of the testing period 2. They own stock in the corporation at any time during the testing period.

References

Types of business entity {{business-stub