This rule does not apply to other types of personal service corporations. 'http':'https';if(!d.getElementById(id)){js=d.createElement(s);;js.src=p+'://';fjs.parentNode.insertBefore(js,fjs);}}(document, 'script', 'twitter-wjs'); The IRS defines a qualified personal service corporation (sometimes called a QPS or a PSC) as a specific type of business where the owner/shareholder provides his or her own services for the corporation. 4.1 Personal service provider Any company, close corporation or trust that meets the definition of “personal service provider” and is in receipt of “remuneration” as defined in paragraph 1 is subject to the deduction or withholding of employees’ tax. This type of corporation has some tax advantages, such as a lower corporate rate, some tax-free fringe benefits, limited liability, and business deductions. The offers that appear in this table are from partnerships from which Investopedia receives compensation. For example, many veterinarians also offer animal boarding and care. To qualify for PSC status, … Journal of Accountancy: Mapping the Scope of Personal Service Corporations. Tax Write-Offs for Corporate Donations to Schools. There are many variables when you’re structuring a business. personal services business) is not allowed to claim any of the standard business … First, the corporation must either employ the individual, or the individual must supply personal services to, or on behalf of, the corporation. Corporation Vs. Next, employee-owners must undertake a certain percentage of the corporation's work. 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. Pursuant to IRC section 11(b)(2), PSCs pay tax at the flat rate of 35% on their taxable income. Personal service corporations using the cash method can deduct business expenses and interest owed to an employee-owner. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania. 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. The IRS allows personal service corporations to use the cash accounting method even if annual revenues exceed $5 million. (f) Personal services contracts for the services of individual experts or consultants are limited by the Classification Act. Plus, a qualified PSC is also required to have a December 31st fiscal year-end, eliminating any tax-timing benefits normally available to C Corporations with staggered year-ends. Personal services contracts: is it time to lift the ban? Income from the performance of services directly related to the use of a vessel or aircraft is treated as derived entirely from sources in the United States if the use begins and ends in the United States. A personal-service activity is performed by an enterprise with the primary purpose of providing personal services, such as law, design or accounting. Money › Taxes › Business Taxes Personal Service Corporations. An employee's main job location (principal place of work) is usually the place where the employee spends most of his or her working time. The employee/owners must also own at least 10% of the outstanding stock of the personal service corporation on the last day of the initial one-year testing period. She has a Bachelor of Science in aerospace engineering, a Master of Business Administration, a Certificate in Technical Writing and Editing and a Certificate in Massage Therapy. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. A personal service corporation cannot choose a fiscal year. However, refer to Activities Outside the United States, below. In most cases, other than certain fringe benefits, you make this allocation on a time basis. Carol Wiley started writing as a technical writer/editor in 1990, was a licensed massage therapist for almost 12 years and has been writing Web content since 2003. This income is subject to nonresident alien withholding if it is not effectively connected with a U.S. trade or business. Have you ever visited your eye specialist and been able to buy your glasses, frames and contact lenses on site as well? If you’re lucky enough to be in a state that permits non-licensed spouses to also hold ownership in a professional corporation or professional LLC, this is easy – make sure your spouse (or spouses, if there are multiple owners involved) own five percent or more. The IRS measures this by compensation cost -- a corporation qualifies if more than 20 percent of compensation is paid to employee-owners for their personal services work. Corporations typically pay taxes based on the tax rate schedule. However, either the owner/employee or their family members must hold all or nearly all of the corporation's outstanding stock. That is, U.S. source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed in the U.S. How about a chiropractor who also sells relaxation materials, a doctor’s office that sells vitamin supplements, and so on? The document lists organizations that qualify to receive tax-deductible contributions. n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. A personal service corporation is a corporation that is created to provide personal services to individuals or groups. If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of income for services performed in the United States. Qualified small business stock (QSBS) refers to shares in a qualified small business that are subject to special capital gains tax rules. An employee can use an alternative basis based on facts and circumstances, rather than the time or geographical basis. If there is no one place where most of the work time is spent, the main job location is the place where the work is centered, such as where the employee reports for work or is otherwise required to base his or her work. We’re here for you. 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. The IRS considers most professional corporations to also be personal service corporations. However, under certain circumstances, payment for personal services performed in the United States is not considered income from sources within the United States. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. Example. A personal service corporation is a company which, as the name suggests, provides personal services. 501(c)(3) covers charitable organizations, one of 29 types of non-profit organizations covered by subsection 501(c) of the IRC for tax-exempt status. This includes services such as accounting, consulting, health, law, architecture, engineering and the performing arts. Page Last Reviewed or Updated: 14-Jan-2020, Request for Taxpayer Identification Number (TIN) and Certification, Employers engaged in a trade or business who pay compensation, Electronic Federal Tax Payment System (EFTPS), Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, Treasury Inspector General for Tax Administration, Source of Income - Personal Service Income.