The IRS defines a personal service corporation as a company whose main work is to offer personal services to its clients. This includes services such as accounting, consulting, health, law, architecture, engineering and the performing arts. To qualify for PSC status, the corporation must meet three requirements.
The first requirement of a PSC is that it has a track record of offering personal services as its principal activity. This is tested by the IRS, typically using data from the previous tax year. Next, employee-owners must undertake a certain percentage of the corporation's work. 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. Finally, employee-owners must own more than 10 percent of the fair market value of the corporation's outstanding stock.
PSC Employee-Owner Status
The IRS sets two conditions in its definition of an employee-owner. First, the corporation must either employ the individual, or the individual must supply personal services to, or on behalf of, the corporation. Independent contractors may also qualify under this rule. Second, an employee-owner must own stock in the corporation during the IRS testing period.
PSC Accounting Periods
Corporations typically use either fiscal or calendar year options when choosing which accounting period to use. This does not necessarily apply to a PSC. These corporations must file taxes on a calendar year basis and can only use a different fiscal year in certain circumstances. They may make elective decisions, or may need to get IRS approval to make a change.
Corporations typically pay taxes based on the tax rate schedule. Tax liabilities on this schedule range from 15 to 35 percent, depending on taxable income. The regular tax rate schedule does not apply to a PSC -- it must pay a flat rate of 35 percent on all taxable income.
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