Can a Personal Service Corporation Be an S Corp?

by Christopher Carter; Updated September 26, 2017

A personal service corporation exists as a qualified professional corporation that provides services in fields like accounting, architecture, law, medicine, the performing arts, consulting and engineering. A personal service corporation can elect taxation as an S corporation, which allows the owners of the business to report their portion of profits and losses on their personal income tax return.

Significance

To qualify as a personal service corporation, a professional corporation must have 95 percent or more of its activities involving occupations like consulting and engineering, as explained by the Reference For Business website. All of the company's stock must be held by licensed individuals or former employees that were licensed to perform the service that the company provides. Employees licensed to perform services, retired employees, and heirs or estates of former employees may own shares of a personal service corporation.

S Corporation Requirements

S corporations can have no more than 100 shareholders, so that means a personal service corporation that elects status as an S corporation cannot have more than 100 shareholders. Individual shareholders of an S corporation must have United States citizenship or status as a resident alien. Therefore, personal service corporations that elect S corporation status cannot have foreign shareholders. Personal service corporations that elect S corporation status cannot issue more than one class of stock ownership. Furthermore, all company offices must be located in the U.S.

Fringe Benefits and Taxes

When a personal service corporation elects taxation as an S corporation, the company cannot take advantage of fringe benefits like death and life insurance. If a personal service corporation does not elect status as an S corporation, the company can deduct the cost of providing fringe benefits to company employees. However, when a personal service corporation does not make an S corporation election, the company must pay a flat 35 percent tax on company income. This means the company must file a corporate income tax with the Internal Revenue Service. The only way around the flat tax rate of a personal service corporation is to issue all income in the form of salaries paid to employees. The salary compensation paid to employees must be within reason to avoid an IRS audit.

Considerations

Professional corporations that fail to qualify as personal service corporations receive taxation like a general partnerships, according to the Reference For Business website. This means shareholders of a professional corporation that fails to qualify as a personal service corporation can pass their portion of company profits and losses directly to their personal income tax return, just like partners in a partnership. Personal service corporations that elect S corporation status must file Form 1120S with the IRS. Form 1120S is a federal tax return form used by S corporations to report each shareholder's portion of the company's profits and losses.

About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.