Personal Service Corporation
Definition
A Personal Service Corporation (PSC) is a type of corporation whose main activity involves providing personal services. These services are typically performed by employees who own a significant portion of the corporation’s stock. The Internal Revenue Service (IRS) defines personal services to include activities in fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting. Due to their structure, PSCs are subject to certain adverse tax implications, most notably being taxed at the highest corporate tax rate.
Examples
- Medical Practices: Corporations where doctors provide healthcare services and own part of the practice fall under PSC.
- Legal Firms: Law firms structured as corporations with employee-owners provide legal services.
- Consulting Firms: Consulting services offered by a corporation where consultants also own shares in the firm.
- Accounting Firms: Accountancy services provided by a corporation where licensed accountants are also shareholders.
Frequently Asked Questions
What qualifies a corporation as a Personal Service Corporation?
A corporation qualifies as a PSC if:
- It is engaged in the performance of personal services in specified fields.
- Substantially all of the personal services are performed by employee-owners.
- More than 10% of the stock by value is held by employee-owners.
Why are Personal Service Corporations taxed at a flat rate?
PSCs are taxed at a flat rate (historically the highest corporate rate) to discourage individuals from forming corporations solely to take advantage of lower-tiered corporate tax rates.
Can a PSC choose another type of tax classification?
PSCs typically cannot choose another tax classification without fundamentally changing their business structure and shareholder composition, which complies with the IRS regulations for other types of corporations.
Related Terms with Definitions
- C Corporation: A standard corporation that pays corporate taxes and may be subject to double taxation on dividends.
- S Corporation: A closely-held corporation that can avoid double taxation by passing income directly to shareholders.
- Employee-Owner: An individual who provides personal services for the corporation and owns stock in it.
- Corporate Tax Rate: The tax rate applied to corporate earnings, which for PSCs is often the highest rate.
Online Resources
Suggested Books for Further Studies
- “Corporate Taxation: Examples & Explanations” by Cheryl D. Block
- “Federal Income Taxation of Corporations and Stockholders in a Nutshell” by Karen C. Burke
- “Taxation of S Corporations in a Nutshell” by Douglas A. Kahn
Fundamentals of Personal Service Corporations: Corporate Taxation Basics Quiz
### What primary activity categorizes a corporation as a PSC?
- [ ] Manufacturing goods.
- [x] Providing personal services.
- [ ] Selling retail products.
- [ ] Importing and exporting goods.
> **Explanation:** A Personal Service Corporation's main activity involves providing personal services such as medical care, legal advice, accounting, or consulting.
### Which of the following fields is considered a personal service under IRS guidelines for PSCs?
- [ ] Retail
- [x] Health
- [ ] Automobile sales
- [ ] Manufacturing
> **Explanation:** The IRS includes specific fields like health, legal services, accounting, engineering, and others as personal services.
### Why are PSCs generally taxed at the highest corporate rate?
- [ ] To encourage their establishment.
- [x] To prevent tax avoidance strategies.
- [ ] Due to the high revenues they generate.
- [ ] Because they are primarily non-profit.
> **Explanation:** PSCs are taxed at the highest rate to discourage the formation of corporations primarily for favorable tax treatment.
### Who performs most of the services in a PSC?
- [ ] Independent contractors
- [x] Employee-owners
- [ ] Partners
- [ ] Outsourced workers
> **Explanation:** In a PSC, most personal services are performed by employee-owners who also hold significant ownership in the corporation.
### What is a requirement for stock ownership in a PSC?
- [x] More than 10% of stock must be held by employee-owners.
- [ ] None of the stock can be held by non-owners.
- [ ] At least 50% of stock must be held by employee-owners.
- [ ] Stock ownership is irrelevant.
> **Explanation:** To qualify as a PSC, more than 10% of the stock must be held by employee-owners who provide personal services.
### Can a PSC elect to be taxed as an S corporation?
- [ ] Yes, without any restrictions.
- [x] No, due to specific IRS regulations.
- [ ] Yes, by filing a form with the IRS.
- [ ] No, PSCs are exclusively C corporations.
> **Explanation:** PSCs cannot typically elect S corporation status due to specific regulations regarding their structure and purpose.
### What happens if a corporation does not meet all qualifications to be a PSC?
- [ ] It automatically becomes an S corporation.
- [ ] It pays no taxes.
- [x] It is taxed under regular corporate tax rules.
- [ ] It dissolves.
> **Explanation:** If a corporation fails to meet PSC qualifications, it is taxed under regular corporate tax rules.
### Which is not typically a characteristic of PSCs?
- [ ] They have ownership restrictions.
- [ ] They involve personal services.
- [ ] Employee-owners perform most of the work.
- [x] They are usually non-profit entities.
> **Explanation:** PSCs are not typically non-profit; they are for-profit entities subjected to specific tax rules.
### What might be an advantage of forming a PSC?
- [ ] Lower regulatory oversight.
- [x] Structure may fit business activities.
- [ ] Paying less tax.
- [ ] Government grants.
> **Explanation:** The structure of a PSC may best fit the business activities of firms involved heavily in intellectual services where owner/operators deliver services.
### Who regulates the taxation of PSCs?
- [x] Internal Revenue Service (IRS)
- [ ] State governments
- [ ] Securities and Exchange Commission (SEC)
- [ ] Local tax authorities
> **Explanation:** The IRS is responsible for the regulations and taxation rules surrounding PSCs in the United States.
Thank you for exploring the ins and outs of Personal Service Corporations with us! Continue to deepen your understanding and keep achieving excellence in corporate taxation knowledge.
