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
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