The IRS recognizes a personal service corporation as a taxable business entity. To qualify, the corporation must adhere to specific requirements.
Requirements for a Personal Service Corporation
Personal service corporations go through a “testing period” in which the principal activity must be performing personal services. Usually, the previous tax year is the testing period for the current tax year. A recently formed corporation begins its testing period on the first day of its tax year. It ends either on the last day of the calendar year of that tax year or on the last day of its tax year.
In addition, employee-owners must perform a substantial amount of the personal services. The IRS defines this as more than 20 percent of compensation earned is because of employee-owners performing services. Another requirement is that more than 10 percent of the corporation’s fair market value of outstanding stock must be owned by employee-owners on the final day of the testing period. Finally, the owner must apply for a personal service corporation tax ID number.
For the purpose of a personal service corporation, the IRS defines employee-owners as people, including independent contractors, who performs personal services for the corporation and as people who own stock in the company during the testing period. Personal services are defined as activities relating to accounting, engineering, health, performing arts and several other industries.
Benefits of a Personal Service Corporation
A company operating as a personal service corporation offers several benefits.
- Perpetuity: The company remains intact if the company transfers ownership or sells shares.
- Limited liability: Considered independent from the owner’s personal finances by the government, a company that fails to pay debts will not cause strain on the owner’s personal finances.
- Tax advantages: These corporations can provide tax-free or tax-deductible benefits for employees. Many other expenses are also deductible.
If you think a personal service corporation may be the right choice for you, IRS EIN Tax ID Filing Service can help you obtain your IRS-EIN-Tax-ID. Contact the company to learn more about personal service corporations and obtaining a Louisiana tax ID number.