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Personal Service Corporation

PostedOctober 18, 2023

By Jason Watson, CPA
Posted Wednesday, October 18, 2023

We are not going to spend too much time on this. A corporation will be deemed a personal service corporation if-

  • Substantially all of the corporation’s activities involve the personal of services such as health, law, engineering, accounting, consulting, among others.
  • At least 95% of the stock is owned by the employee(s) performing the service.

Why do you care? You shouldn’t. Personal service corporations are taxed like regular C Corps, but must use cash-based accounting and have a calendar year-end. There is also a bit more pressure on accumulated earnings since the trigger is lower. Without proper justification for the big pile of cash, the IRS might require dividends to be paid or reclassify these earnings as dividends.

Jason Watson, CPA, is a Partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and business consultation firm located in Colorado serving small business owners and taxpayers worldwide.

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