Veterinarians who have incorporated and meet the requirements could be classified as personal service corporations.
Many service providers opt to incorporate their businesses after reaching a certain income level and hiring employees. They get several tax benefits as employees of a corporation and don't have to pay as much in income taxes. However, they run the risk of being classified as personal service corporations, and losing these benefits, if their business meets certain conditions set by the Internal Revenue Service.
Drawbacks of the Designation
If is business is classified as a personal service corporation by the IRS, it loses out on several benefits afforded to corporations. It will be subject to a flat 35 percent income tax rate. The business must also file taxes at the end of the calendar year like most individual taxpayers and can't use a fiscal calendar year. It has become rare for the IRS to apply this classification because most businesses work to avoid it by not meeting all of the requirements.
Who Owns the Business?
The IRS classifies a PSC as a business with employee-owners who own more than 10 percent of the business. Employee-owners are people who are employed by the company but also own part of the business in stock. Employees can be classified as employee-owners even if they work as independent contractors for the company. For example, if all members of an acting troupe are employed by the business and each owns an equal share of at least 10 percent of the business, they would be employee-owners.
What Do the Owners Do?
Another requirement for identifying a PSC is that the employee-owners are the ones performing most of the services for the company. The employee-owners of an acting troupe are also the ones who do most of the acting and work in maintaining the business for it to be classified by the IRS as a PSC. The IRS requires that employee-owners must receive 20 percent of the overall compensation paid out to employees each year to classify as a PSC.
What Does the Business Do?
The IRS defines a personal service corporation as a business that performs some specific kind of service for its clients. These services are in the fields of accounting, actuarial science, architecture, consulting, engineering, health, veterinary science, law and the performing arts. Determine the nature of the business. If it offers a service to clients such as bookkeeping or operates as a small actors' troupe performing plays in local theaters, it meets one of the requirements for being a PSC.
