A Personal Service Corporation — also known as a Professional Service Corporation, or a PSC — is a corporate entity formed by successful professionals who provide personal services to their clients. Businesses of this type include:
The IRS limits the types of businesses that qualify to be a PSC, so before you apply, consult your New York CPA. Miller & Company LLP, NY Certified Public Accountants, a best rated CPA NYC firm.
For your business to qualify as a Personal Service Corporation in NYC, it must meet several requirements set in place by the IRS. These criteria must be satisfied during a “testing period,” which is often the previous year for tax purposes:
When your business forms a NYC Personal Service Corporation, you enjoy a number of tax advantages. The law allows you, as an owner-employee, to provide tax-free life insurance and health insurance benefits to other employees. You can also offer fringe benefits, such as 401(k) retirement plans with higher limits on contributions than unincorporated businesses have. There are other benefits as well:
Through distribution to your shareholders, the profits of a PSC can be reduced to zero, thereby making the corporate tax liability zero. These advantages don’t exist for other types of business organizations, such as limited liability corporations (LLCs), partnerships or S corporations. If you have questions contact the best NYC accountant firm, Miller & Company LLP.
For businesses such as a sole proprietorship, LLC or partnership, a death or desertion (if the owner leaves) means the business entity dissolves. A Personal Service Corporation in NYC, once formed, remains in existence as long as the requirements listed above are met. Ownership can be transferred, inherited or purchased.
Shares of stock can be transferred as well, with no change to the existing corporation. This is an advantage if you want to Succession Plan to your children or others. As long as you work 20 percent of the time for the business, even as an independent contractor, your PSC legally continues while the new owner-employees continue to do what’s needed to qualify under the rules. All owner-employees must continue to do their 20 percent of business in person to maintain their status as a personal or Professional Service Corporation.
The main advantage of a NYC Personal Service Corporation over a limited liability corporation is the structure of the taxation. A PSC can help you retain company profits. Once the profits from your company are taxed, a PSC can retain up to $150,000 that otherwise has to be distributed to shareholders. This money can be used to pay for company improvements — such as facility renovations and upgrades, equipment purchases or other business transactions.
Your company can purchase items that increase productivity, efficiency or even office morale with the money you retain using this method. An LLC corporation doesn’t allow profits to be retained because all profits from the business must be distributed to the business owners to be taxed individually.
One of the drawbacks of forming a Personal Service Corporation as opposed to an LLC is the tax rate that your corporation receives. When an LLC is taxed, the profits are not taxed at the corporate level, but at individual levels. The profits from an LLC are only taxed once, on your individual tax return. A PSC has a more complex tax structure, and your corporation is actually taxed twice, once at the corporate level and again on at the individual shareholder level.
Another disadvantage of a Personal Service Corporation business in NYC model is the tax rate for your corporation. PSCs do not get the favorable tax rates that LLCs receive. Profits from PSC businesses are taxed at a flat 35 percent rate, regardless of the amount of profit the corporation made. An LLC, on the other hand, is taxed at 15 percent on the first $50,000 of profit. At 35 percent, the PSC often pays at a much higher rate on profits than the owners of an LLC pay on their individual shares of the profits.
You have to legally file any changes you make to your company structure with the taxing authorities in your state. The rules for filing vary, depending upon where your business is based. Carefully consider all of your options before making any decision. Remember that the IRS is aware of any changes you make as well.
Before incorporating your business into a Personal Service Corporation or making any changes to the way your company is currently structured for tax purposes, talk to a small business tax professional. Your personal CPA at Miller & Company can tell you exactly what the advantages and disadvantages are for your individual situation. Get all the facts before you decide.
Do you have questions about services we offer including Personal Service Corporation in NYC and Long Island? Would you like to receive a personal Personal Service Corporation consultation customized to your specific needs? To schedule an appointment with a nationally recognized, best NYC accountant, Paul Miller of Miller & Company LLP firm, please contact our Queens or NYC tax accountants for a FREE CPA consultation.
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