Personal service corporations don’t benefit from the graduated rate structure that other corporations do. For corporations labeled as personal service corporations, the tax rate is a flat 35 percent.


Personal services include activities performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law and the performing arts.


– Internal Revenue Service (IRS)


The tax law definition isn’t completely clear, and the determination of this tax status is often contested in court. Generally, a corporation is treated as a personal service corporation if it meets a “function” and an “ownership” test.

1. Function Test

“Substantially all” of the activities involve the performance of services in a field of law, accounting, health, engineering, architecture, actuarial sciences, performing arts or consulting.

For this purpose, “substantially all” means that 95 percent or more of time spent by employees is devoted to these services.

2. Ownership Test

Substantially all of the stock is held, either directly or indirectly, by employees performing these services or retired employees who provided these services. Ownership of 95 percent or more of the stock is considered to be “substantially all” ownership.

Court Case

Kraatz and Craig Surveying was engaged solely in land surveying. It did not employ any licensed engineers, nor was it associated with any firm employing licensed engineers.

The Tennessee firm did not dispute that it met the ownership test for being a personal service corporation. However, it argued it did not meet the function test because it was not engaged in any of the specified services.

The IRS contended that land surveying constituted performance of engineering. It based its position on existing regulations that treat land surveying and mapping as engineering services (Regulation 1.448-1T(e)(4)(i)).

The surveying firm countered by saying that the regulation was invalid. It argued that the firm’s services would qualify as “engineering” under state law only if they were performed by licensed engineers.

The Tax Court sided with the IRS. First, it upheld the regulation as being valid. Second, it ruled that the determination of whether an entity is a personal service corporation should not controlled by state law but should be, rather, based on all the relevant facts.

Accordingly, the surveying firm was responsible for a tax deficiency of $9,762. (Kraatz and Craig Surveying, Inc., 134 TC No. 8.)

Have Your Attorney Take a Look

Your attorney can analyze whether your business satisfies the definition of a personal service corporation and the most tax-effective way to structure it.