Personal Service Corporations

Certain C-Corporations are classified by the IRS as Personal Service Corporations . To become classified as such the IRS has a couple of rules to look at:
1. At least 95% of the employees time is spent in a certain field. IE: Doctor, Lawyer, nurses, dentists, actors, consultants
2. 95% of the stock is held by the employees performing the services, retired employees or their heirs.

If classified as a Personal Service Corporation then IRS automatically sets your tax rate at 35% from dollar one. This means you have lost your graduated scale that starts at 15%. The shareholders are then again taxed at their current rate when dividends are declared.

Another disadvantage to the Personal service Corporation is that you can only have accumulated earnings up to $150,000 instead of the normal $250,000.