What is the Meaning of Personal Services?

Personal services are a type of business that involves providing services to clients or consumers. These services can be delivered by a freelancer, an employee of a company, or other professionals.

Allocation of income for personal services performed in the United States

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Classification of personal services business

Whether you have an existing business, are starting a new business, or have decided to work for a corporation, you may wonder if your business is classified as a Personal Services Business (PSB) or Personal Service Corporation (PSC). Some differences between these two business entities are essential to know if you are looking for help in making tax deductions and other tax planning strategies.

A four-fold test determines the classification of a personal services business. During this test, the Canada Revenue Agency (CRA) will consider the number of employees, whether you work for a client or a corporation, and your business presence. If you are hired to work for a corporation, you are considered an employee, but if you are hired to work for a client, you are considered an independent contractor.

The CRA will classify a personal services business as a PSB if it has five or fewer full-time employees. If the business has more than five full-time employees, the business will be classified as a professional corporation (PPC).

A personal services business is not eligible for the Small Business Deduction. It is also subject to the total federal and provincial corporate tax rate. It is also not suitable for general tax rate reductions.

Breach of the Anti-Deficiency Act

Whether a federal employee or a private contractor, you are prohibited from providing personal services to the United States government under the Anti-Deficiency Act. The prohibitions on these services run from Article I of the Constitution, which reserves the power of the purse to Congress. Willful or knowing violators of this law are subject to criminal penalties.

In addition, Section 1341 of the United States Code prohibits government employees from entering into contracts, agreements, or other commitments without government authorization. This prohibition is fundamental because of the role of the government in the appropriation process. For a government employee to enter into a binding contract, the agency must demonstrate that the contract is relevant to the agency’s primary mission and function.

Section 1341 also prohibits government employees from accepting voluntary personal services that are not necessary for the agency to perform its functions. This type of service is only permitted in emergencies and is not allowed for services longer than one year. The contract must also be in writing, reflecting the parties intent. An authorized officer of the government must also sign the contract.