Personal services income (PSI) is income received as payment for individual personal efforts and skills. It applies to many contractors who provide services as their means of earning an income. PSI rules can apply to individual sole traders and other types of business entities, but not employees. If PSI rules apply, the entity is called a personal services entity (PSE).
Personal services income (PSI) is available in practically every industry, trade, and profession. However, here are a few examples:
- Professionals in the financial sector
- Consultants in information technology
- Employees in the building industry
- Medical professionals
If you're an employee who merely receives pay and earnings, personal services income (PSI) has no bearing on you. However, if you work for an entity like a firm, partnership, or trust and are an employee of that entity, the PSI regulations may still apply to you.
When more than half of your income is a reward for your personal efforts and skills, rather than being generated by the use of assets, the sale of things, or a business structure, it is classed as PSI. The first step is to determine whether any of your earnings are subject to PSI. If that's the case, you'll need to determine whether the PSI regulations apply to that revenue.
The PSI rules ensure the income is attributed to the individual who performed the services and not apportioned across other entities.
There are several tests to work out if your income is PSI or if you are instead conducting a personal services business (PSB), which means the PSI rules don’t apply. If a personal services entity qualifies as a PSB, the ordinary tax rules apply for that financial year.
What is Considered Personal Services Income(PSI)?
At least one of these four tests must be satisfied for an entity to be classified as a PSB.
- Results Test: the individual must be paid to produce a result, is required to supply their own equipment and tools to produce that result and is liable for the cost of rectifying defects in the work.
- Unrelated Clients Test: the sole trader or entity must be engaged by unrelated clients, and services must be advertised to the public.
- Employment Test: in general, a sole trader or other entity must engage one or more entities to perform at least 20% of the sole trader’s principal work. Entities other than individuals must not be associated with the sole trader.
- Business Premises Test: the entity must maintain and use business premises to conduct personal services. The business premises must be exclusively used by the PSE and physically separate from private premises and customers.
If more than 80% of income in a financial year is derived from one customer, the PSE must satisfy the results test to be classified as a PSB.
If none of the four tests are met, the income is classified as personal services income, and the PSI taxation rules apply. PSI rules restrict the type of allowable tax deductions made in relation to personal services income-earning activities.
What should you do if the Personal Services Income(PSI) rules don't apply to you?
Even if the PSI requirements do not apply, you must nevertheless declare any PSI amounts on your tax return at the appropriate labels.
There are no changes to the deductions you can claim against your income if you received PSI but discovered that the regulations do not apply.
Personal Services Income(PSI) Records Must Be Kept
Understanding what money moves through your firm and why is dependent on keeping track of your income and expenses. You must keep detailed records of all transactions relating to your tax matters, including PSI.
In general, you must preserve records of most transactions for five years in English. The five-year period begins when you prepare or get the records, or when you consummate the transactions (or activities to which they pertain), whichever comes first.
When determining if you are eligible for PSI, keep records that show:
- whether or not the revenue is based on PSI
- how you determined if the PSI regulations are applicable
- which expenses are incurred as a result of any PSI received, and
- the deductions you can make from your PSI
If more than one person is creating PSI, you must keep separate records for each person.
The types of records you may need to keep are listed below.
- invoices for taxes
- Sent time sheets to the customer or labor hire business
- contracts that include deadlines
- diary describing the task done, when it was done, and for whom
- e-mails proving that a deal was negotiated
- Statements from the bank and receipts
- Logbooks for automobiles.
If you’d like to know more about Personal service income(PSI), book a free consultation to talk to us to see if the services you provide meet the tests for conducting a personal services business. We’ll make sure you are claiming the maximum allowable deductions and being taxed correctly.