Puerto RicoTax Obligations Detailed

Employers in Puerto Rico face various tax obligations at both the federal and territorial levels.

Federal Taxes

• Federal Income Tax Withholding: Employers must withhold federal income tax from employees' wages based on the employee's W-4 form. An exemption exists for employees aged 16-26 on the first $40,000 of taxable wages.
• FICA Taxes (Social Security and Medicare):
  • Social Security: 6.2% each for employer and employee (12.4% total) on the first $176,100 of wages for 2025.
  • Medicare: 1.45% each for employer and employee (2.9% total) on all wages. An additional 0.9% Medicare tax is withheld from employee wages exceeding $200,000. No employer share for this additional tax.
• Federal Unemployment Tax Act (FUTA): 6.0% on the first $7,000 of each employee's wages. A credit of up to 5.4% is available for state unemployment taxes paid, resulting in a net FUTA rate of 0.6%.

Puerto Rico Territorial Taxes

• Puerto Rico Income Tax Withholding: Employers withhold income tax based on the employee's Form 499R-4 (Withholding Exemption Certificate).
• Puerto Rico Unemployment Tax: Rates range from 1.2% to 5.4% based on the employer's experience rating, paid on the first $7,000 of each employee's wages. New employers pay up to 4.4%. A 1% special tax applies to all taxable wages.
• Disability Tax: Employers pay a tax to fund disability benefits.
• Chauffeur's and Other Employees' Employment Security Tax: Applicable to employers of chauffeurs and other specified employees.
• Workmen's Accident Compensation Insurance: Employers pay premiums for workers' compensation insurance.
• Municipal License Tax: Paid to the municipality where the business operates.

Tax Filing and Payment

• Federal taxes are generally paid and reported quarterly or semi-weekly, depending on the amount withheld.
• Puerto Rico territorial tax filing and payment deadlines vary depending on the specific tax. Consult the Puerto Rico Treasury Department for details.
• Form 499R-1 is used for monthly deposits of withheld Puerto Rico income tax. Form 499R-1B is the employer's quarterly return. Form 499R-2/W-2PR is the Puerto Rico equivalent of the W-2.

Note: This information is current as of February 5, 2025, and is subject to change. Always consult official sources for the latest regulations.

In Puerto Rico, employee tax deductions consist of federal and state income tax, Social Security, and Medicare, alongside other potential deductions like those for retirement plans and union dues.

Federal Taxes

• Social Security: 6.2% of earnings up to a maximum of $160,200 for 2025.
• Medicare: 1.45% of all earnings. An additional 0.9% Medicare tax applies to earnings above $200,000 for single filers, $250,000 for joint filers, and $125,000 for married individuals filing separately.
• Federal Income Tax: Withholding is determined by the employee's W-4 form and involves tax brackets ranging from 0% to 37%.

Puerto Rico Income Tax

• Withholding: Based on Form 499 R-4, using either the percentage or wage bracket method.
• Rates and Brackets: Progressive rates apply, ranging from 0% for incomes up to $9,000 to 33% for incomes over $61,500. There is an exemption from income tax withholding for employees aged 16 to 26 on the first $40,000 of taxable wages.
• Deductions: Itemized deductions are available for charitable contributions (up to 50% of adjusted gross income), education expenses (student loan interest, educational IRA contributions), medical expenses (above 6% of adjusted gross income), mortgage interest (up to $35,000 or 30% of AGI, whichever is lower) and casualty losses. There is no standard deduction. Personal exemptions are $3,500 per individual, $7,000 for married couples filing jointly, and $2,500 for each dependent. An additional veteran's exemption of $1,500 is also available. Contributions to retirement plans (Puerto Rican IRAs up to $5,000) are also deductible.

Other Deductions

• Union Dues: Deductible if stipulated in a collective bargaining agreement.
• Non-Profit Medical Services: Deductions for dues to non-profit medical-hospital associations are allowed.
• Savings Bonds: Deductions for the purchase of U.S. or Puerto Rico Savings Bonds are permitted.
• Credit Union Payments: Deductions for payments to credit unions are allowed.
• Charitable Contributions: Up to 3% of the employee's annual salary can be deducted for voluntary charitable contributions, subject to certain restrictions.
• Retirement Plans: Contributions to individual retirement accounts (IRAs) and the Pension Administration System ("Sistema de Retiro") are deductible.

Deadlines and Procedures

• Form 499 R-4: Employees complete this form to declare exemptions and determine withholding.
• Form SC 4809: Employers register their identification number with the Puerto Rico Treasury Department using this form.
• Tax Return Due Date: April 15th is the general deadline, with an extension available until October 15th.
• Tax Relief: Due to severe storms and flooding starting August 13, 2024, the IRS extended several deadlines to February 3, 2025. This includes quarterly estimated tax payments and some payroll and excise tax deadlines.

Employer Taxes

Employers also have tax obligations including:

• Federal Unemployment Tax Act (FUTA): 6% of the first $7,000 of each employee's wages, with a potential credit of up to 5.4% for state unemployment taxes paid.
• State Unemployment Tax Act (SUTA): Variable rates apply.
• Workers' Accident Compensation Insurance: Employers are responsible for this insurance.
• Withholding: Employers must withhold all applicable taxes and remit them to the appropriate authorities.

This information is current as of February 5, 2025, and might change in the future due to legislative updates. You should consult a tax professional for personalized advice.

In Puerto Rico, the Sales and Use Tax (SUT) is the primary consumption tax, with specific rates and exemptions.

Sales and Use Tax (SUT)

The SUT is levied on the sale, use, or lease of tangible personal property and certain services in Puerto Rico. It is applicable to most goods and services unless specifically exempted.

• Standard Rate: 11.5% (comprising 10.5% for the state and 1% for municipalities). This applies to all sales of products or services unless a specific exemption is in place. This could also be seen as 10.5% in certain calculations as the 1% can be separate.
• Reduced Rate: 4% for designated professional services and business-to-business (B2B) transactions. The 4% rate is designed to mitigate the tax burden on essential business services.

Thresholds and Registration

• All businesses engaged in selling taxable goods or services in Puerto Rico must register with the Merchant's Registry of the Puerto Rico Treasury Department. The criteria for having nexus in Puerto Rico are broad, including having a physical presence (office, employees), owning property, soliciting business within the territory, or engaging in direct marketing to Puerto Rican residents.
• Small Merchant's Registry: Businesses with gross annual sales below $125,000 in the preceding tax year can opt to register as a small merchant. Small merchants do not collect VAT, file monthly VAT returns, or track input credits. But, they are still required to file a yearly informational return.

Filing and Payment

• Monthly SUT Return: Businesses collecting SUT must file a monthly return by the 20th of the following month. This return details taxable sales and the SUT collected.
• Use Tax on Imports Return: Businesses importing tangible personal property to Puerto Rico also file a monthly return by the 20th day of the month following the import.
• Annual Small Merchant Information Return: Small merchants must submit this return within 60 days of their income tax return due date.

Exemptions

Puerto Rico provides several exemptions from the SUT, including, but not limited to:

• Raw materials, machinery, and equipment used in manufacturing
• Certain medical and health-related items (prescription drugs, prosthetics)
• Agricultural products (fruits, vegetables, livestock)
• Educational materials (textbooks, school supplies)
• Certain services (medical, educational, some professional services)
• Exports of tangible personal property and export services.

Exempt Services

Certain services are also specifically excluded from the SUT:

• Services offered by businesses with less than $300,000 in annual revenue
• Services performed by non-residents for related parties in Puerto Rico holding a qualifying tax grant
• Services between businesses forming part of a controlled group or partnership

Other Indirect Taxes

Puerto Rico also levies excise taxes on specific goods such as sugar, cement, vehicles, cigarettes, liquor, and petroleum products.

It is important to note that this information is current as of today, February 5, 2025, and might be subject to change due to legislative updates or revisions in tax regulations. Consulting with a tax professional is advisable for detailed guidance.

Puerto Rico offers various tax incentives under Act 60 (formerly Acts 20 and 22) for individuals and businesses, particularly those involved in export services and investment.

Individual Investors

As of December 31, 2035, new residents who were not residents of Puerto Rico between January 17, 2006 and January 17, 2012 can benefit from a 100% tax exemption on passive income from dividends, interest, and capital gains accrued after establishing residency.

Export Services

Businesses exporting services from Puerto Rico can take advantage of a 4% corporate tax rate on eligible export services income. Dividends distributed from this income are 100% exempt from Puerto Rico taxes. Qualifying services include:

• Advertising and Public Relations
• Consulting
• Creative Industries
• Software Development
• Research and Development
• Education and Training
• Financial Services

Urban Development Projects

Under Act 182, developers of residential projects in urban centers may receive tax incentives for projects initiated after July 1, 2024. Applications for these incentives should be submitted by December 31, 2025. The incentives include a reduced income tax rate of 4%, a 100% exemption on dividend distributions to shareholders/members from exempt income, along with property tax exemptions of 75% and municipal tax exemptions of 50%. For projects with 7+ residential units, a 50% transferable tax credit on eligible investments is available, rising to 60% for projects within Opportunity Zones.

Additional Incentives

Other incentives under Act 60 include benefits for researchers and scientists, difficult-to-hire employees, and international financial entities. Researchers and scientists can obtain a 100% income tax exemption on compensation up to specified limits. Difficult-to-hire employees can benefit from a 100% exemption on income exceeding $100,000 from wages and benefits. International financial entities can avail of a 4% income tax rate and property/municipal tax exemptions.

It is important to consult with a tax advisor for personalized guidance on eligibility and application procedures, as requirements and incentives can change. As of today, February 5, 2025, this information is current, but may be subject to change with future legislative updates.