In Puerto Rico, employers have several tax responsibilities. These include federal taxes, Puerto Rico specific taxes, and various payment deadlines.

Federal Taxes

Employers are required to contribute to the Federal Insurance Contributions Act (FICA), which includes both Social Security and Medicare taxes. The Social Security tax has a 6.2% rate on wages up to the annual wage base, which is adjusted annually. The Medicare tax has a 1.45% rate with no wage limit, plus a 0.9% Additional Medicare Tax for high earners. Employers must withhold employees' shares from wages and remit both employee and employer portions to the IRS.

The Federal Unemployment Tax Act (FUTA) is another responsibility. The rate is 6.0% on the first $7,000 of each employee's wages annually. Employers receive a 5.4% credit for Puerto Rico unemployment taxes, reducing the effective FUTA rate to 0.6%. This tax is solely employer-paid.

Puerto Rico Specific Taxes

Employers in Puerto Rico must also withhold income tax based on employee wages and filing status. Progressive income tax rates apply. Employees aged 16-26 benefit from an exemption on the first $40,000 of taxable income.

The Puerto Rico Unemployment Tax (SUTA) is experience-rated. New employers typically begin with a rate of around 2.9%. Rates are adjusted annually based on the employer's unemployment history. This tax is also solely employer-paid.

Employers are also responsible for the Disability Benefits Tax. Rates vary depending on industry risk class (between 0.30% -1.10% approximately). This tax is solely employer-paid.

Payment Deadlines

Deadlines for tax payments vary based on tax type and the employer's assigned tax liability. Most taxes are filed monthly or quarterly. Employers primarily use the Puerto Rico Department of Treasury's (Hacienda) online system, SURI, for deposits and filing returns.

Important Notes

Depending on the nature of your business, additional taxes may apply, such as municipal license taxes.

All taxpayers in Puerto Rico are entitled to a standard deduction, the amount of which varies annually. Alternatively, taxpayers may opt for itemized deductions if they exceed the standard deduction amount. Common itemized deductions include medical expenses exceeding a certain percentage of adjusted gross income (AGI), mortgage interest on qualified residences, property taxes, and charitable contributions.

Retirement Plan Contributions

Contributions to traditional Puerto Rican IRAs are deductible up to $5,000 per individual, plus amounts for employer-sponsored plans. Contributions to government retirement systems may also be deductible.

Personal Exemptions

There are several personal exemptions available. These include a set amount per taxpayer ($3,500 for individuals, $7,000 for married taxpayers filing jointly), $2,500 for each eligible dependent, and a $1,500 exemption for veterans.

Other Payroll Deductions

In addition to income tax deductions, employees may also have deductions for Social Security and Medicare (FICA), with a combined rate of 15.3% split between the employee and the employer. There may also be deductions for Puerto Rico Disability Insurance, the rate of which varies based on industry risk.

In Puerto Rico, the Value Added Tax (VAT) obligations for services have been in a transitional period since April 1, 2016. During this period, a combined rate of 11.5% applies to most services, which includes a 10.5% state-level VAT and a 1% municipal surcharge. However, a reduced rate of 4% is levied on specific Business-to-Business (B2B) services, such as professional services, and designated services.

VAT Exemptions for Services

Certain services are generally exempt from VAT in Puerto Rico. These include medical and healthcare services, educational services, financial services, and the export of services.

VAT Filing Procedures

Most service providers are required to file VAT returns monthly, although some might qualify for quarterly filing. The primary method for filing VAT returns and remitting payments is through the Puerto Rico Department of Treasury's online system, SURI.

Important Considerations

One key aspect to consider is the VAT on imported services. Services rendered by non-residents to persons in Puerto Rico may be subject to VAT under a reverse-charge mechanism.

Chapter 3 of the Puerto Rico Incentives Code, previously known as Act 20, is designed for businesses that export qualified services. This program offers substantial tax savings:

• Low Corporate Tax Rate: Qualifying businesses enjoy a significantly reduced corporate income tax rate of only 4% compared to the standard 21% federal rate in the US.
• Tax-Exempt Dividends: Dividends paid to shareholders from profits earned under Chapter 3 are completely exempt from taxation.

Qualifying for Chapter 3

• Your business must provide qualified export services, which include a wide range of industries like technology, finance, and healthcare.
• You must establish a bona fide operation in Puerto Rico with a physical office and local employees.
• Minimum payroll and investment requirements may apply depending on your industry.

Applying for Chapter 3

The application process for Chapter 3 involves submitting a detailed application package to the Puerto Rico Department of Economic Development and Commerce. It's advisable to consult with a tax professional specializing in Puerto Rican tax incentives to ensure a smooth application process.

Incentives under Act 60 for Investors

Act 60 is designed to attract high-net-worth individuals to Puerto Rico. It offers significant tax benefits for qualified residents:

• 0% Capital Gains Tax: Residents enjoy a complete exemption from capital gains taxes on dividends, interest, and gains from the sale of capital assets like stocks and real estate.

Qualifying for Act 60

• You must become a bona fide resident of Puerto Rico, spending at least 183 days per year on the island.
• You must demonstrate proof of sufficient financial resources.

Applying for Act 60

To qualify for Act 60, you'll need to submit a residency application to the Puerto Rico Department of the Treasury. Again, consulting with a tax professional is recommended to navigate the application process.

Additional Tax Incentives

Beyond Chapter 3 and Act 60, Puerto Rico offers a range of other tax breaks depending on your industry and location:

• Act 22: This program provides tax benefits for individuals relocating manufacturing businesses to Puerto Rico.
• Act 73: Offers tax incentives for businesses operating in renewable energy production.
• Act 74: Provides tax breaks for qualified tourism developments.

Exploring Additional Incentives

For a comprehensive overview of all available tax incentives, refer to the official website of the Puerto Rico Department of Economic Development and Commerce. By understanding the various tax incentives and their eligibility requirements, you can determine if establishing or expanding your business in Puerto Rico can be a strategic tax advantage.