As the current world events have developed, many employers have required or allowed their employees to work remotely. In the case of employees who have decided to move from the U.S. to Puerto Rico, both the employer and the employees could be facing unintended Puerto Rico and U.S. federal tax consequences. The following are some of the most relevant tax considerations of a temporary or permanent transition to remote work from Puerto Rico:
For the Individual (Employee):
- A person’s liability for Puerto Rican tax is determined by residence status. A person can be a resident or a non-resident for Puerto Rican tax purposes. An individual is presumed to be a resident of Puerto Rico if the individual spends more than 183 days in a calendar year in Puerto Rico. However, domiciles will have a greater role in determining whether the taxpayer will be considered a resident or non-resident for Puerto Rican income tax purposes.
- The general rule is that a person who is a resident of Puerto Rico is taxed on the individual’s worldwide income. Non-residents are generally taxed on income derived directly or indirectly from sources within Puerto Rico. Although Puerto Rican nationals are US citizens, bona fide residents of Puerto Rico are exempt from US federal income tax on income derived from sources within Puerto Rico.
- In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government.
- Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return. However, they should report all income received from sources outside Puerto Rico on their U.S. income tax return.
- United States citizens or resident aliens who are not bona fide residents of Puerto Rico during the entire tax year are required to report all income from whatever source derived on their U.S. income tax return. However, a U.S. citizen who changes residence from Puerto Rico to the United States and who was a bona fide resident of Puerto Rico at least two years before changing residence can exclude from U.S. taxable income the Puerto Rican source income received while residing in Puerto Rico during the taxable year of such change of residence
- Some Puerto Rico residents pay U.S. federal income taxes. Residents falling within the following categories must pay tax on their income to the United States federal government, via the Internal Revenue Service:
Puerto Rico residents who:
- Work for the federal government such as US Post Office employees, and federal agents of any of the federal executive and judicial branches located in Puerto Rico
- Do business with the federal government
- Are members of the U.S. military
- Earned income from sources outside Puerto Rico
- Puerto Rico-based corporations that intend to send funds to the U.S.
- However, notwithstanding these requirements, some residents of Puerto Rico are not required to file federal income tax returns because their income falls below the poverty threshold. As of 2019, the median income of Puerto Rico was $20,166, which falls below the poverty threshold of $24,400.The IRS does not require individuals or households below the poverty threshold to pay federal income tax.
For Employers
Income Tax
Employers not otherwise engaged in a Puerto Rico trade or business (“Non-PR Employers”) with employees working remotely from Puerto Rico should understand the Puerto Rico income tax implications of such an arrangement and be aware that, depending on the activities carried out by their employees and/or agents in Puerto Rico, they may be considered engaged in a trade or business in Puerto Rico (“ ETB-PR”) and subject to Puerto Rico income taxation. “Whether a foreign corporation is engaged in a trade or business in a given jurisdiction will depend both on the type and the amount of its activities in such jurisdiction. Being engaged in a trade or business implies more than a single isolated act or transaction; it means ‘conducting and continuing business by carrying on progressively all the acts normally conducted in the business.’ “ Llewellyn v. Pittsburgh, 222 F. 177 (1915).
Under both the Puerto Rico and federal income tax regimes, the rendering of services in the jurisdiction at any time during the taxable year generally is considered a trade or business.
Sales and Use Taxes
A Non-PR Employer not otherwise ETB-PR will be required to register with SURI (PR Treasury's online platform) as a merchant if it has employees rendering services in Puerto Rico. Depending on the activities the employees undertake in Puerto Rico, this Non-PR Employer could be required to file monthly sales and use tax returns.
Payroll Taxes
Non-P.R. Employers will be subject to withholding and reporting requirements on payroll payments made to Puerto Rico resident employees. In general, under the PR Internal Revenue Code (“PR Code”) and the regulations issued thereunder, every employer paying wages must deduct and withhold income taxes from the total amount of wages using the withholding schedules approved by the PR Secretary of the Treasury. For these purposes, “wages” means all remuneration for services performed by an employee for his employer, including the remuneration paid for services rendered by a Puerto Rico resident as employee of a foreign entity (i.e., non-PR entity) not ETB-PR. To report the payment(s) and remit the taxes withheld, the Non-P.R. Employer will be required to register at SURI.
P.R. Employers will be subject to U.S. withholding and reporting requirements on payroll payments made to employees who are U.S. citizens and residents, unless the compensation paid is excludible from the definition of wages. One of these exclusions is for Puerto Rico resident employees who render services in Puerto Rico. If the employee becomes a resident of the U.S., this exclusion will not apply and the P.R. Employers could be required to withhold and remit U.S. payroll taxes.
Other State Tax Considerations
Businesses should pay careful attention to guidance published by states in which they have employees working remotely to determine if the employees’ presence at the remote worksites establishes nexus and employer withholding obligations for the business.
If you find yourself considering these options, or already in the process of moving to Puerto Rico or any other U.S. territory to work remotely, get in contact with me for a personalized consultation. If you have more questions, or need further guidance on planning your tax strategy, let’s discuss. I'm always happy to provide detailed and personalized guidance through a 1:1 consultation. You may book the best day and time for you to meet by contacting me to schedule your consultation.
