Puerto Rico is a unique jurisdiction from a payroll tax perspective because Puerto Rico private sector employees are not subject to federal income tax withholding. Puerto Rico employees generally owe personal income tax on employment wages earned and are subject to withholdings required by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).

As part of the tax reform recently proposed by the Governor of Puerto Rico, the Puerto Rico Secretary of the Treasury issued Administrative Determination No. 10-09 (AD 10-09), which exempts employers from their obligation to withhold Puerto Rico income tax from wages paid in December 2010 and from the 2010 Christmas Bonus. (Note: this is not a discretionary bonus.) AD 10-09 exempts employers and withholding agents from their obligation to withhold income tax at source from wages paid in daily, weekly, biweekly, bimonthly, and monthly payroll periods in December 2010. The Administrative Determination also exempts employers from the requirement to withhold income tax from the 2010 Christmas Bonus.

Any income that is not considered wages or designated as the statutory Christmas bonus is subject to Puerto Rico income tax withholding. Employers should continue making the withholdings required by federal law, including the FICA and FUTA taxes, and other applicable local and employee voluntary deductions.

This entry was written by Niza Motola.