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To streamline the process that employers with operations in Puerto Rico (P.R.) need to follow to comply with their U.S. payroll tax obligations, the IRS recently replaced the tax forms that such employers must use to report FUTA and FICA taxes on wages paid to their P.R. employees. Previously, employers used some P.R.-specific tax forms to report FUTA and FICA taxes on P.R. wages. Beginning 2024, employers must use exactly the same tax forms that are used in the U.S. (i.e., Form 940 for FUTA and Form 941 for FICA).
Likewise, the employer’s payroll tax guide specific to operations in P.R. (IRS Publication 179) has been eliminated. Employers with operations in P.R. must now refer to the regular U.S. employer’s tax guide (IRS Publication 15) for information on their U.S. payroll tax obligations and related compliance process. On March 26, 2024, the IRS published its latest announcement regarding this matter, which is found at https://www.irs.gov/forms-pubs/certain-forms-instructions-and-publications-used-by-taxpayers-in-puerto-rico-have-been-replaced
Background
Wages that private employers operating in P.R., even U.S. companies, pay to their local employees are generally exempt from the withholding of U.S. income tax at source [Code § 3401(a)(8)(C)]. Instead, such wages are subject to P.R. income tax withholding [PRIRC § 1062.01(a)(1)]. The amount withheld must be deposited with the Puerto Rico Department of the Treasury (“Hacienda”) monthly, if not more than $50,000 of P.R. income taxes were withheld on wages during the lookback period (i.e., the twelve-month period ending on June 30th of the immediately preceding calendar year); by-weekly, if more than $50,000 were withheld during the lookback year; or daily, if $100,000 or more are withheld during a single day. P.R. tax withholding on wages is reported to Hacienda by filing local tax Form 499R-2/W-2PR (i.e., the P.R. W-2) by January 31st of the following year. The local W-2 must also be provided or sent – by mail or electronically – to the corresponding P.R. employees within seven days of its filing with Hacienda. P.R. employees generally do not receive a U.S. Form W-2 in connection with their wages for services rendered within the Island.
Both the deposit of P.R. income tax withholding and the filing of the local Form W-2 are completed electronically through Hacienda’s online portal, Sistema Unificado de Rentas Internas or “SURI”; https://suri.hacienda.pr.gov/_/ More information on the withholding of P.R. income tax at source on wages is available in Hacienda’s Employer’s Guide, https://hacienda.pr.gov/sites/default/files/tablas_retencion_2017_2.pdf
On the other hand, wages paid to P.R. employees are subject to the payment and/or withholding of the same FUTA and FICA taxes that apply in the U.S. [Code § 3306(j) for FUTA and Code § 3121(e) for FICA]. The corresponding taxes must be electronically deposited with the IRS, not Hacienda, through the Electronic Federal Tax Payment System or “EFTPS”, and the same payment and reporting due dates apply.
Previously, employers filed Form 940-PR with the IRS to report their FUTA tax payments on wages paid to P.R. employees. Beginning with the 2023 filing (i.e., the one due January 31, 2024), such reporting must be done using the regular Form 940. Similarly, beginning with the Q1-2024 filing (i.e., the one due April 30, 2024), employers no longer use Form 941-PR to report their FICA tax payments and withholdings on P.R. wages. Instead, employers must now use the regular Form 941. In summary, the same U.S. tax forms are now used to report FUTA and FICA taxes on wages paid to U.S. and P.R. employees.
