The Withholding Requirements for Independent Contractors
- Posted: December 23, 2019
- Posted by: Travis Lynk
- Last Reviewed: December 23, 2019
The Withholding Requirements for Independent Contractors
In general, companies or individuals in Puerto Rico paying for services rendered must withhold a certain percentage of the amount paid for tax purposes, as stipulated by a December 10, 2018 amendment to Section 1062.03 of the Puerto Rico Internal Revenue Code of 2011. Effective January 1, 2019, individuals and corporations paying for services rendered are obligated to deduct and withhold income tax. However, the exact requirements and specifications differ dramatically for employees and independent contractors, and numerous categories of businesses are exempt. For employees, the situation is more in depth, with the payer required to withhold income tax, Social Security, and any other benefits that may be applicable. For independent contractors, the key requirement is to withhold 10% of the amount paid and send it to the Puerto Rico Treasury Department (Hacienda) through the SURI portal monthly.
Not every payment for services rendered is subject to the withholding requirement. Notably, the first $500 per calendar year paid to a given service provider is exempt.
However, there are other payments that are entirely exempt from the requirement, even if the payment exceeds $500 in a given year:
- Payments to hospitals, clinics, homes for the elderly, and institutions for the disabled (if a laboratory is an integral part of a hospital or clinic, it is also exempt)
- Payments to bona fide farmers
- Payments to contractors or subcontractors rendering construction services (note that architectural, engineering, design, consulting, and similar services are not exempt)
- Payments to the Puerto Rican government, including its agencies, public corporations, and political subdivisions
- Payments for church services
- Payments to nonprofit organizations certified by Hacienda
- Commission payments to direct salespeople of consumer products
- Payments of salaries and wages subject to withholding under Section 1062.01 of the 2011 Internal Revenue Code of Puerto Rico
- Payments to air or maritime carriers or entities providing telecommunication services between Puerto Rico and another region (any payments made by such entities to nonprofits for services such as bookkeeping or reporting the sales of air or maritime tickets are also exempt)
- Payments for insurance contracting
- Payments for printing, for television or radio broadcasts, or to newspapers, magazines, or other publications, including for ad placement
- Payments (lease or sale) for personal or real estate property
- Payments to foreign entities not involved in trade or business with Puerto Rico
- Payments for services rendered outside of Puerto Rico
If the payment includes fees for additional activities, such as travel or machinery, the payer should request that the service provider separate the amounts on the bill to facilitate the calculation of the withholding amount.
Payments to Non-PR Residents
If a payer makes a payment to a non-resident service renderer who is providing services in Puerto Rico without being registered in the Puerto Rico State Department to engage in trade or business in Puerto Rico, the payer must withhold 29% instead of the normal 10%. This percentage is reduced to 20% if the non-resident is a U.S. citizen.
As mentioned in the list above, payments for services rendered outside of Puerto Rico are not subject to the withholding requirement, but the payer must apply the B2B tax of 4%. However, holders of Act 20 are exempt from this requirement.
Payer Responsibilities and Penalties
Payers are required to file the withholding amounts to Hacienda within the first 15 days of the month following the month during which the payment was made. Payers must also file quarterly and annual returns as well as informative declarations for payments not only for all services received but also for rent, advertising, insurance, telecommunications, and Internet and television access.
Payers incur a penalty of $500 for each informative declaration filed late or not at all. If they do not file an informative declaration, they are also unable to deduct the relevant expenses on their tax return.
A 100% exemption from the withholding requirement is available to new businesses. A new business is defined as an individual or entity that is in its first year of service and began operations (in or outside of Puerto Rico) during the calendar year for which it is requesting the exemption.
Individuals or corporations requesting this waiver must meet a series of requirements, including a Merchant Certificate, the authorization to do business in Puerto Rico, an employer’s identification number, and the submission of previously filed tax returns. Individuals must also fill out an affidavit form (Form SC 2678) and prove that they have no debt with Hacienda, have not had any previous business, and are in their first year of rendering services. The additional requirements for corporations are a completed Model SC 2680 to request a Withholding Waiver Certificate and proof that the company owner has not previously rendered the same kind of services.
Corporations that meet certain requirements are eligible for a 6% reduction of the withholding requirement. To be eligible, a corporation or partnership must have filed all income tax returns, have no outstanding debts with Hacienda (or have an approved payment plan for any outstanding debts), have forwarded the amount of net loss in operations, and prove that the withholding will lead to a tax refund or credit.
The exemption renews annually, with Hacienda automatically issuing a certificate through SURI to corporations that meet the requirements. Those who do not receive a certificate can request one at the closest District Collection Office.
Whether a business is fully or partially exempt, it must fill out and submit form SC 2755 for the respective year in order to enjoy the benefits of exemption.
By February 28 of the year following the payments, in addition to informative declarations, payers must file an Annual Reconciliation Return for the amounts withheld from PR residents. For payments made to non-residents, the Annual Reconciliation Return is due by April 15 of the year following the payments.
Payers must also complete and send a copy of informative declaration forms 480.6A or 460.6B to each nonexempt entity to whom they paid more than $500 in the relevant calendar year. If the entity is subject to a full or partial waiver, the relevant number must also be included. All forms and declarations are to be submitted through SURI. Late filing of these forms can result in penalties.