Puerto Rico Employees Tax Setup and Reporting
This article has been updated for 2024 reporting.
This article covers the following 3 common situations for using ReadyPay to set up and report Federal taxes for employees who live in Puerto Rico.
- Employees who were bona fide residents of Puerto Rico during the entire tax year -and- who earn income from sources inside of Puerto Rico.
- Employees who were bona fide residents of Puerto Rico during the entire tax year -and- who earn income from an employer on the US mainland.
- Employees who moved between the US mainland and Puerto Rico during the year and thus were partial-year residents of Puerto Rico.
Read this article carefully before doing any setup. Each situation has multiple required steps. Failure to complete the setup fully will result in inaccurate reporting.
There are other employment situations to consider that are beyond the scope of this article. For additional information, review IRS topic numbers 901, 902, and 903 at https://www.irs.gov/taxtopics. You can also find information at the Puerto Rico Department of Treasury at http://www.hacienda.pr.gov/.
Situation 1
Employees who were bona fide residents of Puerto Rico during the entire tax year -and- who earn income from sources inside of Puerto Rico.
This process follows a method for collecting and reporting Federal taxes and creating annual employee withholding forms that is different than the method used for residents of the US mainland. Complete all the steps for this situation before the employer pays any Puerto Rico employee.
1. Add and configure the company with the Federal and State tax codes
- End client companies use the standard Federal tax codes.
- End client companies use the "PR" SITW tax code.
- End client companies use the PRSUI (and related) tax codes.
- In Master Company Setup > Taxes > PR > Return > Other1 enter the EFILE Confirmation Code (you must file your eFile first per the state and then add the confirmation code you get in return in this field).
- In Master Company Setup > Taxes > PR > Return > Other2 enter the Employment Code (Return will default to R. Valid values are A, H, M, X, F, R, or Q).
2. Add and configure the employee with Puerto Rico versions of the Federal tax codes
Most employees who work and reside in Puerto Rico do not file a Federal income tax return with the IRS. Also, PR employees will not receive a Form W-2.
- Add FUTA, SS, MED, MED-HI, SS-R, and MED-R to the employee. For 943 filers, set up FITW43, SS43, MED43, MED43-HI, SS43-R, and MED43-R. DO NOT add FITW or FITW43.
- Add the SITW tax code PR to the employee.
- In Employee > Miscellaneous > user8 add the employee's Control Code. This number is assigned by the Puerto Rico Department of the Treasury.
3. Map Earnings, Deductions, and Taxes to Code Groups for Form 499R-2/W2-PR
Form 499R-2/W2-PR is the annual employee withholding statement for Puerto Rico. ReadyPay uses a code group method because Puerto Rico continually updates which information goes in each box code. ReadyPay uses descriptive box codes vs numbered box codes in RPD for the code group names. The Code Groups must be added to the company before processing Form 499R-2/W2-PR.
| Code Group ID | What the Code Group is used for |
|---|---|
| W2PR_ERHealth | Cost of employer-sponsored health coverage |
| W2PR_Charity | Charitable Contributions |
| W2PR_Wages | Wages |
| W2PR_Commissions | Commissions |
| W2PR_Allowances | Allowances |
| W2PR_Tips | Tips (include all Tip codes) |
| W2PR_ExpenseBenefits | Reimb. Expenses and Fringe Benefits |
| W2PR_GovFund | Governmental Retirement Fund |
| W2PR_CODAPlans | Contributions to CODA PLANS |
| W2PR_DoubleYourMoney | Contributions to the Save and Double your Money Program |
| W2PR_SSTips | Tips (include all Tip codes) |
| W2PR_USSTaxonTips | Uncollected Social Security Tax on Tips. If this applies, you must track with a separate code or do an end-of-year adjustment run. |
| W2PR_UMEDTaxonTips | Uncollected Medicare Tax on Tips. If this applies, you will have to track with a separate code or do an end-of-year adjustment run. |
| W2PR_ExemptSalaries1 | When the amount is > 0, the Exempt Salaries Code shown in Box 16 will use the Code Group's description. |
| W2PR_ExemptSalaries2 | When the amount is > 0, the Exempt Salaries Code shown in Box 17 will use the Code Group's description. |
| W2PR_ExemptSalaries3 | When the amount is > 0, the Exempt Salaries Code shown in Box 18 will use the Code Group's description. |
| W2PR_PhysicianBox | Companies that pay qualified physicians must have earning codes that are used exclusively to pay the physicians. Then, add those Earning Codes to the Code Group. When the amount > 0 then Box A will be checked. |
| W2PR_DomesticBox | Companies that pay domestic services employees must have earning codes that are used exclusively to pay those employees. Then, add those Earning Codes to the Code Group. When the amount > 0 then Box B will be checked. |
| W2PR_AgriculturalBox | Companies that pay agricultural labor employees must have earning codes that are used exclusively to pay those employees. Then, add those Earning Codes to the Code Group. When the amount > 0 then Box C will be checked. |
| W2PR_MinisterBox | Companies that pay a qualified Minister of a church or member of a religious order must have earning codes that are used exclusively to pay those employees. Then, add those Earning Codes to the Code Group. When the amount > 0 then Box D will be checked. |
| W2PR_HealthProBox | Companies that pay Health professionals (other than physicians) must have earning codes that are used exclusively to pay those employees. Then, add those Earning Codes to the Code Group. When the amount > 0 then Box E will be checked. |
| W2PR_OtherBox | Companies that pay all other types of employees must have earning codes that are used exclusively to those employees. Then setup those Earning Codes in a Code Group. When the amount > 0 then Box F will be checked and the Code Group description will appear on the line to the right of Box G. |
| W2PR_DirectEmploy | Companies that pay Direct employment wages. See agency instructions for details. Earning codes selected in this code group must have the worked hours for those earning codes totaled. The Worked checkbox on the earning code must be checked to be included in the total. The state requires an EIN to go with the hours in some cases. Configure the User7 field in Company Setup > EE User Fields tab for the employee's EIN. Then enter the employee's EIN in that field on the employee's Miscellaneous tab. |
| W2PR_HRA | Not used on the paper forms. Only used in eFile. |
4. Pay the employees
Paying employees with the correct earning codes is crucial to having correct withholding statements at year end. Taslar recommends periodic review throughout the year. Corrections will require adjustment runs.
5. Process the employee Withholding Statements
Producing Forms 499R-2/W2-PR for the employees is done from the System > Tax > Filings screens. In the Return field, select one of the task codes PRW2 (paper forms) or PRW2EFILE (produce the eFile).
- Your service bureau's SSA ID needs to be stored in the Tax Preparer record (Preparer Information tab > Details subtab > Reserved1 field).
- No form setup is required in System > Setup > W2/1099 Form Setup. The year end screens are not used to produce employee statements.
Situation 2
Employees who were bona fide residents of Puerto Rico during the entire tax year -and- who earn income from an employer on the US mainland.
You will report the PR employee wages and OASDI taxes on the standard Form 941/943. Creating annual employee withholding forms (499-r2/W2-PR) for the bona fide residents of Puerto Rico is done manually. Prior to year end, you must obtain a fillable PDF form to complete for the Puerto Rico employees. Complete all the steps for this situation before the employer pays any Puerto Rico employee.
1. Add and configure the company with the standard versions of the Federal tax codes
- Add the tax codes FITW, SS, MED, MED-HI, SS-R, and MED-R to the company. For 943 filers, set up FITW43, SS43, MED43, MED43-HI, SS43-R, and MED43-R. Use the EIN Assistance button for each tax code for additional information about how to set up ReadyPay to process the employer's returns.
- Add the tax code FUTA to the company.
2. Add and configure the standard versions of the Federal tax codes to use with the Puerto Rico employees
For most employees who work and reside in Puerto Rico, they do not file a Federal income tax return with the IRS. You must block the FITW and FITW43 tax codes on those employees so they do not withhold any tax.
- Add FITW to the PR employee and block the tax.
- Add SS, MED, MED-HI, SS-R, and MED-R to the employee. For 943 filers, set up FITW43, SS43, MED43, MED43-HI, SS43-R, and MED43-R.
- Add the tax code FUTA to the employee.
- In Employee > Miscellaneous > user7 add the employee's Control Code. This number is assigned by the Puerto Rico Department of the Treasury.
3. Map Earnings, Deductions, and Taxes to Code Groups for Form 499R-2/W2-PR
Even though you will produce Forms 499R-2/W2-PR manually, establishing the code groups can assist you with determining the amounts that will populate the form's boxes. Prior to year end, you must obtain a fillable PDF form to complete for the Puerto Rico employees.
- Use the same code groups listed in Step 3 of "Situation 1" above.
- Separate earning codes are needed for paying wages to the Puerto Rico residents vs. residents of the US mainland. Using the same earning codes for both groups will result in Forms 499R/W2-PR being generated for both groups.
4. Pay the employees
Paying employees with the correct earning codes is crucial to having correct withholding statements at year end. Taslar recommends periodic review throughout the year. Corrections will require adjustment runs.
5. Process the Puerto Rico employee Withholding Statements
Producing Forms 499R-2/W2-PR for the employees is done manually. You must obtain a fillable PDF form to complete for the Puerto Rico employees.
No form setup in System > Setup > W2/1099 Form Setup is required. The year end screens are not used.
6. Process the Form W-2 employee Withholding Statements for residents of the US mainland
Situation 3
Employees who moved between the US mainland and Puerto Rico during the year and thus were partial-year residents of Puerto Rico.
Situation 3 follows the steps in Situation 2. The biggest difference is you must produce both a Form W-2 and Form 499R/W2-PR for each employee who meets the situation's criteria. To do so, you will terminate the employee when they are no longer a resident on the US mainland. You will then hire the employee under a different employee ID number when they become a resident of Puerto Rico.
Questions?
Contact your Payroll Service Provider.