Payroll in Puerto Rico‍

Puerto Rico's flexible tax plan — which provides a 4% income tax rate and a federal tax exemption on source income — makes it an alluring place to do business.

While Puerto Rico is a U.S. territory, there are some key differences in managing payroll and compliance with local labor laws and tax regulations. Hiring employees or contractors in Puerto Rico requires a firm understanding of these laws, especially regarding working conditions, employee benefits, payroll compliance, and other crucial factors.

Fortunately, there's an easy way to hire in Puerto Rico while minimizing the risks of different employment laws and payroll processes. You can work with a reliable payroll provider in Puerto Rico like Skuad.

Payroll Process in Puerto Rico

Payroll in Puerto Rico can be a long and tedious procedure that includes the following steps:

• Gather employee tax information and have each employee fill out Form 482 and Form 1040.
• Plan your payments on a weekly, bi-weekly, or semi-monthly schedule.
• Keep records of attendance and establish an attendance policy that tracks the time an employee arrives at work, carries out their duties, takes breaks, and leaves for the day.
• Calculate net earnings and remove Social Security and Medicare deductions.
• Pay your workers and ensure that the amount is accurate and sent on time.
• File your taxes and remit deductions to the U.S. Government via the IRS, the Government of Puerto Rico, or both.

Speak to a Skuad agent to learn more about getting help when filing taxes in Puerto Rico.

Payroll Management in Puerto Rico

A good payroll management structure is essential to keeping your payroll process efficient and compliant. Payroll management involves calculating employee gross and net earnings, tax commitments, and deductions. Payroll management in Puerto Rico involves the following key features:

• Monitoring every process in payroll
• Tracking the payroll process
• Collecting and maintaining accurate employee data
• Properly issuing payment when due
• Resolving payment issues
• Meeting legal obligations
• Keeping a record of financial endeavors and transactions

Payroll Processing in Puerto Rico

Payroll processing in Puerto Rico involves essential steps that ensure every employee receives their rightful earnings. There are various methods of processing payroll in Puerto Rico, and they mainly depend on the size of your company and your bandwidth. The payroll officer or HR manager must make sure all payments are accurate, compliant, and timely.

Payroll Compliance in Puerto Rico

Payroll compliance in Puerto Rico is crucial to running an ethical business. U.S. Fair Labor Standards Act (FLSA) and the Puerto Rico Department of Labor and Human Resources (PRDLHR) ensure that employees get fair compensation from employers. Employers must comply with these laws, which protect employees from discrimination, harassment, and inequality. If your company is found to be non-compliant, you may incur hefty fines or be forced to cease business operations in Puerto Rico altogether.

Payroll Components in Puerto Rico

When processing and managing payroll in Puerto Rico, you need to be aware of all statutory requirements around paid leave, working conditions, and benefits.

Leave

Maternity leave

Puerto Rican workers are entitled to eight weeks of maternity leave — four weeks before and after delivery. This can extend to 20 weeks for those with post-childbirth complications. Maternity leave in Puerto Rico also covers adoptive mothers of children under six years.

Paternity leave

Fathers can take up to eight weeks of paid paternity leave, including adoptive fathers of a child of up to five years. This paid leave becomes 15 days if the child is six years old. Male employees also get up to 15 days of paternity leave if they are co-adopting a minor.

Sick leave

Employees have a right to 12 days of paid sick days within a 12-month calendar year. This sick leave may extend by five days for COVID-19 patients.

Annual leave

Here's a breakdown of the eligibility criteria for annual leave:

• Employees working for an establishment between one and five years may have between six and nine days off.
• People working for a company between 5 and 15 years get up to 12 days of annual leave.
• Employees working for over 15 years have a right to 15 days of annual leave.

Holidays

Employees in Puerto Rico are entitled to paid days off during national holidays. The country observes more than 15 federal holidays, including the following U.S. bank holidays and local holidays:

• New Year's Day
• Día de Reyes
• Natalicio de Eugenio María de Hostos
• Presidents Day
• Día de la Abolición de Esclavitud
• Good Friday
• Natalicio de José de Diego
• MLK Day
• Memorial Day
• Fourth of July (Independence Day)
• Natalicio de Don Luis Muñoz Rivera
• Constitución de Puerto Rico
• Natalicio de Dr. José Celso Barbosa
• Labor Day
• Veterans Day
• Día del Descubrimiento de Puerto Rico
• Thanksgiving
• Christmas day
• General Elections Day

Working conditions

Working hours

The standard working hours for a full-time employee in Puerto Rico are eight hours per day and 40 hours per week. Employees are entitled to at least an eight-hour break after an eight-hour shift or workday.

No employee must work for more than five consecutive hours without a one-hour meal break, usually unpaid.

Overtime

Overtime hours are calculated immediately after the normal eight-hour day or 40-hour week. Employers must pay overtime workers 1.5 times their original, hourly pay when this occurs. This also applies to individuals working on holidays. Working overtime is not mandatory and must be honored per the employment contract terms. Overtime work is governed by the 1938 Fair Labor Standards Act (FLSA) of Puerto Rico. This applies to companies that make over $500,000 annually.

Payroll

In Puerto Rico, employment laws permit employers to pay employees either weekly, bi-weekly, or semi-monthly. Employers will pay all employees in American dollars.

Minimum wage

Workers in Puerto Rico earn a relatively high minimum wage compared to those in other nearby countries. The minimum wage of every employee under the Fair Labor Standards Act is $8.50, starting from January 1, 2022, except for student workers or tipped workers.

Payment type

Employers can choose their preferred payment methods, whether that's bank transfers or paychecks. Employers are not obligated to grant workers time off to cash their checks. However, any significant setback in cashing a check without fault from the employee will result in compensation. According to labor laws, employees receive an additional 100% of their pay as compensation.

13th salary

In December, paying staff an additional (13th) month's salary is mandated by law. This is 2% of their salary or $600 for employers with more than 20 employees. Companies with less than 20 employees on their payroll may pay 2% or $300.

Tax and income deductions

Employers are mandated by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) to pay taxes on their and their employees' earnings.

While non-residents are only taxed for income earned in Puerto Rico, residents are taxed for earnings within Puerto Rico and anywhere else. Here's a breakdown of the personal income tax rates for employees:

• 0%: $9,000 or less
• 7% of the excess over $9,000: $9,000-$25,000
• 14% of the excess over $25,000, plus $1,120: $25,000-$41,500
• 25% of the excess over $41,500, plus $3,430: $41,500-$61,500
• 33% of the excess over $61,500, plus $8,430: excess of $61,500

A bona fide resident who conducts their business locally may enjoy certain coveted benefits. These benefits are for specific business types described as "eligible services" under Export Services Act (Act 20):

• 0% property taxes
• 0% dividends from export services
• 4% fixed income tax rate

Employers and employees are also expected to remit these deductions:

• Medicare: 2.9% split equally between employer and employee (plus an additional 0.9% tax withheld from annual earnings over $200,000)
• Social security: 12.4% shared equally among employer and employee
• Federal unemployment: 6% (paid by the employer only and not deducted from an employee's salary)
• State unemployment: Only employers pay between 1.4% and 5.4% (2.9% for new employers)

The national standard VAT in Puerto Rico is 11.5%.

Employee Benefits

Every individual working for an employer in Puerto Rico is entitled to certain benefits. Employee benefits are any monetary or non-monetary compensation an employer provides besides their basic salary.

In Puerto Rico, employees are typically granted the following benefits:

• Temporary Non-Occupational Disability Insurance (SINOT)
• 13th-month salary
• Paid sick leave
• Christmas cash bonus
• Insurance against injuries sustained at work

Working with a payroll expert can help you manage employee-related obligations, especially employee benefits. Speak to a Skuad agent today to discover the winning blueprint for consistently providing timely benefits for your staff.

Start Building Your Team in Puerto Rico Today

Puerto Rico has quickly bounced back from recent natural and economic disasters, making it an ideal place to hire employees for your business.

Puerto Rican law permits you to process payroll in Puerto Rico by:

• Yourself or your internal staff
• Hiring a freelance payroll specialist or accountant
• Partnering with a payroll services provider

Partnering with a reliable payroll provider like Skuad comes with several benefits:

Save time and money

A 2019 National Association of Professional Employer Organizations (NAPEO) study found that working with a payroll provider like Skuad in Puerto Rico can save over $1,700 for each employee you hire.

While you focus on other important business operations, let Skuad handle your payroll responsibilities.

Hire internationally with ease

Skuad can help you hire and manage some of the best talents in Puerto Rico and around the globe — in 160 countries worldwide.

Stay payroll compliant

Our tax filing services help make running your payroll in Puerto Rico easy and compliant. We'll make sure you file all necessary Puerto Rico tax forms and stay 100% compliant.

Want to start hiring workers in Puerto Rico? Request a Skuad team demo today to see what Skuad can do for your company.