We have recently contracted several Sole Proprietors(US Citizens residing in Puerto Rico) to clean our facility in San Juan, Puerto Rico. While we are familiar with the standard 1099Misc reporting required for IRS reporting, we have heard that we may be required to deduct a percentage for local PR reporting. Does anyone have any more info on this and does the 1099Misc serve as the proper document to continue using? We are a U.S. based Corporation in the entertainment and manufacturing business.

Should we post this elsewhere? Since there have been no replies in two weeks, are we in the correct forum?

Process Coordinator:

This is the correct forum. The reason I have not answered is because I do not know anything about a special withholding requirement in Puerto Rico for Form 1099-MISC. Most employers use the subcontracting method to avoid the withholding requirements.

However, since I do not practice in PR, I suggest you call (787) 721-2020 and ask. This is the number I got off the Puerto Rico government website under the Department of the Treasury.

We have sent inquiries to the Dept of Treasury in San Juan. We called that number also several months ago and were instructed to send inquiries via mail. Since their response time seems elongated, we decided to chase other options and opinions while we wait. It's always good to have another opinion or set of eyes on a situation.
I'm kind of surprised that being in Atlanta that PR hasn't come up before. With multi-jurisdictional companies like Coca-Cola and Georgia Pacific in the area, I had hoped our situation had risen before.

Here's what we have been told via other sites so far. If you subcontract a US Citizen living in PR, you not only have to give him a 1099Misc(if qualified, sole proprietor) for US reporting, but you also have to deduct 7% withholding from the payment and submit it to PR. I'm sure you can see the twist here. If we report the full amount via the 1099Misc to the IRS and deduct the 7% (which has obviously would have no box for reporting on the 1099 form) then the taxpayer is basically being taxed for money not received or double taxed as it were. As a resident of PR, he falls under their tax umbrella also even if he is not a citizen of PR. We do understand that PR has some allowances for this. We are trying to cover all the bases and get as many opinions as possible.

So you can see where we stand. I've been interacting directly with the IRS for many years and have served as a testing monitor for several of their projects(Tin Matching in particular since 2002 prototype testing began.) This Puerto Rico issue has really just emerged as we moved some business there. Hopefully by the end of 2005, we will get it all under control. I'm meeting with a Compliance group in June and I've already asked that PR be included as a forum topic.

This is a great site. I've jumped around to lots of forums of interest. Keep up the good work.

PRC

PRC:

The amount taxed is the amount designated as "nonemployee compensation". The fact that you withheld 7% to pay PR taxes does not constitute double taxation, just like withholding taxes for the various states with income taxes does not constitute double taxation.

I am not surprised that anyone who earns income in PR has to pay PR taxes. That is consistent with the attitude of most states. However, like withheld state income taxes, the PR withholding will be tax deductible, either as "state/local taxes paid" on Schedule A or as a foreign tax.

I see exaclty what you are saying. Hopefully PR will fulfill our request soon for info on the steps we need to follow, I expect they will be very much as the pattern you describe here.

Thanks again,

Ps. My parents lived in the Druid Hills area of the Atlanta area from 1975 until 1990. They had a business venture located in the Merchandise Mart downtown. I always enjoyed the area when I visited. The Ponce de Leon area (small shops etc... ) was a particuar favorite. I saw Red Skelton at THE FOX many years ago. I haven't been back since 1994. I need to get off my lazy hindparts and come back.

---PRC

Puerto Rico has other advantages I'm sure!

We have employees who are independent contractors in PR. You have to withhold 7% after the 1st $1500 earned from the contractor. You report this on an annual Puerto Rico form 480.6B