If you’re running a business in Puerto Rico, or thinking about starting one, you’ve probably asked yourself: Does Puerto Rico pay federal taxes to the US?
The answer isn’t a simple yes or no.
Puerto Rico’s unique status as a U.S. territory creates different tax obligations, especially for entrepreneurs. Understanding these differences is essential to avoid compliance issues, maximize credits, and fully take advantage of local and federal incentives.
Here’s what you, as a business owner, need to know.
Puerto Rico’s Unique Tax Landscape
Puerto Rico is part of the United States but is treated differently regarding federal taxation. Unlike states, Puerto Rico has its own tax system, managed by the Departamento de Hacienda.
As a general rule:
- If your business income is earned entirely within Puerto Rico, you don’t pay federal income taxes on it.
- But if you earn income from U.S. sources, employ remote workers in the U.S., or offer services to U.S.-based clients, federal taxes may apply.
So while not everyone pays federal income tax, many business owners do, even if they operate mainly from Puerto Rico.
You Still Pay FICA Taxes
Regardless of your federal income tax obligations, FICA taxes (Social Security and Medicare) are mandatory. Every employer and employee in Puerto Rico must contribute, just like in the mainland U.S.
If you’re self-employed, you’re responsible for the full amount, currently 15.3% of net earnings, which must be reported using IRS Form 1040-SS. Missing this step? That’s a red flag. The IRS considers self-employment tax separate from income tax, and skipping it could lead to penalties.
When Federal Taxes Do Apply to Puerto Rico Business Owners
As a business owner, these are the most common situations where you’ll be expected to file federal tax returns:
- You operate as a self-employed individual or freelancer
- Your business has U.S. clients or customers
- You receive income from investments or real estate in the States
- You have employees or contractors based in the U.S.
- You’re part of a partnership or corporation with U.S. source income
In each of these scenarios, failing to report correctly can trigger audits, penalties, or missed deductions.
The Impact on Incentives and Tax Credits
Here’s something most entrepreneurs don’t realize: To claim certain federal tax credits, like the Child Tax Credit or even specific pandemic-related relief, you may need to file a federal return even if you owe nothing.
This is especially important for LLCs or sole proprietors with low net income. You might be leaving money on the table by not filing.
What About Act 60 and Tax Incentives?
If you’re operating under Puerto Rico’s Act 60 (formerly Act 20/22), the rules get even more complex.
Act 60 offers major tax benefits, such as:
- 4% corporate tax rate for eligible export services
- 100% tax exemption on dividends
- 0% capital gains tax on assets acquired after becoming a resident
But here’s the catch:
These incentives come with strict compliance requirements, including residency rules, annual reports, and business activity tests. And if you generate U.S.-source income, you may still have federal obligations.
Failing to understand where your income is sourced or how the IRS classifies your business activity can put those benefits at risk.
Limited Representation, Limited Benefits
Unlike the 50 states, Puerto Rico has no voting representative in Congress. That has real consequences.
While business owners contribute to Social Security and Medicare, they often receive less federal funding and support. This was clear after Hurricane Maria and during COVID relief distribution.
Bottom line? Puerto Rican entrepreneurs pay into the system but don’t always get proportional benefits. That’s why it’s crucial to take full advantage of the credits and deductions you are entitled to — and make sure your filings are airtight.
3 Key Takeaways for Business Owners
- You may owe federal taxes even if based in Puerto Rico — especially if you earn U.S.-source income or are self-employed.
- Filing IRS Form 1040-SS is required for self-employed individuals and entrepreneurs who pay into Social Security.
- Working with a tax advisor in Puerto Rico is essential to stay compliant, protect your incentives, and avoid missed opportunities.
Need Help Navigating Your Federal Tax Obligations?
At ASGC, we help business owners across Puerto Rico handle the complex intersection between local and federal taxes. Whether you’re running a local shop, a digital agency, or an Act 60 startup, we make sure your tax strategy aligns with your goals.
From IRS filings to Puerto Rico tax incentives, we’ve got you covered.
Need to know if you should file a federal return?
Unsure how U.S. clients affect your tax status?
Want to protect your Act 60 benefits?
Let’s talk. Our tax experts are ready to guide you step by step.
Contact us today to schedule a free consultation.