Act 135 of August 7, 2014 amended the Puerto Rico Internal Revenue Code (PR Code) to exempt from taxation up to $40,000 of salary income earned by a “young employee.” PR Code defines a “young employee” as an employee between the ages of 16 and 23. The Act 135 exemption is in effect for all taxable years through December 31, 2019, including this most recent tax year.
On February 5, 2015, PR Treasury issued Tax Policy Informative Bulletin No. 15-03 (IB 15-03), which provides guidance relative to the Act 135 exemption. Based on IB 15-03, employers’ obligations relative to this exemption are as follows:
A young employee (between the ages of 16 and 26) receiving a salary-based income can claim a $40,000 exemption. Such exemption must be included in box 16 on PR Treasury Form 499R-2/W2-PR - Withholding Statement (PR-W2). In addition, the employer is required to add the exemption code “E” in box 16A of the eligible employee’s PR-W2, to indicate that the exemption corresponds to the benefits granted by Act 135. Any salary in excess of $40,000 must be included as income in the corresponding box (i.e., box 7 (wages), box 8 (commissions), box 9 (allowances) or box 10 (tips)). Therefore, for PR Treasury to recognize the exemption, the exempt amount must be properly reported on the eligible employee’s PR-W2, that is, the amount earned by the eligible employee (up to $40,000) must be reported in boxes 16 and 16A, and the exemption code “E” must be provided.
The Act 135 exemption is also applicable for income earned by a young employee from personal services rendered and/or self-employment. In such cases, the eligible person will be responsible for independently claiming the exemption in his or her income tax return.
Employers Must Take Immediate Action
The Act 135 exemption is in effect for taxable year 2014, even though PR Treasury issued the IB 15-03 guidance only a few days ago. Employers were required to provide the PR-W2s to its employees by January 31, 2015. As a result of the PR Treasury’s “late guidance” on the issue, employers must now immediately correct the 2014 PR-W2s for those eligible employees, in compliance with the IB 15-03 guidance. Failure to correct the PR-W2s for those eligible employees will result on the non-recognition of the exemption. Note that the PR Treasury will not recognize the exemption unless it is properly reported in the PR-W2s, in accordance with IB 15-03.