On October 22, 2018, the Puerto Rico Department of the Treasury (the “PR Treasury”) issued Publication 18-03, which makes tax reporting and tax deadline changes for certain severance payments.
By way of background, Puerto Rico's Unjust Dismissal Act (Act 80) provides a list of reasons for "just cause" employment dismissals. An employee who is terminated without just cause is entitled to compensation set by the Act 80. Act No. 4 of January 26, 2017, known as the Labor Transformation and Flexibility Act (Act 4), amended the Puerto Rico Internal Revenue Code to exclude from an individual's gross income “compensations or severance pay received by an employee by reason of dismissal, without the need to determine just cause thereof, up to a maximum amount equal to the severance pay that the employee may receive pursuant to Act. No. 80 (Act 80 payments).” Note that the tax exemption granted through Act 4 includes any severance pay received by an employee, up to the maximum amount that an employee could receive pursuant to Act 80. Due to the change in the Puerto Rico income tax treatment of Act 80 payments brought by Ac 4, the PR Treasury revised form 480.6D for the tax year 2017 to include Act 80 payments as exempt income. Therefore, Act 80 payments made during tax year 2017 needed to be reported as wages on form 499R-2/W-2PR (“W2PR”) for purposes of FICA (Social Security and Medicare), and as exempt income on form 480.6D for purposes of Puerto Rico income taxes.
Pursuant to Publication 18-03, which provides electronic transfer filing instructions for form W2PR, for tax year 2018, Act 80 payments will no longer be reported as exempt income on form 480.6D, but instead, as “exempt salaries” on form W2PR. Thus, Act 80 payments made during tax year 2018 will be reported only on form W2PR, for both FICA and Puerto Rico income tax purposes, eliminating the double reporting for such type of payments.
It is important to note that the tax reporting change has also resulted in a change to the tax reporting deadline for Puerto Rico income tax purposes. Act 80 payments made during tax year 2017 were reported on form 480.6D for Puerto Rico income tax purposes; the deadline for the 480.6D tax reporting was February 28, 2018. Due to the change in tax reporting made for tax year 2018, Act 80 payments made during tax year 2018 will now be reported, for both FICA and Puerto Rico tax purposes, on form W2PR by January 31, 2019 (i.e., the deadline to file form W2PR). Since the 480.6D form will no longer be needed for reporting Act 80 payments for Puerto Rico tax purposes, the February 28, 2019 deadline for form 480.6D filing will no longer be applicable. Failure to comply with the January 31, 2019 deadline could result in penalties.
Employers that made Act 80 payments during 2018 (or who are planning to make Act 80 payments by year end) should take the necessary steps to comply with these new reporting and deadline changes.