Pursuant to the current income tax withholding rules issued by the Puerto Rico Department of the Treasury, there are specific income tax withholding rules applicable when a Christmas bonus is paid, which differ from those applicable to regular wages.
The special rules provide that when the Christmas bonus does not exceed $600, the employer will not make any withholding. The bonus amount, however, will still be subject to FICA and Medicare withholdings, unless the employee’s earnings have already reached $118,500, the maximum compensation amount from which FICA is withheld.
For Christmas bonuses in excess of $600, but not in excess of $1,500, the employer must withhold a 7% tax from the total amount of the bonus, and FICA and Medicare.
On the other hand, when paying Christmas bonuses in excess of $1,500, employers may use one of the following three methods to determine the applicable withholding tax:
- First Method – the employer determines the wages the employee received during the year, up to the date closest to the bonus payment. The amount of the bonus is added to this wage amount. The tax to be withheld is computed upon this combined amount as if it were an annual payroll period. The tax previously withheld, if any, is subtracted from this amount, and the result will constitute the total tax to be withheld upon the bonus payment.
- Second Method – the employer determines an effective withholding rate for each employee. This rate will be the ratio that the total tax withheld during the payroll period closest to the bonus payment bears to the total employee’s salary. The employer multiplies this rate by the bonus total.
- Third Method – the employer determines the withholding amount pursuant to the “alternative method” established under Article 1062.01(d)-1. (as described in the Employer’s Manual issued by the Puerto Rico Department of the Treasury).
Based on the above, employers that have already paid bonuses and withheld income taxes for bonuses of $600 or less will have to correct the error and should contact legal counsel to decide on the proper course of action. This will also apply to any withholdings that have not followed the special rules described above, and have therefore affected the amount of the employee’s bonus.
Note that although the Puerto Rico Department of the Treasury has recently issued new withholding rules applicable for wages paid after December 31, 2016, the rules applicable to the Christmas bonus remain the same.