Puerto Rico Treasury Secretary Francisco Parés-Alicea issued a call to self-employed individuals and services companies to review the “Optional Contribution” as an alternative when filing this year’s tax return.
“This is one of the major changes approved in the 2018 Tax Reform and an alternative that could facilitate compliance with tax obligations in a simpler way,” he said.
The “optional contribution” is a tax on gross income, with no deductions and no personal exemptions or dependents, payable — at the taxpayer’s choice — at a preferential rate ranging between 6% and 20%, depending on the total gross income generated during the taxable year.
“Every taxpayer engaged in the provision of services, including individuals who are self-employed, corporations and conduit entities may choose the optional contribution and fulfill their tax liability at a much lower tax rate than the regular income tax rate,” he said.
“For individuals the maximum income tax rate is 33% and in the case of corporations, it is 37.5%. The optional contribution can be as low as 6%. The maximum optional contribution rate applicable to taxpayers whose gross income exceeds $500,000 is 20%,” Parés-Alicea said.
There are about 173,000 taxpayers who are self-employed on the island and of these, 90% generates less than $100,000 in annual gross income, so most are taxed under the 6% optional contribution rate, he said.
To choose it, the income should be substantially generated from the provision of services.
“That earned income must represent at least 80% of the total gross income received during the taxable year. Moreover, these taxpayers should not have an outstanding tax payment balance,” he said.
Any individual who is eligible to opt into the optional contribution for the 2019 tax year and wants to benefit from it must comply with paying Treasury the total tax determined under this option by no later than Jan. 31, 2020 — the deadline set by the Internal Revenue Circular Letter 20-02.