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Comprehensive Guide to Payroll Management in Puerto Rico

Puerto Rico is a small territory on the Caribbean Islands that comes under the jurisdiction of the United States of America. It is an ideal country for setting up a business as it has proximity to some of the strongest economies like the United States, Mexico, Canada, etc. Hence, companies can access a vast market and easily expand their operations to neighboring countries.

The country is considered a middle-income economy, ranking 65th out of 190 countries in the Ease of Doing Business Index 2020 as per the World Bank Report. The country’s GDP was recorded to be $103.14 billion in 2020, and the nation is actively seeking foreign investments in different forms. Hence, several international companies are now interested in setting up their operations in Puerto Rico.

Puerto Rico is a cosmopolitan country wherein people speak various languages. Hence, you can set up a company in Puerto Rico and address the market with unique product offerings.

While you incorporate a company in Puerto Rico, you need to develop a comprehensive payroll policy that addresses the needs of all the employees associated with the organization. When you create a payroll system in Puerto Rico, you must adhere to all the federal and local laws of the country.

Read on to understand the in-depth payroll policies and procedures in Puerto Rico that goes into creating a compliant payroll system for the company.

How Is Payroll Calculated in Puerto Rico?

Every company uses software or a tool to calculate employees’ payroll in Puerto Rico. However, few companies manually conduct the entire process. Therefore, the payroll calculation will depend on your company’s chosen calculation method.

Before calculating the amounts for different payroll contributions, you must develop a robust payroll system in Puerto Rico.

The payroll calculations in Puerto Rico involve calculating the components like gross salary, net pay, overtime, allowances, etc. Also, you must check the company policy to ascertain the number of allowances you can pay employees.

The payroll calculation process followed for all the employees is relatively standardized. Hence, there is no scope for discrimination in the process. Also, when calculating the employees’ payroll, you must check the federal laws on payroll and ensure that you adhere to them.

Important Elements of Salary Structure in Puerto Rico

The salary structure in Puerto Rico comprises several elements, including

  • Cost to Company: The cost to the company (CTC) is the figure that represents the total amount that the company bears to onboard a particular employee. The CTC of an employee includes all the components of the salary, like gross pay, net pay, allowances, basic pay, etc. Hence, it is an overarching figure that encompasses all payroll components.
  • Gross salary: The employee’s gross salary represents the employee’s annual earnings.  It contains all the elements of the employee’s pay except the deductions.
  • Net salary: The net salary is also referred to as the employee’s take-home salary. The net pay is credited to the employee’s bank account after all the mandatory deductions like taxes, social security contributions, etc.
  • Basic salary: The basic salary of an employee is the most important component of the salary structure. The basic salary is a base for calculating other salary components. Hence, it constitutes about 30-45% of employees’ total pay. The company fixes the basic salary based on the industry standards and the position parity within the company.
  • Bonus: All employees in Puerto Rico are entitled to an annual bonus. The yearly bonus equals 6% of the first $10,000 salary. Therefore, the maximum amount that the employees in Puerto Rico receive as a bonus is $600.
  • Allowances: Apart from the basic salary, the companies have several allowances to help the employees bear the additional costs. Employees are entitled to different kinds of allowances based on their compensation structure and the level in the organization. Some standard allowances given to employees in Puerto Rico are:
    1. Meal allowances
    2. Food allowances
    3. Mobile recharge allowances
    4. Cab allowances

How to Set Up a Payroll in Puerto Rico?

Setting up a payroll system in Puerto Rico is relatively straightforward if you follow the simple steps below:

  • Step 1: Choose the company type you want to establish in Puerto Rico. Once you choose a type, you can select the company’s name and fill out the incorporation to register the company.
  • Step 2: Now, curate the Articles of Association of the company and bylaws, and submit them to the Registrar. You must also collect the employer identification number and the certificate of incorporation from the relevant authorities.
  • Step 3: Ensure you register the company with applicable tax and social security authorities to make all the mandatory payments on time.
  • Step 4: Set up a local bank account in Puerto Rico. You will use this bank account to make all payroll-related payments.
  • Step 5: Go through the employees’ timesheets and calculate their gross pay. Verifying timesheets helps to calculate overtime payments, which are an essential part of gross pay.
  • Step 6: Now, calculate the taxes and the social security contributions and deduct them from the gross pay to calculate the employee’s net pay.
  • Step 7: Select a payroll system that will aid you in processing your payroll in Puerto Rico.
  • Step 8: Now, finalize the payroll cycle by checking any federal requirements you might have missed.

When you set up a payroll system, you must adhere to the payroll rules and regulations in Puerto Rico. If you are facing issues understanding payroll laws, contact a PEO service provider like Multiplier. They have a payroll compliance checklist in Puerto Rico to ensure you do not miss any steps while setting up payroll in the country.

A Step-by-step Process of Payroll Processing in Puerto Rico

Setting up payroll in Puerto Rico is complicated as it includes various steps. Here is the step-by-step guide to setting up a payroll in Puerto Rico:

Step 1: Choose a payroll system:

Puerto Rico offers different payroll systems. Hence, you must have a clear idea about the kind of system you need and decide on a budget. Here are some payroll systems that Puerto Rico offers:

  • Manual payroll: Numerous sizable businesses in Puerto Rico use a manual payroll system. Companies must onboard employees to take care of the manual payroll process in the manual payroll system. This option is ideal for larger organizations with the resources to hire a dedicated HR team and train them.
  • Outsourcing: You may also outsource a different vendor to handle the company’s whole payroll system. You must, however, confirm that the third party is abiding by all applicable laws and compliance standards.
  • Payroll software: Payroll software that handles the payroll with little to no human participation is an ideal option if you want your system to take care of all the aspects of the payroll system.

Step 2: Chalk out a payroll policy

  • Several laws govern payroll in Puerto Rico. These details must be spelled out in the company’s payroll policy and shared with all the employees.
  • It would help if you made a payroll policy that addresses every facet of the company’s payroll, such as the pay structure, payment schedule, etc.

Step 3: Add the employees to the payroll system

  • As soon as you choose a payroll system for your company, you should start adding all the employees to the payroll system.
  • You can register the employees by providing basic details like their name, phone number, address, etc.
  • The components of the compensation structure and their corresponding amounts must also be added to the system.
  • Additionally, include the payroll cycle’s specifics. In Puerto Rico, payroll is typically processed once every month. At the end of the month, employees are paid their salary and other perks.

Step 4: Verify the timesheets and calculate the gross pay

  • You need to verify the employees’ timesheets to compute their overtime payments.
  • Once you have the overtime amount, you can calculate employee salaries.
  • Now, factor in all the deductions and subtract them from the amount you calculate as the employee’s gross pay.

Step 5: Reconcile the payrolls

  • Try to cross-check every piece of information that you add to the system.
  • Add the correct ledger detail for every transaction and try to spot errors. If you spot any errors, attend to them immediately.

Step 6: Distribute the pay slips

  • Now, create pay slips for every employee who works for the organization.
  • The pay slip can be provided to the employee in either hard copy or digital form. Your annual salary payments will be represented by the number of pay stubs you receive.

All employees must have an active bank account to receive salary payments. The company can help employees set up these accounts by collaborating with a Puerto Rican bank. Once you have a bank account in place, you will understand the payroll process in Puerto Rico quite easily.

Payroll Contributions

Multiple payroll contributions are a part of the payroll system in Puerto Rico. You must try to adhere to the minimum requirements of the components while calculating these contributions.

Minimum wage

  • Every employer in Puerto Rico must pay their employees an amount equivalent to the minimum wage decided by the Government.
  • Currently, the minimum wage for employees in Puerto Rico is $8.50 per hour. The salary will increase to $9.50 per hour in July 2023.

Overtime

  • If the employees in Puerto Rico work beyond their regular hours, they are entitled to overtime pay.
  • If an employee performs any activity after the 40 hours a week are over, the employee becomes eligible for overtime pay.
  • The employee’s overtime pay is equivalent to 150% of the employee’s regular pay. The rate of overtime payments is also applicable to people who work on public holidays.

Employer contribution

Employers in Puerto Rico contribute to different social accounts for the welfare of their employees. The company makes these contributions directly to the accounts that handle these funds.

ContributionRate
FICA Social Security6.2%
FICA Medicare1.45%
FICA Medicare for above $ 250,000 for couples and $125,000 for adults0.9%
FUTA or Federal Unemployment Tax Act0.60% – 6%
SUTA or State Unemployment Tax1.40% – 5.40%
SUTA New Employer Tax2.90%

Hence, the employer makes a total contribution of around 17.95% to 22.85%.

Employee contribution

The employees also contribute a part of their salary to social security accounts. However, the employer deducts this amount from their salary and pays directly to the relevant authorities.

ContributionRate
FICA Social Security6.2%
FICA Medicare1.45%
FICA Medicare for above $ 250,000 for couples and $125,000 for adults0.9%
FUTA or Federal Unemployment Tax Act

 

6%

Taxes

All employees must make timely tax payments in Puerto Rico. However, you do not have to go through the hassle of tax payments as the amount gets directly debited from the salary amount and is paid directly to the authorities.

Tax rates are set based on the income slab of the employees working in the country. These tax rates are:

Income SlabTax Rate
<$9,0000%
$ 9,000 – $25,0007%
$ 25,000 – $ 41,500$1,120 + 14% on the amount over $25,000
$41,000 – $61,500$3,430 + 25% on the amount ever $41,500
>$61,500$8,430 + 33% on the amount over $61,500

Bonus

All employers in Puerto Rico must pay their employees an annual bonus. The bonus amount is calculated by taking 6% of the first $10,000 employee’s salary. However, the annual bonus amount cannot go beyond $600.

Payroll Cycle

The companies in Puerto Rico do not have a fixed payroll cycle. Depending on their work nature and the company funds’ availability, they might pay their employees bi-weekly, monthly, or semi-monthly. Employees must pay all their employees by the 15th of every month if they make monthly payments.

Puerto Rico Payroll Options for Companies

Before choosing a payroll option for their business, companies in Puerto Rico might consider all their options. You must establish a budget, ascertain the company’s payroll requirements, and then choose a payroll option from the choices given below:

  • Internal payroll: In Puerto Rico, most large businesses with human resources divisions employ internal payroll to oversee payroll procedures. The business manages the entire system internally and hires more staff to expedite the process.
  • Remote payroll: A remote payroll is a common option for subsidiaries and branches. In this situation, the payroll system for the parent firm includes a list of the subsidiary’s employees and pays the employees as per Puerto Rican law.
  • Payroll processing companies: Payroll processing companies can help you manage your payroll in Puerto Rico. However, you will have to manage all legal issues about payroll.
  • Global PEO platforms: A PEO company may handle the complete payroll process of any organization. To relieve yourself of the duty of managing your company’s payroll system, get in touch with a worldwide PEO platform like Multiplier.

Entitlement and Termination Terms

The employment contract should outline the employee’s rights and provide termination provisions to avoid future problems.

The rights of employees include pay, working conditions, vacation time, and other perks. Employers are required to state a valid reason for terminating an employee. The following are grounds for terminating an employee:

  • Agreement reached after a discussion between the employer and the employee
  • While employed there, the employee acted dishonestly
  • If there is a fundamental change in the company

Employers must specify the reason for the termination, in the letter of termination given to the employee. Employees are also entitled to severance money from the employer to sustain themselves while seeking a new job.

Puerto Rico Payroll Processing Company

Expanding the firm could be challenging if you are new to Puerto Rico and unsure of the rules and regulations that apply to companies in the country. You can seek help from some experts who can guide you through the entire process.

Contact a PEO company like Multiplier to receive guidance on the local laws and other requirements that govern the payroll systems in Puerto Rico. Keep your options open if you are looking for the best payroll assistance support.

How Can Multiplier Help with Global Payroll?

It might seem challenging to set up a payroll system in Puerto Rico. However, you can quickly set up a compliant payroll system with the right guidance and expert assistance.

You can contact a global PEO platform, like Multiplier, to help you determine your payroll requirements. In more than 150 countries, Multiplier has assisted companies in setting up complaint payroll systems. Our expert team will assist you in knowing about the federal standards that apply to Puerto Rico, and they will work with you to set up a payroll system that conforms to those regulations and meets the needs of all employees.

Frequently Asked Questions

Employees who work for a company with less than 21 employees are entitled to an additional bonus of 2%. However, the additional bonus cannot go beyond $300.

The employees can take an annual leave of 6 days a year. However, the number of annual leaves increases with the employee’s seniority.

The employees are entitled to 18 days of public holidays in Puerto Rico. 

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