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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Who is liable for the withholding tax if you work in Puerto Rico

Resolved Question:

I'm an independent 1099 Contractor from the US. I worked 8 months in Puerto Rico and never had any money withheld. Now, the company I'm working for (as a 1099 contractor) just learned that they should have been withholding 20% of my pay. Who is liable to pay that 20%? Me or the company that should have withheld it?
Submitted: 7 years ago.
Category: Tax
Expert:  RD replied 7 years ago.

Normally the federal tax withholding will come out of your pay and it should be withheld by the company making the payment to you.

Are you a US resident or citizen and resident of CA?

 

 

Customer: replied 7 years ago.
I'm a US resident who lives in California. But I work in Puerto Rico as a 1099 Contractor for a consulting firm (head quarters in Connecticut) at a clients site in Puerto Rico.
Expert:  RD replied 7 years ago.
So you are paid by the Connecticut firm and not from the Puerto Rico client. Is this correct?
Customer: replied 7 years ago.
Yes, that is correct.
Expert:  RD replied 7 years ago.

If you are paid Form 1099 and the income is Puerto Rico source and you have provided a valid Social Security number than the company(Connecticut Co) is not required to withhold taxes. Did they provide you any backup as to the requirement to withhold taxes?

Customer: replied 7 years ago.
No they haven't. And that is what is so frustrating. They say they must now withhold pay but can't say exactly why they think that. Nor are they willing to put anything in writing about this topic. I think they have not thoroughly researched everything and may be acting prematurely by telling us they are going to start withholding pay.

Thank you very much, I really appreciate your input. It is helpful.
Expert:  RD replied 7 years ago.

I do not think that you should be subject to tax withholding unless anything discussed below applies. You, as an independent contractor, are required to estimate your tax liability and make quarterly installment payment of the estimated tax liability.

Here is a link on backup withholding from IRS on Form 1099.

http://www.irs.gov/publications/p505/ch01.html#d0e4002

 

Below is the extract from the same website link provided above-

Withholding rules. When you open a new account, make an investment, or begin to receive payments reported on Form 1099, the bank or other business will give you Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. You must show your TIN on the form and, if your account or investment will earn interest or dividends, you also must certify (under penalties of perjury) that your TIN is correct and that you are not subject to backup withholding.

 

The payer must withhold at a flat 28% rate in the following situations.

  • You do not give the payer your TIN in the required manner.

  • The IRS notifies the payer that the TIN you gave is incorrect.

  • You are required, but fail, to certify that you are not subject to backup withholding.

  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 210-day period.

 

Taxpayer identification number. Your TIN is one of the following three numbers.

  • Your social security number (SSN).

  • Your employer identification number.

  • An IRS individual taxpayer identification number (ITIN). Aliens who do not have an SSN and are not eligible to get one should get an ITIN. Use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN.

 

An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law. For more information on ITINs, get Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number.

 

How to prevent or stop backup withholding. If you have been notified by a payer that the TIN you gave is incorrect, you can usually prevent backup withholding from starting or stop backup withholding once it has begun by giving the payer your correct name and TIN. You must certify that the TIN you give is correct.

 

Let me know if you have any questions.

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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