How to Find and Pay Contractors in Puerto Rico: A Guide for US Mainland Employers

Puerto Rico is a prime location for US mainland companies looking to expand their hiring pool. Learn best practices for hiring and paying contractors there.

Caitlin MacDougall
Caitlin MacDougall
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Puerto Rico has been known for decades as a popular destination for island tourists, but its potential in the global market has US mainland companies looking to hire on the island as well.

Puerto Rico is a prime location for nearshoring: that is, manufacturing goods and hiring workers closer to the US mainland. The pandemic revealed just how disruptive delays in the supply chain can be, and in the last year, President Biden committed to have all US government-backed technology to be developed in the US instead of offshore. Not only does the measure alleviate pressure on the supply chain, but it keeps the US competitive with other manufacturing countries, and protects US companies from cyberattacks.

And it's understandable why companies hiring in places like San Juan would be a no-brainer for US companies. It's close enough to Latin America that it can serve as a conduit to other markets, and as a US territory its labor laws are very similar to those in the mainland US. Not only that, but there is no exchange rate because Puerto Rico uses the United States dollar.

Photo of people wearing helmets looking out from a cave overlooking a valley

Industries in Puerto Rico 🏭

Since the economic depression that followed Hurricane Maria in 2017, tech has been seen as a potential jumpstart for the commonwealth's economy. While trade, finance, tourism, and government account for half of the country's GDP currently, recently there have been more investments in startups and STEM education, which has heralded a shift to tech in the economic landscape. Experts are hoping that with more investment in Puerto Rico's tech industry, the economy will grow even stronger.

Employees versus independent contractors

If your company is looking to tap into the job market in Puerto Rico, you will need to consider which type of worker makes sense for your company to hire. Here's an overview of the differences between employees and contractors.

Employees

In an employment relationship, the employer has oversight over how their employees work and a certain amount of control over an employee's process. The employees' wages and duties are determined by the employer, and the employees are economically dependent on the business that employs them.

Generally employers are responsible for withholding a percentage of what the employee earns for tax purposes, although some businesses are exempt. Employers are responsible for withholding not only income tax, but Social Security, as well as benefits such as retirement.

Employees are covered by the Fair Labor Standards Act (FLSA), which is a law that establishes minimum wage, overtime, record-keeping, and youth employment standards. Employees covered by FLSA receive a federal minimum wage of $7.25, although in Puerto Rico the minimum wage has increased to $8.50 an hour. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) amends the Fair Labor Standards Act so that special considerations are made in regard to youth minimum wage and overtime for Puerto Rican workers.

In some cases, a contract worker may better suit your company's needs. If your company needs to hire a short-term worker, there are a couple options that may prove more practical.

Independent contractors

An employer may classify a worker as an independent contractor under certain circumstances. Hiring a contractor can be a prudent alternative to hiring employees because it cuts down on a company's expenses that would otherwise be spent on payroll taxes and benefits. This also means, however, that some companies are more inclined to classify their workers as independent contractors. In doing so, they may deliberately or mistakenly misclassify a worker, resulting in legal trouble and costly penalties.

There are three categories of evidence required to prove that a worker is an independent contractor: behavioral, financial, and the type of relationship. For a worker to be an independent contractor, the employer does not have behavioral control over them: the contractor determines how they fulfill their duties without an employer's oversight.

In the financial category, a worker is classified as a contractor if there is evidence that they set their own prices for services rendered. A contractor also uses their own tools to perform their duties as well.

For the "type of relationship" category, evidence must be provided that the contractor does not have the same benefits as an employee. For example, a contractor does not receive vacation pay or insurance, nor do they receive severance pay if their contract is terminated without just cause.

Fixed-term employees

Fixed-term employees are employees hired by an organization for specific projects or a specific period. They may not work longer than three consecutive years, including any contract renewals.

Temporary employees

A temporary employee is a kind of fixed-term employee. Hiring a temporary worker might make more sense for your business if you have multiple projects, with no guarantees for how much work you can offer or how long a project will take. Temporary employees are often hired in these circumstances:

  • to fill in for an employee during a leave of absence
  • for a single project
  • to work during a short period of time in which the employer has an extraordinary amount of work, such as annual inventory or equipment repairs.

An important distinction between independent contractors and temporary employees is that temporary employees are hired through a temporary service company. With temp workers, the temporary service company and the client are jointly responsible for the employee, although some responsibilities may be split between the temporary service company and the client—payroll, for example.

Photo of palm trees at a shore overlooking the ocean

Finding the right independent contractor 👩‍💻

How do you find talented professionals abroad? Here are a few tips for making sure that you end up with the best person for a contract position.

Role description 📝

Businesses tend to attract more applicants on job sites if they provide details about a job's description. When your company posts on a job board or job site, make sure to include the job's specific duties, the ideal candidate's skillset, the salary or compensation, and whether the candidate will be subject to a probationary period. Of course, make sure to include what type of contract being offered, whether it's an employee contract, part-time, or project contract.

The dominant language spoken in Puerto Rico is Spanish, although many residents speak English as well. In recent years, many residents view being bilingual as an asset, as it increases job options inside and outside Puerto Rico.

Still, it probably doesn't hurt to provide a translation of a job posting in Spanish. Lighthouse is one translation company that companies use to translate job materials in Puerto Rico. SES Translators is another translation service that can translate materials, including employee handbooks.

Interviews 👥

Virtual interviews are the most convenient option for companies, whether it's to hire abroad or locally. Puerto Rico is in Atlantic Standard time, the easternmost time zone, which the interviewer should note when scheduling the interview. The country does not follow Daylight Savings Time.

Taxes in Puerto Rico

Once you have found the right contract workers in Puerto Rico, you will need to make sure you are following the right tax filing procedures. Employers hiring employees in Puerto Rico are subject to the taxes imposed by the Federal Insurance Contributions Act (FICA); in other words, they must remit payroll, Social Security, and Medicare taxes every pay period. Employers in Puerto Rico are also obligated to pay the Federal Unemployment Tax Act (FUTA).

In order to hire employees in Puerto Rico, a foreign country needs to register with the Department of State of the Commonwealth of Puerto Rico, and if they're doing trade or business in Puerto Rico, they will need to register with the Department of State. If the employer is from a foreign country, hiring workers may constitute as doing trade or business, depending on the nature of the business. Therefore, a foreign company will need to register with the Department of State. If an employer wishes to hire a contractor, however, they may not need to register with the Department of State, depending on the independent contractor's duties and the nature of their job.

Tax obligations for employers of independent contractors

Employers who pay an independent contractor for rendering services are not responsible for withholding the contractor's taxes. Instead, the contractor must withhold 10% their payment and submit it each month to the Puerto Rico Treasury Department (Hacienda). Payments to contractors or subcontractors rendering construction services are exempt from this requirement, but contractors in design, consulting, engineering, architecture and similar services are not exempt.

An independent contractor in is considered self-employed, and must required to register with the US government. Puerto Rican contractors can register using a 1040-PR form. On this form, the contractor will need their employer identification number or employer social security number. Independent contractors pay a self-employment tax, which covers social security contributions and Medicare taxes.

Photo of sculptures at a square surrounded by colorful buildings in Old San Juan

Paying independent contractors in Puerto Rico 💸

There are a few options to consider when it comes to paying your contractors. Here's an overview.

Bank transfers using SWIFT 🏛

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a network trusted and used by financial institutions around the world. Many companies use SWIFT for their international payments because it securely transfers funds with little risk of the transfer not reaching the contractor's bank account.

Payments through SWIFT are routed through multiple banks before they reach the payee's bank. The downside is that a fee is deducted each time there is a transfer. These bank fees can add up, and reduce your contractor's compensation, and payroll costs for your company will likely be higher. Fees are unpredictable, too: even  if a bank has been used as previously to make a transfer, the bank may charge a different fee for each transfer.

Money transfer companies 💳

There are some money transfer companies that conveniently operate online: Remitly, Xoom (owned by PayPal), and Wise (formerly Transferwise), are a few of them. Transfer companies like these typically require that payees use their company-issued debit cards to access funds, and a fee is charged every time the debit card is used.

Another downside to this method is that transfer companies often charge percent-based fees when transfering a payment, and there may be additional markup fees added for exchange rates. These fees can be less costly than SWIFT fees, but it's still an inconvenience for payers and payees.

Traditional money transfer services 🏦

It's easy to find companies like MoneyGram and Western Union on city streets in Puerto Rico, and these traditional money transfer services are conveniently found online as well. The pros of using these transfer services is that they often have better markups on currency rates; however, a con is that these companies typically add markups for currency exchange—the same as other transfer services. Moreover, these companies often charge percent-based fees as well.

Cryptocurrencies 🤑

Cryptocurrency has been making the news recently as some businesses like Facebook have been creating their own digital currency. Some companies are even debating whether to accept digital currency as payment. Not everyone has a system set up for sending or receiving cryptocurrency, however. Even if they were, crypto may still be subject to exchange rates and fees.

In Puerto Rico, in particular, cryptocurrency has a negative connotation among residents, as an influx of crypto-billionaires are moving to the territory for tax breaks and have started displacing locals. While these billionaires are given tax breaks, the actual residents of Puerto Rico don't receive the same perks: most Puerto Ricans pay capital-gains levies of about 15%, and are still muddling through a depressed economy.

Photo of two murals – one of a man holding a large bundle of flowers and another of a street lined with colorful buildings and lit by a street lantern – on a building labeled Casa Galguera in Old San Juan

International Compliance

Staying compliant with a country's labor law is an integral part of hiring abroad. There are certain requirements that must be fulfilled in order to accept services from contractors. Sometimes, companies will try to limit their payroll costs and have their employees classified as self-employed workers, or independent contractors. Even if an employer unwittingly misclassifies an employee, or breaks any of the other employment rules and regulations, they could find themselves in a maelstrom of legal penalties and fines.

Many companies find that hiring a team of HR experts mitigates the risk of breaking compliance. With HR services like Pilot, a team of experts can help you navigate the complexities of hiring abroad, particularly in a place like Puerto Rico, where the details of employment law are not necessarily the same as those in the mainland US.

Partnering with Pilot 🤝

Pilot can minimize your company's risk of noncompliance abroad. Our team of HR experts can handle your company's payroll, benefits, and any other HR needs. We're known for fully supporting the hiring process for employees and contractors from day one, and we can help you figure out which option is best for your company. There are so many vital aspects to running a successful business, and we have this part covered.

Pilot's payroll system supports payments in over 240 countries around the world, which allows companies to pay a broad range of international talent. Contractors love getting paid through Pilot because we don't mark up exchange rates for bank transfers, and unlike other wire transfer services, we do not require contractors to use an e-wallet to access their funds.


Interested in learning more about Pilot? Schedule a demo with one of our experts.


⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.


Cover photo of colorful buildings in San Juan by sjdents0 on Pixabay

Photo of cave overlooking a valley by José Aniello Ramírez on Pixabay

Photo of palm trees on the shore by MariamS on Pixabay

Photo of colorful buildings and sculptures in Old San Juan by Anita S. on Pixabay

Photo of murals on a building in Old San Juan by sjdents0 on Pixabay

Caitlin MacDougall
Caitlin MacDougall
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