Understanding Payroll Taxes

Most residents of Puerto Rico do not have to pay federal income tax, under Section 933 of the tax code. Since most residents of Puerto Rico would not be required to pay any income tax anyway, based on their annual income, this is not really a benefit. In fact, the lack of income tax is often used as an excuse for not providing equal federal funding to Puerto Rico.  Workers in Puerto Rico do pay the same payroll taxes as workers in the states — but still do not receive equal benefits under Social Security. This injustice can be solved by statehood.

What are payroll taxes?

At the federal level, the primary payroll taxes include Social Security and Medicare taxes, collectively known as FICA taxes. Social Security tax, currently set at 6.2% of an employee’s gross wages up to an annual limit, and Medicare tax, levied at 1.45% with no wage base limit, are shared between the employee and the employer, with each party contributing an equal amount. These taxes fund the Social Security and Medicare programs, which provide benefits to retirees, the disabled, and those in need of medical care.

These taxes are withheld from paychecks automatically. You may not even realize that you are paying them, but they will be shown on your paycheck stub, so you can see how much you pay in.

Inequality

There are significant inequalities in Social Security payments and related programs for residents of Puerto Rico compared to those living in the 50 states and the District of Columbia. These disparities exist despite Puerto Ricans being U.S. citizens and contributing to Social Security and Medicare through payroll taxes. Here are the main areas of inequality:

• Supplemental Security Income (SSI): This is a crucial federal program that provides monthly payments to low-income seniors and people with disabilities. Residents of Puerto Rico are excluded from receiving SSI benefits, with the exception of those living in the Northern Mariana Islands, another U.S. territory. Instead, Puerto Rico receives a significantly less generous block grant program called Old-Age Assistance, Aid to the Blind, and Aid to the Permanently and Totally Disabled (AABD). The average SSI payment on the mainland is considerably higher than the average payment under AABD in Puerto Rico. This means that vulnerable populations in Puerto Rico receive substantially less federal assistance compared to their counterparts in the states.
• Medicare Part B Enrollment: Unlike residents of the mainland, Puerto Ricans are not automatically enrolled in Medicare Part B. They must actively choose to enroll and pay the monthly premiums. This can create a barrier to accessing necessary medical services, especially for those with lower incomes or limited access to information.
• Medicare reimbursement rates for healthcare providers in Puerto Rico are lower than those in the states. This has contributed to a shortage of doctors and specialists on the island, as many find it financially unsustainable to practice there. This directly impacts the access and quality of healthcare for Social Security beneficiaries in Puerto Rico.
• Earned Income Tax Credit (EITC) and Child Tax Credit (CTC): Puerto Rican workers are ineligible for the federal Earned Income Tax Credit (EITC). While low and middle-income Puerto Ricans can receive the refundable portions of the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC), the eligibility and amounts often differ from those in the states. For example, the refundable portion of the CTC was previously limited to families with three or more children. These tax credits are designed to supplement the income of working families and can significantly impact their financial well-being.
• Social Security Administration (SSA) workforce: The size of the SSA workforce in Puerto Rico has been described as inadequate to meet the needs of the beneficiaries on the island. This can lead to difficulties in accessing services and information related to Social Security benefits.

Solutions

These inequalities are rooted in Puerto Rico’s status as an unincorporated territory of the United States.

While Puerto Ricans are U.S. citizens and pay federal taxes (including Social Security and Medicare taxes), the Supreme Court has upheld Congress’s authority to treat territories differently from states in federal benefit programs. The excuses presented by the U.S. government for excluding Puerto Rico from SSI has often revolved around its distinct tax status, where residents are generally exempt from most federal income taxes. However, the facts show that this justification is insufficient and discriminatory, especially considering that Puerto Ricans do pay significant federal taxes in the form of self-employment tax, excise taxes, business income tax, estate taxes, and more.

Piecemeal efforts to change these inequities don’t work. Sometimes there may be temporary improvements, but each Congress can change the previous laws. As a state, Puerto Rico will be on a footing with the current 50 states, and will have equal access to federal funds, along with all the rights and responsibilities of U.S. citizenship. Understanding payroll taxes can help make it clear that the trade off of income tax for benefits is really not good deal for Puerto Rico.

Contact your legislators today. Make sure they know that the people who vote for them care about statehood for Puerto Rico.