Early in 2011 the treasury for the commonwealth of Puerto Rico issued radical changes in the Withholding Exemption Certificate (Form 499), those changes were not very clear at first sight, as the explanation and examples provided were confusing, in an already confusing topic. The goal of the treasury was to lower the impact of withholding in the salary of employees; this reduction would be achieved incorporating a new table with allowances called “Special Deduction Table”, among other changes.
Luckily, we have SAP with its partner BSI in charge of understanding the changes for us. BSI did its job and released the corresponding bulletins to adapt the BSI engine with these changes, the bulletins were 001 and 038 for version 9, the main changes these bulletins presented were the following:
- Exemption of retention for those employees that earn less than $20,000 a year
- Incorporates the new allowance table called “Special deduction”
- Removes the Allowance Deduction Table (based on the employee marital status)
- Deletes marital status for personal and dependent exemption (consolidates 14 marital status into 4)
Before moving on, I would like to explain a bit of the background in the calculation of PR withholding. Before 2011, we had 2 main formulas available to calculate the tax, namely the AUTOMATIC method and the OPTIONAL method; the main difference between them was that with the OPTIONAL method you had to indicate the number of allowances the employee wanted to claim (which is the total amount of allowances divided by 500) and with the AUTOMATIC method you had a flat number of allowances based on the marital status of the employee.
Graphically both formulas would perform these steps to calculate the withholding:
With the 2011 changes, the PR treasury didn’t use any more the 2 formulas; there would be only one formula to calculate the withholding.
I was in charge of testing and implementing all these new changes, and besides the confusing scenario, I had to have into account that the upgrade from BSI 8 to 9 had an upcoming deadline, so every company with SAP in PR had to test all these changes and implement them as soon as possible, in order to be in the current version and don’t lose the BSI support.
After one week of testing, I found out several inconsistences between the manual calculation I was doing using the tax employers guide and the output of BSI, therefore I touched base with BSI and had some phone calls with them to explain the situation, they contacted the treasury and after researching informed me that they were going to release a new bulletin to fix all the inconsistences and cover all the scenarios that could be indicated by the employee in the form 499 R4-1; here I would like to point out the excellent customer service and fastness of resolution that BSI has.
Finally, the bulletin 041 with the PR corrections came out. To my surprise, in the quick formulas for PR they still had two formulas available (where as the treasury had merged them into one), but I realized they did it in order to be able to map all the possible combinations that an employee could enter in the new form 499.
With this bulletin, the new graphic of calculation steps would look like this:
You can see that now the only difference between the two formulas is the “Special Deduction”, that means that if the employee selected in Form 499 that he/she would like to have the Allowance Based on Deductions you should select the AUTOMATIC method in Infotype 0210, or indicate the OPTIONAL method if the employee didn’t select this option.
Along with bulletin 041, SAP also released a note to add a brand new field in the Infotype 0210 PR, in order to indicate the option of an Additional percentage to be withheld:
After all the backs and forth, it is very confusing for the HR department to map correctly what the employee selected in the new form 499 into SAP, so that I will explain what I found is the correct mapping from 499 R4.1 to Infotype 0210 PR:
Field Status Imptos:
You have 4 options here
- 01 – Individual: You have to enter this value if the employee selected “Complete” or “None” in section A1
- 02 – Married: You have to enter this value if the employee selected “Complete” or “None” in section A2 and didn’t mark the option “Optional Computation”
- 11 – Married living with spouse, selecting the Optional computation of tax: You have to enter this value if the employee marked the option of “Optional Computation”
- 12 – Married filing joint claiming half: You have to enter this value if the employee selected “Half” in A2
Field Personnel allowance:
Here you have to enter 0 if the employee selected “None” in A1 or A2
Or enter 1 if the employee selected “Half” or “Complete” in A1 or A2
Note 1: If the employee selected “Complete” and “Married person” as marital status, it would be the same if you enter 1 or 2 in the SAP field Personal allowance, since the employee can claim its own allowance (1) or the spouse’s (2)
Note 2: If you enter more than 1 Personal allowance in SAP (or more than 2 if the marital status is married) BSI will consider the surplus as Dependent Exemptions
Field Dependent allowance:
Enter here the number that the employee indicates in section B “Exemption for dependents: Number of dependents”
Note that the “Joint Custody” dependents will be entered later on in SAP, not here.
Field Exemption Amount:
This field will be used to enter the Optional Allowances and the Joint Custody Dependents Exemptions
- If the employee indicated a number in section C4, enter this number multiplied by 500
- If the employee indicated a number in section B “Joint Custody”, you have to enter this number multiplied by 1250 (add to the previous amount, if any)
Field Additional exemption amount:
If the employee selected “Additional Veterans personal exemption” in A3, you have to enter 1500 in this field.
Field Alternate Formula:
If the employee selected “None” in section C1 you should enter 02, otherwise leave it blank. Here is where we select whether we are going to use AUTOMATIC or OPTIONAL formula (i.e. if we are going to use the new deduction “Special allowance table” with this employee or not)
Note that you should also leave this SAP field blank if the employee selected the option “Check here if your annual gross wages do not exceed $20,000 …”
Field Additional Withholding:
If the employee indicated an amount in section D, this amount must be entered in this field.
Field Porcentaje Ad:
If the employee indicated a percentage in section D, this percentage must be entered in this field
If you perform the upgrade and apply all bulletins without conversion of marital status, you will have big changes in the employees withholding (it will probably increment) since all the obsolete marital status will be mapped to “Individual”, which is the one with highest withholding.
If you perform the upgrade and only perform a conversion of marital status, and you mainly use the AUTOMATIC formula, the employees that earn less in your company will have a reduction of withholding, whereas the high salaried employees will have an increment, this will happen since the table for special deductions only applies for the salaries up to $40,000 a year.