Note: This is important information on employment tax withholding obligations and Form W-2 filing obligations of federal employers with employees who work in the Commonwealth of the Northern Mariana Islands and Puerto Rico. For Form W-2 requirements, see the section captioned "Wage and Tax Statements (Forms W-2)."
Withholding Taxes. There are special income tax withholding requirements for certain federal agencies that have employees who work in the Commonwealth of the Northern Mariana Islands (CNMI) or Puerto Rico. The U.S. Treasury Department has entered into agreements under 5 U.S.C. Section 5517 ("5517 Agreements") with the CNMI and with Puerto Rico that require certain federal employers to withhold U.S. territorial income taxes (rather than U.S. federal income taxes) on certain employees. The 5517 Agreements apply to all executive agencies, military departments, and the Postal Service; they do not apply to the legislative or judicial branches.
Note: Because the U.S. Coast Guard is a military organization included within the U.S. Department of Homeland and Security, the 5517 Agreements with the CNMI and Puerto Rico apply to the U.S. Coast Guard.
Under the terms of these 5517 Agreements, the above-referenced federal agency employers are required to withhold U.S. territory income taxes, rather than federal income taxes, from compensation paid to the following two groups of employees:
- Employees whose regular place of federal employment is in the CNMI or Puerto Rico (non-servicemembers). A civilian employee's regular place of federal employment means the official duty station or place where an employee actually and normally performs services, irrespective of the employee's residence. It does not include a place where the employee is on travel or temporary duty status.
- Servicemembers of the U.S. Armed Forces whose state of legal residence (SLR) is the CNMI or Puerto Rico, regardless of duty station location. A 5517 Agreement applies to Armed Forces members who are:
- On active duty status in the regular or reserve components of the Air Force, Army, Coast Guard, Marine Corps, or Navy;
- In the National Guard and participating in exercises or performing duty under 32 U.S.C. Section 502; or
- In the Ready Reserve and participating in scheduled drills or training periods or are serving on active duty for training under 10 U.S.C. Section 10147.
A 5517 Agreement does NOT apply to the two following types of federal-related personnel:
Federal retirees who are residents of the CNMI or Puerto Rico; and
Armed Forces members who are stationed in the CNMI or Puerto Rico, unless their state of legal residence is the CNMI or Puerto Rico.
These two categories of federal-related personnel do not follow the special rules in this section.
American Samoa, Guam and the U.S. Virgin Islands. The U.S. Treasury Department has not entered a 5517 Agreement with American Samoa, Guam, or the U.S. Virgin Islands. Federal employers with employees in these three territories do not follow the rules covered in this special section but instead should follow all other applicable federal employer tax rules. For further information on these rules, see Publication 80, Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.
FICA Taxes. A 5517 Agreement applies only to income taxes. It does not apply to other federal taxes, such as the Old-Age, Survivors, and Disability Insurance taxes and hospital insurance taxes imposed on wages (collectively, FICA taxes). Federal employers are still required to withhold FICA taxes from its employees' wages, pay those FICA taxes to the U.S. government, and report them on Block 4 and Block 6 of Forms W-2, Wage and Tax Statement.
Wage and Tax Statements (Forms W-2). Federal employers subject to a 5517 Agreement are still required to issue a Form W-2 to all employees for whom they withheld income taxes or FICA taxes. Federal employers may use the federal Form W-2 for reporting income taxes withheld and paid to a U.S. territory, as well as to report FICA taxes. In such case, when filing out a paper Form W-2, the employer should report per the following:
Block 1 "Wages, tips, other compensation": Employee's total wages
Block 2 "Federal income tax withheld": Income taxes paid to the U.S. Treasury only.
Note: For income taxes paid to the U.S. territory treasury, see Blocks 15-17. Unless a federal employee had federal income tax withheld (for example, because the employee was a part-year resident of the CNMI or PR), Block 2 will be empty.
Block 4 "Social security tax withheld"
Block 6 "Medicare tax withheld"
Blocks 15-17 "State": For W-2 reporting purposes, State and Territory are synonymous.
Block 15 "Employer's state ID number": Employer's identification number
Block 16 "State wages, tips, etc.": Employee's territory wages
Block 17 "State income tax": Income taxes paid to the territory treasury, per a 5517 Agreement
Federal employers subject to a 5517 Agreement should follow all other applicable rules in Section 10 of Publication 80, Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands, relating to the filing of Wage and Tax Statements, including electronic filing requirements with Social Security Administration.
CNMI and Puerto Rico Territory Employer Returns. Federal employers are also required to file quarterly and annual employment tax reports with the CNMI and Puerto Rico tax departments, as required under territorial tax rules. For questions on territory employer tax requirements, contact the CNMI or Puerto Rico tax departments, respectively.
Other Federal Employer Tax Requirements. Federal employers subject to a 5517 Agreement should follow all other applicable federal employer tax rules. For further information on these rules, see Publication 80, Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.
For additional information on rules pertaining to 5517 Agreements, see 5 U.S.C. Section 5517 and 31 Code of Federal Regulations Part 215 - Withholding of District of Columbia, State, City and County Income or Employment Taxes by Federal Agencies.