US VIRGIN ISLANDS Law and Practice Contributed by: Marjorie (Jorie) Roberts, Duncan J.J. Kessler and Jessica McKenney, Marjorie Rawls Roberts PC
5. Tax Law 5.1 Taxes Applicable to Employees/ Employers
dents of the USVI with USVI source income is provid - ed in IRS Publication 570, “Tax Guide for Individuals With Income from U.S. Territories”. Employers that have USVI employees must pay Fed - eral Insurance Contributions Act (FICA) taxes, which are also referred to as Social Security and Medicare taxes, to the IRS. Starting in 2024, employers pay FICA taxes using Form 941 (Employer’s Quarterly Federal Tax Return), but do not answer questions regarding US income tax withholding – unless they have an employee who is subject to such withhold - ing – because income taxes for USVI employees are paid to the BIR on Form 941 V.I. (Employer’s Quarterly Virgin Islands Tax Return). Additionally, employers must pay USVI and US unem - ployment insurance taxes as well as USVI workers’ compensation insurance. 5.2 Taxes Applicable to Businesses Income tax is withheld from the pay of most employ - ees. An individual’s pay includes their regular pay, bonuses, commissions and vacation allowances. It also includes reimbursements and other expense allowances paid under a non-accountable plan. If an individual’s income is low enough, such individual will not have to pay income tax for the year and may be exempt from withholding. Each individual has the responsibility of requesting their employer to withhold income tax from non-cash wages and other wages not subject to withholding. If such employer does not agree to withhold tax, or if an insufficient amount of tax is withheld, the individual may have to pay an esti - mated tax to the BIR. In addition, FICA is made applicable by specifically defining “United States” to include the USVI for pur - poses of the Old Age, Survivors and Disability Insur - ance (OASDI, also known as Social Security) and hos - pital insurance taxes (“Medicare”). Also, FICA taxes on self-employment income apply. These taxes are paid to the IRS and not the BIR because they are not “mir - rored” to the USVI. The IRS has specific authority to administer and collect these taxes in the USVI.
As previously touched on, the Code applies in the USVI as the USVI tax code through the use of a substi - tution scheme known as the “mirror” system. Pursu - ant to the mirror system, the words “Virgin Islands” are substituted for the words “United States” wherever they appear in the mirror Code. Also under the mirror Code, “any changes to, interpretations of, regulations and revenue rulings on and court interpretations of the substantive tax provisions of the Internal Revenue Code are applicable to Virgin Islands tax cases as long as the particular provision at issue is not manifestly inapplicable or incompatible with a separate territorial income tax...” The Code contains several sections – notably Sec - tions 932, 934 and 937 – that deal specifically with the USVI and, more particularly, govern the extent to which the USVI can grant tax incentives and how USVI residents and persons with USVI source income file their income tax returns. Guidance contained in IRS Publication 570 (Tax Guide for Individuals with Income from US Territories) discusses the filing requirements of USVI residents and US citizens and residents with USVI source income, and is updated annually. Individuals who perform work in the USVI but are not bona fide residents of the USVI are required to file Form 1040 with the IRS and with the BIR and, on the return filed with the BIR, include IRS Form 8689 (Allocation of Individual Income Tax to the U.S. Virgin Islands) to allocate taxes for income earned in the USVI to the BIR. Often, this allocation is made based on the time spent working in the USVI. Taxes on USVI income are then paid to the BIR and other taxes are paid to the IRS with a credit given on the return filed with the IRS for income taxes paid to the BIR. Individuals who are bona fide residents of the USVI during the entire taxable year pay the full amount of their tax liability on their worldwide income to the USVI tax authorities (the BIR). An employee who performs above a minimum threshold of work in the USVI that qualifies as USVI source income is subject to taxation. Guidance for filing by USVI residents and non-resi -
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