If I'm a bona fide resident of Puerto Rico, do I owe any U.S. federal tax on my freelance income?

You owe self-employment tax, even though you likely owe $0 in federal income tax. IRC §933(1) excludes Puerto Rico-source income from federal gross income for a bona fide PR resident — that exclusion applies to the income tax. Self-employment tax is a separate tax under a different part of the code (Chapter 2, IRC §1401-1402), and the IRS's own Publication 570 states plainly that bona fide residents of a U.S. territory who have self-employment income must generally pay self-employment tax to the United States even when they have no U.S. income tax filing obligation. The two taxes run on independent tracks, and §933 only silences one of them.

How do I become a 'bona fide resident' of Puerto Rico for this exclusion to apply?

IRC §937 and its regulations require passing three separate tests for the full tax year: the presence test (satisfied by any of several paths — 183+ days in Puerto Rico during the year is the simplest, but alternatives exist for people who travel), the tax home test (your tax home can't be outside Puerto Rico at any point in the year), and the closer-connection test (you can't have a closer connection to the U.S. mainland or a foreign country than to Puerto Rico). A genuine partial-year version does exist for the year you actually move, though: Treas. Reg. §1.937-1(f) relaxes the tax-home and closer-connection tests to only the last 183 days of the year you move to Puerto Rico (or the first 183 days of the year you move away), and a taxpayer who was a bona fide resident for at least two years before moving away can still exclude the Puerto Rico-source income earned during the part of that final year before the move, under Treas. Reg. §1.933-1(b). Outside a move year, though, the three tests above do need to hold for the entire year.

Is this the same as the Foreign Earned Income Exclusion (FEIE) that people use when working abroad?

No — different statute, different mechanics, and Puerto Rico isn't 'abroad' for federal tax purposes at all. The FEIE (IRC §911) requires either a bona fide foreign residence or 330 full days physically present outside the U.S. in any rolling 12-month period, is capped at an inflation-adjusted dollar amount, and is claimed by filing Form 2555. The §933 exclusion for Puerto Rico has no dollar cap, uses the fixed-year §937 tests described above (not a rolling 12-month window), requires no election form, and — critically for retirement planning — a foreign totalization agreement often coordinates U.S. and foreign Social Security taxes for FEIE filers, while no such agreement exists for Puerto Rico, because Puerto Rico residents already pay directly into the U.S. Social Security system through self-employment tax and FICA.

What form do I actually file if all my income is excluded and I only owe self-employment tax?

As of tax year 2023, Form 1040-PR was discontinued. A bona fide Puerto Rico resident with self-employment income files Form 1040-SS instead, attaching a standard Schedule C (Form 1040) to compute net profit and a standard Schedule SE (Form 1040) to compute the self-employment tax — the same schedules a mainland filer uses, just riding on the 1040-SS instead of a full Form 1040. If every dollar of your income is excluded under §933 and you have no other U.S. filing trigger, you still generally need to file to report and pay the self-employment tax; a simple SE-only situation may not require attaching the full schedules, but most self-employed filers with actual business expenses to deduct will still complete a Schedule C to arrive at the correct net-earnings figure for Schedule SE.

I have an Act 60 tax decree — does that get me out of self-employment tax too?

No. Act 60 is a Puerto Rico commonwealth incentive program that reduces Puerto Rico local tax rates for qualifying residents; it has no authority over the federal tax code and never mentions IRC §933 or self-employment tax. A decree changes what you owe the Puerto Rico Treasury Department (Hacienda) on Puerto Rico-source income — it does nothing to your federal self-employment tax obligation, which flows entirely from your §937 bona fide residency status and the nature of your income as self-employment earnings under §1402. People who assume an Act 60 decree is a complete federal tax exemption are conflating two entirely separate tax systems.

Schedule C and Self-Employment Tax for Bona Fide Residents of Puerto Rico (2026)

Published: September 5, 2026 · Reading time: 9 min

TL;DR: A bona fide resident of Puerto Rico excludes Puerto Rico-source income from federal income tax under IRC §933(1) — no dollar cap, no election form. But self-employment tax is governed by a completely different part of the tax code (Chapter 2, IRC §1401–1402), and IRS Publication 570 confirms it still applies in full to that same income. A freelancer netting $60,000 in Puerto Rico-source Schedule C profit can owe $0 in federal income tax and $8,477.73 in self-employment tax in the same year — and because there's no federal income tax base left to reduce, the usual half-SE-tax deduction that softens this bill for mainland filers does nothing here. Since tax year 2023, the filing vehicle is Form 1040-SS (Form 1040-PR was discontinued), with a standard Schedule C and Schedule SE attached. An Act 60 local tax decree changes none of this — it's a Puerto Rico commonwealth program with no authority over federal self-employment tax.

Move to Puerto Rico as a bona fide resident and freelance income from PR-based clients, and the internet will tell you your federal tax bill just went to zero. That's half right, and the half that's wrong is the expensive half.

Two Different Taxes, One Exclusion

IRC §933(1) is genuinely generous: a bona fide resident of Puerto Rico for the entire tax year excludes from federal gross income "amounts derived from sources within Puerto Rico" — with one narrow exception for income received as compensation for services performed as a U.S. government employee. No dollar cap, no Form 2555-style election, no phase-out. If you qualify and your income is PR-source, that income simply isn't part of your federal taxable income.

The trap is what "federal income tax" doesn't include: self-employment tax. SE tax is imposed under Chapter 2 of the Internal Revenue Code (IRC §1401–1402) — a different chapter, funding Social Security and Medicare, not the general fund. IRC §1402(a) says so directly, instructing a Puerto Rico resident to compute net earnings from self-employment "without regard to section 933" — the statute itself, not just an inference from silence. The IRS's own Publication 570, Tax Guide for Individuals With Income From U.S. Territories, states the practical consequence: bona fide residents of a U.S. territory with self-employment income must generally pay self-employment tax to the United States, even when they have no U.S. income tax filing obligation at all.

So the two taxes run on independent tracks. Excluding your income from one doesn't excuse it from the other.

Qualifying as a Bona Fide Resident: The §937 Tests

IRC §937 and its regulations set three tests, all of which must be true for the entire tax year:

The presence test. The most common path is being physically present in Puerto Rico for at least 183 days during the tax year. Four alternative paths exist for people who travel more (for example, at least 549 days across a rolling three-year period with at least 60 days in each year, or spending 90 days or fewer in the United States during the year), but 183 days is the one most freelancers plan around.
The tax home test. Your tax home — the general area of your main place of business — can't be located outside Puerto Rico at any point during the year.
The closer-connection test. You can't have a closer connection to the United States or to a foreign country than you have to Puerto Rico (measured by things like where your family lives, where you're registered to vote, and where your driver's license is issued).

This is a different, more mechanical framework than the §911 tests used for the Foreign Earned Income Exclusion (FEIE) — there's no rolling 12-month window here, and no facts-and-circumstances "bona fide foreign residence" standard. It's a fixed-year, multi-factor test built specifically for U.S. territories.

The year you actually move is a real exception to "the whole year." Treas. Reg. §1.937-1(f) relaxes the tax-home and closer-connection tests in a move year to just the last 183 days of the year (moving to Puerto Rico) or the first 183 days (moving away), rather than requiring the full calendar year. And under Treas. Reg. §1.933-1(b), someone who was a bona fide PR resident for at least the two years before moving away still excludes the Puerto Rico-source income earned during the part of that final year before the move — a genuine partial-year exclusion, not an all-or-nothing rule. Outside a move year, all three tests above do need to hold for the full twelve months.

Worked Example: $60,000 Net Profit, $0 Income Tax, $8,477.73 of SE Tax

Marisol is a bona fide resident of Puerto Rico all year, running a freelance branding and design business entirely for Puerto Rico–based clients. Her Schedule C shows a $60,000 net profit for 2026.

Federal income tax: Every dollar is Puerto Rico-source, and she meets all three §937 tests. Under §933(1), the entire $60,000 is excluded from federal gross income. Federal income tax owed: $0.

Self-employment tax: §933 has no effect on this calculation.

Step	Amount
Net Schedule C profit	$60,000.00
Net SE earnings (× 92.35%)	$55,410.00
Self-employment tax (× 15.3%)	$8,477.73

Ordinarily, a mainland filer would deduct half of that SE tax ($4,238.87) from their taxable income on Schedule 1, softening the income-tax hit. Marisol's income tax base is already $0 — there's nothing left to deduct against. The half-SE-tax adjustment, one of the few built-in offsets to self-employment tax, is worth nothing to her in this scenario. That's the real shape of the "PR tax exclusion": it's a full pass on one tax and zero relief on the other.

For 2026, the self-employment tax rate remains 15.3% (12.4% Social Security up to the wage base, plus 2.9% Medicare with no ceiling), and the Social Security wage base is $184,500 — relevant mainly to higher-earning PR-based freelancers whose net SE earnings exceed that figure, since the 12.4% portion stops applying above it while the 2.9% Medicare portion never does.

Filing: Form 1040-PR Is Gone

Through tax year 2022, a Puerto Rico resident with only self-employment income and no U.S. income tax obligation typically filed Form 1040-PR, a Puerto Rico–specific form with its own built-in profit-and-loss and SE-tax computation sections.

Form 1040-PR was discontinued after tax year 2022. Starting with tax year 2023, the correct vehicle is Form 1040-SS, which was redesigned to drop its own built-in computation sections in favor of attaching the same Schedule C (Form 1040) and Schedule SE (Form 1040) that every other self-employed filer in the country uses. In practice, this means a Puerto Rico freelancer's Schedule C now looks identical to a mainland freelancer's — same lines, same categories, same self-employment tax mechanics — it's simply attached to Form 1040-SS instead of a full Form 1040, since there's no U.S. taxable income to report on the 1040 itself.

The Act 60 Confusion

Puerto Rico's Act 60 (which consolidated earlier incentive laws like Act 20 and Act 22) offers reduced Puerto Rico tax rates to qualifying individual resident-investors and export-services businesses. It is a commonwealth statute, administered by Puerto Rico's own Treasury Department — it has no jurisdiction over the federal tax code, and its text doesn't reference §933, §937, or self-employment tax in any way.

Holding an Act 60 decree changes what you owe Puerto Rico on Puerto Rico-source investment or business income under Puerto Rico law. It does nothing to your federal self-employment tax bill, which is governed entirely by your §937 residency status and the ordinary Chapter 2 rules. A freelancer with an Act 60 decree who nets $60,000 in self-employment income still owes the same $8,477.73 in federal SE tax as Marisol above — the decree simply isn't part of that calculation.

Authoritative References

Tracking Puerto Rico-source income separately from the rest of your business? Start a free CentSense account and every invoice and expense gets categorized as it comes in — so the income and deduction split you need at filing time is already done.

This guide is general education for U.S. freelancers and Schedule C filers in 2026. It is not personalized tax advice — bring your specific residency and income facts to a CPA or EA familiar with Puerto Rico/territory taxation.

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