If you’re considering doing business or hiring employees in Mexico, it’s important to first learn the country’s tax system and payroll tax structure, including your tax liability obligations as an employer.
Understanding Mexican payroll tax laws will help ensure your company is meeting its legal corporate tax obligations, and avoid potential financial penalties with the Mexican tax authorities.
Calculating Payroll Taxes in Mexico
Payroll tax payments in Mexico are the employer’s responsibility, and are calculated at the state level. Each of the country’s 31 states has their own annual payroll tax requirements. Taxes are charged as a percent of the entire payroll, and rates range between 1% and 3%, depending on the state.
To calculate your business’s annual employer payroll tax burden, you need to:
- Look up your state’s payroll tax percentage.
- Multiply your annual payroll for a specific employee by your state’s tax percentage.
- Repeat these steps for each employee, then add up your individual employee tax payments to calculate your annual Mexican payroll taxes for a given year.
For example, let’s say you’re hiring a full-time employee in the state of Puebla, where the tax rate is 3%. If an employee has an annual salary of MXN $50,000, then the annual payroll tax for that employee for the calendar year would be MXN $1,500.
Mexican Social Security Taxes
Social security taxes in Mexico are collected by the Mexican Social Security Institute, or IMSS (Instituto Mexicano del Seguro Social). The IMSS guarantees retirement and old-age pensions, survival pensions, disability insurance, access to day care, and other social allowances.
Every Mexican private sector employee has the right to social security benefits and the obligation to pay social security taxes. However, it’s the employer’s responsibility to withhold the appropriate amount from employees’ paychecks.
The withholding rate for social security contributions is calculated as a percentage of each employee’s base salary. The current social security rate in Mexico is 9.23%.
Calculating Base Listed Salary
Mexico’s Social Security Law stipulates that social security benefits are calculated using the Base Listed Salary (BLS), known as the Salario Base de Cotización in Spanish.
When calculating your employees’ BLS, you’ll need to include all cash payments, including:
- Daily wages
- Commissions
- In-kind payments
- Bonuses
- Any other remuneration paid by the company
Employers also need to include all mandatory employee benefits, such as vacation days (including the extra premium of 25% paid on top of the regular salary) and Aguinaldo (Christmas bonus) in order to determine an employee’s BLS.
Work Risk Insurance
Another important payroll tax that companies operating in Mexico need to be aware of is the work risk insurance premium, which is based on the occupational risk for a particular profession.
The IMSS assigns five different risk categories to jobs. An office-based sales position is an example of a Class 1 job (lowest risk level). A bus driver, an airline pilot, and a commercial logger are examples of jobs with progressively higher risk levels.
The risk level of a specific employee’s job on your payroll determines the exact annual premium you’ll pay to the IMSS. Below is a table listing the different premiums for each risk class.
Employers must submit an annual Professional Risk Insurance Premium Report by the last day of February each year. Your rate may go up or down by 1% annually based on your risk profile from the previous year, but that’s the annual maximum change allowed.
Mexican Social Housing
Social housing for private sector employees falls within the scope of social security in Mexico. However, it’s not managed by the IMSS, but by the Instituto del Fondo Nacional de la Vivienda para los Trabajadores (INFONAVIT). In English, it’s known as the National Housing Fund Institute.
Employers in Mexico are required to pay the equivalent of 5.00% of their employees’ base annual salaries to INFONAVIT each year.
Employer-Employee Fees
A company’s employer-employee fees constitute the total annual amount paid to the IMSS by the employer and the employee. These fees include work risk insurance, life insurance, and other financial obligations. Some fees are paid only by the company, although most are split between the worker and their employer. Work risk insurance, health insurance, and maternity insurance are examples of employer-employee fees that only the company pays.
These fees also include maternity leave and paternity leave. Pregnant employees in Mexico are entitled to a minimum of 84 calendar days’ maternity leave divided into two 42-day periods taken before and after giving birth.
Employees who are terminated without cause in Mexico, and are over a certain age, are entitled to special severance payments. Advanced and old age severance packages are examples of employer-employee fees that are contributed to by both employees and employers.
Mexican Withholding Tax
In addition to employer payroll taxes and social security taxes, you’ll also need to withhold the appropriate amount of income tax when paying employees.
Here’s a table listing the withholding tax requirements for Mexico’s 11 different income levels.
To calculate an employee’s withholding tax level you need to:
- Find the income level that matches the employee’s monthly income.
- Subtract the lower limit from your employee’s annual salary. The resulting number is known as a surplus.
- Next, find the surplus tax rate percentage for your employee. Apply that percentage to the surplus you just calculated.
- Finally, add the fixed fee for that employee’s income level. This will give you the amount of withholding tax you’d owe for that particular month.
Although withholding taxes are required for employees in Mexico, they are not required for money received by corporations from a third party.
Employee Subsidies in Mexico
Mexico subsidizes the earnings of low-income residents by applying a tax credit to these individuals’ income tax withholdings, decreasing the withholding amount. In certain cases, the government might also increase the person’s yearly tax refund. The end result is a boost in take-home pay for lower-earning workers.
Mexico caps employee subsidies at a monthly income level of MXN $7,382.84. This means that any employee earning more than that on a monthly basis is not eligible for these benefits.
Benefits of an EOR When Determining Payroll Taxes in Mexico
If your company doesn’t have a physical presence in Mexico, but you want to hire Mexico-based employees, an Employer of Record (EOR) can help simplify the process. An EOR acts as the legal employer for your international employees, assuming the responsibility of hiring and managing employees on your behalf, including providing payroll services.
Partnering with an EOR helps companies to easily build and grow global teams without the the need to navigate a mountain of red tape, and reduces the risk of non-compliance with local rules and regulations. The alternative to working with an EOR for international hiring in Mexico is known as entity establishment — setting up a legal entity in the country.
Entity establishment is a complex and pricy process, often taking several months to a year before you’d be cleared for local hiring.
Outsourcing to an EOR for international hiring is significantly less costly. EORs can:
- Handle your international payroll: An EOR will act as your payroll provider, paying your employees on your behalf in whatever local currency is required (in this case, Mexican pesos). The company will also have in-depth knowledge of local tax codes, regulatory practices, and everything else that goes into managing global payroll.
- Alleviate compliance concerns: Different countries each have their own federal and local laws governing employee payments. An EOR helps ensure that you are compliant with the unique set of laws for any country in which your company operates. This is extremely important since a compliance slip-up can result in heavy fines or even a lawsuit.
- Hire and pay international contractors: Sometimes a particular project or role doesn’t require hiring a full-time employee. An EOR gives employers the flexibility to also hire contractors as needed, and avoid the potential for misclassification under local labor law.
- Take care of your global HR heavy lifting: EORs can manage employment contracts, benefits administration, same-day onboarding, HR support, calculating sick leave, and more. EORs even provide visa support for international employees.
With the increased prevalence of remote work, there’s never been a better time to start hiring globally. At Remofirst, we give companies a centralized platform to build and manage world-class remote teams in 180+ countries. We can handle your payroll taxes in Mexico and make sure your international team runs smoothly and successfully.
Book a demo and see what Remofirst can do for your company. Our team of experts will get back to you within 15 minutes, or you’ll get your first month of service for FREE.
FAQs
How much tax is deducted from employee salaries in Mexico?
The amount of tax deducted from salaries in Mexico depends on certain factors like income level, deductions, and tax credits. The top income tax rate in Mexico is currently 35%.
How are employees paid in Mexico?
Employees in Mexico don’t have a universally accepted payment cadence. They are typically paid monthly, bi-weekly, or weekly, depending on the employer's payroll schedule. The currency used for payments in Mexico is the Mexican Peso (MXN).
How many hours per week do employees in Mexico work?
The standard work week in Mexico consists of 48 hours, typically spread across six days. Eight hours per day is the norm.
