One of the main challenges global companies face when building a distributed workforce in Mexico is navigating the country’s complex payroll tax regulations. Calculating tax liabilities for the Social Security scheme alone poses serious compliance risks.
Fortunately, some due diligence goes a long way in minimizing risk exposure and simplifying payroll administration for your Mexican workforce.
Read on for a breakdown of local payroll taxes and learn how to compliantly hire and pay a distributed workforce in Mexico from anywhere.
Mandatory payroll taxes and contributions in Mexico
Most of Mexico’s mandatory payroll taxes and contributions fall under the umbrella of Social Security, including healthcare, disability, retirement, unemployment, occupational risk insurance, nursery benefits, and a housing fund.
Employers that engage talent in Mexico must also withhold and remit income taxes on their employees’ gross earnings.
Below, we break down Mexico’s Social Security schemes and employee income tax brackets.
Because Mexico’s Social Security program encompasses most of the country’s state-backed insurance schemes, Social Security contributions account for most of the employer payroll tax liability in the country. Conversely, employees contribute much less to Social Security than employers.
The IMSS (Instituto Mexicano del Seguro Social) manages Social Security in Mexico, with total employer contribution rates ranging from 34% to 50%, while employee contribution rates amount to around 2.78%.
You can find details about each Social Security scheme, including their employee and employer contribution rates, in the table below:
|Sickness and maternity
|A program that provides health insurance to employees and income support for those on sickness and maternity leave
|20.40% calculated based on one monthly UMA (MXN 3,135.70 in 2023)
1.10% on the difference between Base Listed Salary (BLS) and three monthly UMAs
1.75% on the BLS
|0.40% on the difference between BLS and three monthly UMAs
0.625% on the BLS
|Disability and life
|A healthcare and life insurance fund for non-work-related injuries and illnesses that result in disability or death
|1.74% capped at MXN 2,593.50
|The primary state-backed pension fund
|2% capped at MXN 2,593.50
|Unemployment and old-age
|Supplemental retirement insurance for those unemployed at age 60 or 65
|3.15% - 11.88% depending on the employee's income bracket, capped at MXN 2,593.50
|A fund that provides income support and medical coverage for work-related injuries and illnesses
|0.54% - 7.59% depending on the risk category of the employer's industry, capped at MXN 2,593.50
|Nursery and social benefits
|A childcare services program for working parents of children aged 43 days to four years
|1% capped at MXN 2,593.50
|Housing fund (INFONAVIT)
|A fund that guarantees decent housing to Mexican employees
|5% capped at MXN 2,593.50
Employee income taxes
Whether you are locally incorporated or engage Mexican talent from abroad, any company that hires employees in Mexico must withhold and remit income taxes on employee gross earnings on their employees’ behalf.
Income tax rates in Mexico range from 1.92% to 35%, depending on the employee’s income tax bracket, which we have listed in the table below:
|MXN 0 to 8,952.49
|MXN 8,952.50 to 75,984.55
|MXN 75,984.56 to 133,536.07
|MXN 133,536.08 to 155,229.80
|MXN 155,229.81 to 185,852.57
|MXN 185,852.58 to 374,837.88
|MXN 374,837.89 to 590,795.99
|MXN 590,796.00 to 1,127,926.84
|MXN 1,127,926.85 to 1,503,902.46
|MXN 1,503,902.47 to 4,511,707.37
Additional payroll contributions in Mexico
In addition to the above payroll taxes and contributions, all employers in Mexico must offer their employees a vacation accrual, vacation premium, and 13th-month salary. They must also withhold and remit a state-level payroll tax.
Vacation accrual and premium
Mexico’s Federal Labor Law (FLL) guarantees all employees in Mexico a minimum of 12 days of paid annual vacation, depending on their tenure with their employer, plus an annual vacation premium, or bonus, equal to 25% of the employee’s base salary.
Every employee in Mexico is entitled to an end-of-year payment, or 13th-month salary, called Aguinaldo, worth 15 days of standard pay for employees who have worked for the entire year.
Employees who have worked for less than the full year receive a pro-rated payment proportional to the time they have worked for their employer. Aguinaldos must be paid before December 20.
Learn more in our guide to 13th-month pay.
All employers across Mexico must pay a state-level employer-only payroll tax ranging from 1% to 3% of their entire payroll, depending on the state where they’ve registered their business.
How is payroll tax calculated in Mexico?
First, determine your employees’ gross monthly earnings to calculate payroll taxes in Mexico. Next, calculate the employer and employee payroll tax liability for Social Security, vacation accrual, the vacation premium, Aguinaldo, the state payroll tax, and employee income tax as specified percentages of the employee’s gross earnings.
Remember to include payroll taxes and contributions in your total employee cost calculations when building a distributed workforce in the country.
Interested in hiring an employee in Mexico? Use our employee cost calculator below to accurately calculate payroll contributions and annual costs for your talent in Mexico.
Key elements of payroll in Mexico
Any company that hires employees in Mexico must familiarize themselves with the key elements of local payroll to mitigate risk and avoid fines, litigation, and other noncompliance penalties.
Key aspects of Mexican payroll include but are not limited to the following:
- Fiscal year. The Mexican tax year is the calendar year, running from January 1 to December 31.
- Payroll cycle. Mexico follows a weekly or bi-weekly payroll cycle, depending on the industry. While employers in most industries run payroll once every two weeks, those in the manufacturing sector, for example, must pay their employees weekly.
- Minimum wage. The general minimum wage in Mexico in 2023 is MXN 207.44 per day, while the minimum wage in the Free Zone of the Northern Border is MXN 312.41.
- Overtime. A standard workweek in Mexico is 48 hours. Employers must pay employees 200% of their standard wage for the first nine hours of overtime and 300% for any time beyond that.
- Termination. Mexican labor law does not require a minimum notice period for termination.
- Severance. In case of termination for unjust cause, the employer must pay the employee three standard salaries for the first year of service, plus 20 days of additional wages for each year of service, a seniority premium equal to 12 days of wages for each year of employment (capped at two monthly minimum wages per year), and accrued wages and benefits.
- Annual leave. Employees in Mexico who have worked for their employer for at least one year are entitled to 12 days of paid annual leave and a vacation premium, or bonus, worth 25% of their standard monthly salary. Annual leave increases by two days yearly from the second to the fifth year and by two days every five years after that.
- Maternity leave. Mothers receive two to six weeks of paid maternity leave before their expected due date and six to 10 weeks of postnatal leave. Maternity leave in Mexico is mandatory and paid at 100% of the regular salary.
- Paternity leave. Fathers are entitled to five working days of 100% paid paternity leave after the birth of a child.
- Adoption leave. In the case of adoption, mothers receive six weeks of paid leave starting from the day they receive the child, while fathers receive five working days.
- Sick leave. The FLL guarantees employees up to 52 weeks of paid annual sick leave at 60% of their standard wage from the fourth day of illness up to 52 weeks.
- Holidays. All employees in Mexico enjoy seven paid public holidays plus an extra day off every six years for the presidential inauguration.
How to set up payroll in Mexico
The process for setting up and administering payroll for a distributed workforce in Mexico varies depending on individual circumstances. Below, we outline the general steps most companies take to set up payroll in the country:
- Register your business in Mexico. Choose a business structure and register your business name. Then, register with the Tax Administration Service (Servicio de Administración Tributaria, SAT), Mexican Social Security Institute (Instituto Mexicano del Seguro Social, IMSS), and the National Workers Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT).
- Register with the state tax authority. Register with the respective tax authority in the state where your business is located to pay the state payroll tax.
- Open a bank account. Open a bank account with a local bank to make payments to authorities and employees in Mexico.
- Establish your payroll process. Establish a structured payroll process to reduce inefficiencies, delays, and errors: decide whether to run payroll internally or to partner with a payroll provider, determine your payroll cycle based on your industry, correctly classify workers, and establish payment methods.
- Ensure compliance. Determine employer and employee payroll tax liabilities. Ensure your work contracts and payroll procedures comply with local payroll regulations and CBA mandates, such as minimum wage requirements, 13th-month pay, and annual leave.
- Calculate tax liabilities and pay employees. Calculate taxes and contributions as specified percentages of your employees’ gross monthly earnings and make accurate and timely withholdings and remittances. Pay employees and provide them with payslips detailing gross pay, taxes, deductions, and net earnings.
- Register new employees. Register new hires with the three bodies mentioned above (SAT, IMSS, and INFONAVIT) and incorporate them into your payroll cycle.
Payroll options for employers in Mexico
The three most common methods global companies use for running payroll for a distributed workforce in Mexico are internal payroll administration, local payroll outsourcing, or global payroll outsourcing.
Each approach has its benefits and drawbacks, depending on individual needs and preferences. We explain each method in detail below.
One option for companies with local Mexican entities is to run payroll internally. This approach requires sourcing local talent and building in-house finance teams to handle the entire payroll process, from calculations and compliance to payments and filing.
While internal payroll gives you control over your payroll processes, the employer remains fully responsible for navigating Mexico’s complex tax and labor regulations, creating a serious payroll compliance risk.
To reduce risk exposure, consider partnering with a third-party legal expert.
Local payroll outsourcing
Instead of handling payroll internally, global companies with Mexican entities can also turn payroll over to a third party. With local payroll outsourcing, a local third-party payroll provider handles everything from calculations to filings on your behalf.
Outsourcing payroll lightens your workload, giving you more time to oversee your team’s day-to-day tasks. However, it limits visibility into the payroll process, often leading to payment errors and delays that are difficult to resolve.
This approach also offers limited scalability. Suppose you plan on hiring and paying talent in multiple countries. In that case, you’ll partner with a different payroll provider in each market, further siloing your payroll information, increasing your workload, and decreasing transparency even more.
Global payroll outsourcing
The best way to simplify payroll administration while ensuring compliance and scalability is to outsource payroll to a global payroll partner. A global payroll partner is a third-party entity that simplifies running payroll for an international workforce.
By consolidating payroll into a single workforce management platform, a global payroll partner allows global companies to run timely and accurate payroll for international teams without creating operational inefficiencies, like errors and delays.
With expertise in international payroll and tax laws, including Mexico, and a network of local payroll vendors worldwide, a global payroll partner ensures payroll compliance in any market where your employees live.
If you choose this approach, select a properly vetted provider that is well-versed in tax and labor regulations worldwide and ensure their workforce management platform meets your needs for transparency.
How to administer payroll in Mexico before entity establishment
As with most countries, hiring in Mexico isn’t fast or simple. Global companies that want to hire local employees must first undergo entity establishment.
Entity establishment is a lengthy and complex obstacle for global companies that prefer to test the waters of local markets before making long-term investments. Even if you’re already undergoing entity establishment in Mexico, you still have to wait several months to a year before you can legally hire local talent.
A simple alternative is to partner with an employer of record (EOR). An EOR is a third-party entity that acts as the legal employer of your global workforce, allowing you to hire employees internationally without first setting up local entities or risking violating local tax and labor regulations.
With expertise in payroll and tax regulations worldwide, an EOR handles compliant onboarding and runs timely and accurate payroll on your behalf, giving you more time to focus on your team’s daily responsibilities.
What’s more, an EOR not only runs global payroll but can also take on the heaviest HR tasks associated with building global teams. By handling onboarding, relocation, immigration, and global benefits administration while providing ongoing HR support, an EOR offers a perfect solution for companies interested in quickly hiring employees in multiple countries.
Learn more: What Is an Employer of Record (EOR)?
Simplify payroll and taxes in Mexico with Velocity Global
Hiring and paying top talent in Mexico and building a distributed workforce in the country is much easier with an experienced partner at your side.
Velocity Global’s EOR solution makes it easy for global companies to hire and pay employees in 185 countries, including Mexico, without establishing local entities.
Backed by a team with expertise in worldwide payroll regulations, our EOR solution consolidates your payroll processes into a single workforce management platform, offering transparency and scalability as your team grows while ensuring compliance along the way.
With Velocity Global, your employees in Mexico receive accurate and timely payments with consistent support so you can build a distributed workforce in the country with peace of mind.
Contact Velocity Global today to get started.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.