Payroll and taxes in Mexico: Comprehensive Guide for Employers
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Navigating payroll and taxes in Mexico can be complex, especially for employers looking to ensure compliance while optimizing their operations. Our comprehensive guide to payroll and tax in Mexico provides essential insights and detailed information to help you manage these crucial aspects of your business efficiently. From understanding local labor laws and tax obligations to mastering the intricacies of payroll processing, this guide is designed to equip you with the knowledge you need to succeed. Whether you’re new to the Mexican market or looking to refine your existing processes, this resource will help you streamline your payroll operations and stay compliant with Mexican regulations.
Mandatory payroll taxes in Mexico
In Mexico, employers are responsible for several mandatory payroll taxes that ensure employees receive essential social services, such as healthcare, retirement savings, and housing benefits. Understanding and managing these taxes is crucial for businesses operating in Mexico, as they play a key role in maintaining legal compliance and supporting the welfare of employees.
Employer taxes
In Mexico, employers are responsible for a range of payroll taxes and contributions that must be withheld from employees’ wages and paid to various government entities. These taxes fund essential services, such as social security, housing, and healthcare. The key payroll taxes that employers must pay include:
Social Security Contributions (IMSS)
Instituto Mexicano del Seguro Social (IMSS) contributions are mandatory for employers and cover a variety of social security benefits for employees, including healthcare, maternity leave, and pensions. Employers are responsible for contributing a percentage of the employee’s salary to the IMSS.
Employers contribute approximately 20% to 28% of the SBC to the IMSS, covering various social security benefits, including healthcare, retirement, and worker’s compensation.
Payroll Tax (Impuesto Sobre Nómina - ISN)
The Payroll Tax, known as Impuesto Sobre Nómina (ISN), is a state tax levied on employers based on the total compensation paid to employees. The rate varies by state, generally ranging between 1% and 3%.
To calculate ISN, employers multiply the total gross wages paid to employees by the applicable state tax rate. For example, if the tax rate in a particular state is 2%, and the employer’s total payroll is MXN 100,000, the ISN would be:
ISN = 100,000 * 2% = MXN 2,000
Retirement Savings Contributions (SAR)
Employers are also required to contribute to the Sistema de Ahorro para el Retiro (SAR), which is the retirement savings system. This contribution is aimed at ensuring that employees have a pension upon retirement.
The SAR contribution is typically 2% of the employee’s integrated salary (SBC). This amount is paid into the employee’s retirement account.
Housing Fund Contributions (INFONAVIT)
Employers must contribute to the Instituto del Fondo Nacional de la Vivienda para los Trabajadores (INFONAVIT), which provides housing loans to employees. This contribution is mandatory and is intended to support employees in acquiring housing.
The INFONAVIT contribution rate is 5% of the employee’s SBC. Employers calculate this contribution by multiplying the employee’s integrated salary by 5%.
Dive in to simplify your payroll processes and protect your business from costly errors. Read the full article here: Mastering Payroll in Mexico: Calculating IMSS and Employer Social Contributions
Employee contributions
Statutory employee taxes and contributions in Mexico include Social Security (IMSS), retirement savings (SAR) and Income tax (ISR).
Social Security Contributions (IMSS)
This covers healthcare, disability and life insurance, and pension funds. Employees contribute between 2.375% and 10.75% of their SBC to social security, depending on the specific benefits covered (healthcare, disability, retirement, etc.).
Retirement Savings (SAR)
Employees contribute to the Sistema de Ahorro para el Retiro (SAR), which is their retirement savings account. The contribution rate is typically 1.125% of their integrated salary.
Federal Income Tax (ISR)
This is a progressive tax withheld from an employee’s earnings, based on their income bracket. The percentage deducted increases with the level of income.
For a more in-depth look at employee contributions in Mexico, including detailed breakdowns of social security, retirement, and income tax obligations, check out our full article. It covers everything you need to ensure compliance with Mexican payroll regulations. Dive deeper into the details here: Mastering Payroll in Mexico: Employee Contributions.
Additional payroll contributions in Mexico
In addition to the above payroll taxes and contributions, employers in Mexico must offer employees a Christmas bonus, vacation bonus, Profit sharing and comply with applicable CBA-mandated contributions.
Aguinaldo (Christmas Bonus)
Aguinaldo is a mandatory year-end bonus paid to employees. By law, it must be equivalent to at least 15 days of the employee’s salary and must be paid by December 20th each year. Some companies may offer more than the minimum requirement as part of their benefits package.
Vacation Bonus (Prima Vacacional)
Prima Vacacional is a vacation bonus that employees are entitled to when they take their legally mandated vacation days. The bonus is equivalent to at least 25% of the salary corresponding to the vacation days taken.
Profit Sharing (PTU - Participación de los Trabajadores en las Utilidades)
Profit Sharing (PTU) is a mandatory payment where companies share a portion of their profits with employees. Employees are entitled to 10% of the company’s pre-tax profits, distributed based on the salary and the number of days worked in the year.
CBA-mandated contributions
Employers covered by CBAs must ensure they comply with these additional contributions and benefits as stipulated by the agreements. Non-compliance can result in legal disputes, fines, and labor strikes.
Key elements of payroll in Mexico
Managing payroll and taxes in Mexico involves navigating a complex system of legal requirements, tax obligations, and employee benefits.
Below is a detailed list of the key elements that employers must consider when handling payroll in Mexico:
➤ Fiscal year: The fiscal year in Mexico aligns with the calendar year, running from January 1st to December 31st. Employers must align payroll, tax reporting, and financial statements with this period.
➤ Payroll cycle: In Mexico, employees are typically paid on a bi-weekly (quincenal) or weekly (semanal) basis.
➤ Minimum salary: Mexico sets a national minimum wage that is updated annually and varies by geographic region. The country is divided into two main wage zones: Zone A (which includes the northern border region) and Zone B (the rest of the country).
➤ Overtime: Overtime in Mexico is paid at 200% of the regular hourly wage for the first nine hours of overtime worked in a week. Any overtime beyond nine hours in a week must be compensated at 300% of the regular hourly wage.
➤ Notice period: In Mexico, there is no mandatory notice period required by law for termination. However, many employment contracts and collective bargaining agreements (CBAs) may specify notice periods for resignations or dismissals.
➤ Severance: Severance pay in Mexico is required in cases of dismissal without just cause. It includes three months of the employee’s daily integrated salary (salario diario integrado), plus 20 days of salary for each year of service and any accrued benefits such as vacation pay and proportional Christnas bonus.
➤ Leave & PTO: Employees in Mexico are entitled to twelve days of paid vacation after one year of service. After each year, two days will be increased until reaching 20 days and then two days will be added for every five years.
➤ Maternity & Paternity leave: Employed mothers have the right to 12 weeks of maternity leave. Employed fathers gave the right to 5 days of paternity leave. Find more about parental leave in Mexico.
How is payroll tax calculated in Mexico?
Calculate employment cost
Calculating employment costs in Mexico is a complex process that involves numerous factors, including taxes, mandatory contributions, and various employee benefits. Each of these components can vary based on specific circumstances and regulations, making the process intricate and highly detailed. Due to the complexity, we’ll address the full scope of calculating employment costs in Mexico in an another article, where we will explore these elements in greater depth.
Here you’ll find a comprehensive breakdown!
Calculate net salary
To accurately calculate the net salary of your employee, you’ll have to deduce taxes: the Social Security and related contributions and the Income tax.
Follow the steps below:
Take a look at our article if you want to have more details about how to calculate net salary in Mexico.
Step-by-step Payroll Process in Mexico
Managing payroll and taxes in Mexico involves several critical steps to ensure compliance with local laws and to accurately compensate employees. The payroll process can be broken down into three main stages: the pre-payroll stage, the payroll stage, and the post-payroll stage. Below is a detailed look at each of these stages.
Pre-payroll stage
The pre-payroll stage is crucial for setting up the foundational elements required to process payroll accurately. This stage includes the following key activities:
Data Collection: Collect and verify all employee information, including personal details, job classification, salary, benefits, and any other variable compensation like bonuses or overtime. Ensure that all employment contracts are up to date and that all relevant employee data is entered correctly into the payroll system.
Policy Verification: Review company policies, labor laws, and collective bargaining agreements (CBAs) to ensure compliance with minimum wage laws, tax obligations, and other legal requirements. This includes verifying the correct application of overtime rates, vacation accrual, and any other benefits.
Payroll Calendar: Establish a payroll calendar that aligns with the company’s pay cycle, whether it is weekly, bi-weekly, or monthly. Ensure that all critical deadlines are met, including the submission of taxes and social security contributions.
Payroll stage
The payroll stage is where the actual calculation of employee compensation takes place. This stage includes:
Gross Pay Calculation: Calculate the gross pay for each employee, including their base salary, overtime, bonuses, commissions, and any other earnings. This forms the starting point for determining the total compensation due to each employee.
Deductions Calculation: Calculate all mandatory deductions, such as social security contributions (IMSS), retirement savings (SAR), housing fund contributions (INFONAVIT), and income tax (ISR). Ensure that all deductions are made according to the applicable rates and regulations.
Net Pay Calculation: Subtract the total deductions from the gross pay to arrive at the net pay, which is the amount the employee will actually receive. Ensure that all calculations are accurate and that all deductions are in compliance with Mexican labor laws.
Payslip Generation: Generate detailed payslips for each employee, outlining their gross pay, deductions, and net pay. Payslips should be distributed to employees on the agreed payroll date.
Post-payroll stage
The post-payroll stage involves compliance reporting, payments, and record-keeping. Key activities include:
Payments: Disburse net salaries to employees through their designated bank accounts. Ensure that payments are made on time and in the correct amounts.
Compliance Reporting: Submit all required tax and social security payments to the relevant authorities. This includes filing reports with the Mexican Tax Authority (SAT), IMSS, and INFONAVIT, among others. Ensure that all reports are accurate and submitted within the specified deadlines.
Record Keeping: Maintain detailed records of all payroll transactions, including payslips, tax filings, and payment confirmations. These records should be kept for the legally required period to ensure compliance and for future reference during audits.
Post-Payroll Analysis: Review the payroll process to identify any discrepancies or areas for improvement. Ensure that any issues are resolved promptly and that the payroll process remains efficient and compliant with regulations.
Payroll options in Mexico
Running payroll for distributed team can be tricky and most global companies uses the following methods: in-house payroll administration, payroll software or local payroll outsourcing provider.
We discuss each method in detail below.
In-house payroll
If you already hav a Mexican legal entity, one of your option is to run payroll internally. To do so, you’ll have to source and hire payroll teams so they can administer payroll in-house.
This option gives you complete control over the payroll process and you’ll be fully in charge of compliance. Even if it seems a good option, it can be tricky to navigate local regulations whens starting a business. Also, sourcing, hiring and training your own team can be more expensive than outsourcing your payroll.
Payroll software
The payroll software is the perfect option for start-up and small businesses.
It allows small team to run payroll without spending a lot of money.
Local payroll outsourcing
Outsourcing payroll to a local payroll outsourcing provider is usually a wining strategy for businesses of all sizes. The partner handles payroll calculations, taxes and compliance on your behalf so you can focus on your core business.
The challenge when opting for local payroll outsourcing is the level of control that you’ll have. Indeed, it usually limits visibility into the payroll process, making it difficult to resolve payment errors and delays.
Simplify payroll and taxes in Mexico with Europortage
Payroll and taxes in Mexico are complex especially when it comes to compliance. That’s why we recommend working with a direct and local partner like Europortage.
Our team of local experts is on hand to support you throughout the entire employee lifecycle. We can give you clear advice on business incorporation and global hiring, in addition to handling employment contracts, payroll, and benefits. That way, you can focus on growing a world-class team and business.
Get in touch to find out more and start hiring top talent in Latin America!
