When companies decide to hire talent in Mexico, many of them are confused by PTU, or employee profit sharing.
PTU, also known in Mexico as employee profit sharing, is a constitutional right for employees who have worked at least 60 days for a company. According to Mexico’s federal labor law, an employer must divide 10% of their profit equally among all employees.
Profit sharing payments are capped at 3-months of an employee’s salary and prorated for employees who have been with the company for less than a year.
The goal of PTU is to reward employees for their hard work and valuable contributions to the company.
Like social security taxes, PTU is a required part of navigating payroll in Mexico.
In Mexico, profit sharing, like social security, is a constitutional right and mandatory benefit. Here’s how it works:
Per the constitution, a National Commission establishes what percentage of profits companies must pay their employees. This is determined by government officials and labor experts.
Companies that meet the requirements for PTU (in most cases, businesses that have been operating for 2+ years) must pay 10% of their taxable income to their employees. This percentage is subject to change.
Per law, employers in Mexico must explain how their profit-sharing calculations are made by giving their workers an annual report. The profits are determined by the annual Income Tax Return (ISR) with the Tax Administration Service (SAT).
Companies must make the previous year’s PTU payments by May 30th. If you’re a sole proprietor or another single-member business, then the deadline is June 29th.
You can read more about PTU in Fraction IX, Section A of Article 123 in the Mexican Constitution. You also check out Chapter VIII for more information.
In most cases, PTU is a right, or mandatory benefit. If your business is registered with the tax authority and has employees, then you are required to pay profit sharing in Mexico.
According to Article 126, certain organizations and companies are exempt from PTU, including:
Companies that are newly formed and have been in business in Mexico for fewer than two years and are actively building a new product or offering a new service. After the first two years, employees will receive PTU payments
Companies that are newly formed and in their first year of operation
Companies with a taxable profit that does not meet their industry’s threshold, as outlined by the Department of Labor and Social Services
Government institutions, including organizations with cultural and charitable missions
Mexican Social Security Institute
Mining and extraction companies (during the exploration and development phase)
Private assistance companies
If your business is profitable, the government will find out. Evading PTU payments can lead to steep fines and penalties.
Most seasonable and full-time employees are entitled to PTU, given they have worked at least 60 days in the calendar year. For employees that did not work the full year, payments are prorated.
Certain workers are exempt from PTU, including:
Domestic employees, like janitorial workers
Workers who have spent less than 60 days with the company
Others that provide temporary services
If you fail to enroll an eligible employee in your company’s profit sharing program on their first official day of employment, your business could be fined upwards to $18,000 USD.
Employers in Mexico must take PTU into consideration when determining compensation and benefits packages further. To make the process smoother, companies should take PTU, stock options, private health insurance, performance bonus, and other forms of variable compensation into account when determining each employee’s base salary.
However, you cannot use PTU to pay for other bonuses or incentives unless that is clearly spelled out in the contract.
In theory, you take 10% of your profits and divide them among employees. In practice, dividing PTU can be more complicated.
To calculate PTU in Mexico, companies divide the profits into two equal parts.
The first part is distributed equally among employees (this is prorated for employees who worked less than 1 year)
The second part of the profits is based on the employee’s base salary–the payout is divided in proportion to the worker’s annual salary or wages.
In general, workers with higher salaries will receive a higher PTU payment.
In practice, payments can become more complicated, since you need to take into account 1) how long an employee has worked for your company and 2) if the PTU exceeds a certain proportion of their salary.
If an employee worked for less than 1 calendar year but 60 days, their PTU will be prorated
If the PTU is higher than an employee’s three months of salary on the date of payment, then the PTU is capped at three months. Commission payments should not be counted towards salary.
If, after completing the above calculations, your company has a surplus amount, then this profit is considered surplus profit. The company can re-invest these funds into the business.
The deadline for companies to pay PTU is May 30 or within 60 days of filing the company’s annual tax return for the previous year. For “natural persons” with business activity, the deadline is June 29.
Many US employers think that profit sharing is like a 401K or other retirement plan, but that is not the case.
401K contributions are not directly related to the company’s profits (technically speaking, they are deferred employee wages). They aren’t legally required, either.
In the US, profit sharing looks different. It generally takes the form of end-of-year performance bonuses, stock options, and equity.
Independent contractors do not receive profit-sharing payments, even if they have worked 60 days for the company. However, misclassifying workers as contractors to avoid PTU payments can lead to lawsuits and fines.
Not sure if you’re misclassifying workers in Mexico? Partner with an EOR like Via to help you navigate payroll in Mexico.
Given that they meet all of the requirements, foreign employees living and working in Mexico are entitled to receive PTU benefits.
Many companies want to hire workers in Mexico and build hubs in places like Mexico City and Guadalajara, but aren’t sure how to navigate PTU, or employee profit sharing, and other aspects of compliance abroad.
With Via, we can help you calculate and understand profit sharing. We have on-the-ground experts within the country with the legal knowledge to understand exactly what employees are entitled to.
Our team of local labor lawyers and experts ensure that your company remains compliant while expanding abroad. As your employer-of-record/entity in Mexico, Via assumes responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
With Via’s transparent pricing, you can pay full-time employees or contractors in Mexico with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.