How to Manage and Pay Contractors in Mexico
Mexico is becoming an important hub for FinTech and other tech sectors. Many businesses can benefit from partnering with workers in the country to grow their companies.
Mexico’s diverse workforce makes it an ideal location for hiring independent contractors. From small startups to large corporations, hiring contractors in Mexico can prove to be a lucrative decision.
However, when you hire Mexican contractors, you’ll need to know how to:
Pay
Manage
Maintain compliance
Hire and recruit
Here’s a look at everything you need to know about managing and paying contractors in Mexico.
What is the difference between an independent contractor and full-time employee in Mexico?
When you hire contractors in Mexico, you’ll need to be extra careful about distinguishing full-time employees from independent contractors in the eyes of the Mexican government.
In Mexico, employee-employer relationships are regulated by the Mexican Federal Labour Law (Ley Federal del Trabajo). This law regulates what commercial codes and taxes contractors are required to abide by.
Some general distinctions between employees and contractors are:
Employees are on payroll while contractors are paid per project
Contractors file and deduct their own taxes
Employees are entitled to benefits while contractors are not
Contractors are not entitled to notice or severance
Contractors set their own hours and completion of projects while employees have a set schedule
In general, employees are directly working for a company in Mexico, while independent contractors are hired by a business to complete a specific service or project.
Misclassifying contractors
Unlike the business-friendly United States, Mexico has robust laws in place that favor employees and contractors.
Make sure you are properly distinguishing between an employee and contractor. According to the Federal Income Statue in Mexico, if you misclassify a contractor in Mexico, your company could be subject to lawsuits. You might also be required to build a permanent establishment in Mexico, which means paying additional taxes and adhering to specific laws.
Employees who are misclassified as contractors in Mexico may be entitled to accrued benefits, social security, and other compensations for the amount of time they’ve been doing work as an employee but labeled as a contractor.
How to determine if you need a contractor in Mexico
After deciding whether or not it makes sense to hire a contractor in Mexico, you’ll need to 1) determine the scope or your project and 2) determine the amount of time you’ll need the contractor for.
Although you should always be asking yourself these questions in whatever place you need to hire a contractor, including places like the United States and Canada, it is especially crucial you’re considering these questions when you’re hiring a contractor in Mexico:
Do I want to put this person on my payroll, or should they be responsible for their own taxes?
Is this person going to be working enough to where they are entitled to benefits and other forms of compensation from my company?
What qualifications does this person have that make them specialized to complete a specific project?
Do they need to put in bids to compete for these projects, or can I assign them everyday tasks like an employee?
Can I give this person independence to complete this project without inserting managerial opinion along the way?
How long will it take to complete this project?
Where to find contractors in Mexico
One of the best ways to find contractors in Mexico is through word-of-mouth referrals. But, without an established business base in the country, you may have to turn to other resources.
Job boards for hiring contractors in Mexico include:
Sites like UpWork and Fiverr allow you to research what services you need a contractor for and reviews on the candidate you plan to hire.
How to onboard contractors in Mexico
In Mexico, employment agreements are always mandatory, for both employees and contractors.
Take this requirement as an opportunity to always create a strong independent contractor agreement that details the scope of the working relationship. Putting a clear and detailed independent contractor agreement in place protects both you and the contractor, as well as helps both parties avoid any future misclassification or liability problems.
Independent contractor agreements outline important details between the contractor and client, including:
Description of the services being provided
Length of the project or service
Payment and other billing details
Dispute resolutions
How to pay contractors in Mexico
Before the first invoice hits from your Mexican contractor, you’ll need to know exactly how to pay them.
You have a few options to legally pay independent contractors in Mexico:
Use a third-party payroll service or EOR. One of the simplest ways to avoid payment and transaction fees when paying contractors is to use a global EOR service like Via. We don’t charge any hidden or foreign-transaction fees. Using a third-party payroll processing service in Mexico can be tricky because they need to be properly registered with local bureaucracies.
Set up a bank account. You can set up a bank account in Mexico to pay your contractors. However, you’ll normally need to set up an entity within the country and register with the proper bureaucratic organizations (which can take months).
International money order. One of the common ways to pay a Mexican contractor without an entity is to set up an international money order. They can take awhile to process, and the contractor will have to physically deposit the order. This is a good option when you’re only fulfilling one invoice.
Digital wallets. You can set up a digital wallet through multinational peer-to-peer lending companies like PayPal or Zelle. These services help you deposit and transfer money into your contractors accounts. This is perhaps the quickest way to pay contractors without partnering with an EOR service like Via. Most of these services do charge fees, so be aware of that before choosing this option.
Money transfer services. Another popular option for companies looking to send large amounts of money across borders is using a money transfer service like Payoneer. This option has a high transfer limit, quick transfer time, and different options for sending money. These transfers can occur relatively fast and usually ensure a prompt payment. But, if you transfer money in a different currency like USD to pesos, there usually is a conversion fee. Payoneer, for example, charges $1.50 for domestic transfers and a 2% fee for non-currency transfers.
How can Via convert Mexican contractors to full-time employees
After establishing a secure employment relationship with your Mexican independent contractor, you may want to bring them on as a full-time employee.
Using a global employer-of-record service like Via makes the process of converting contractors to full-time employees simple.
In Mexico, converting a contractor to a full-time employee must be completed in steps and both parties must come to an agreement.
To convert a contractor to a full time employee you need to:
Determine their new hourly rate/annual salary
Calculate employment taxes and deductions
Factor in employee profit sharing (PTU)
Determine benefits and bonuses
At Via, we have experts on-the-ground that can give you legal advice and guide you through the conversion process.
Determine new hourly rate/annual salary
As contractors normally charge more for their services because they pay their own taxes and don’t receive benefits, the rate that they charge may not easily align with how much someone performing those same tasks would be paid at your company as a full-time employee.
Using an EOR like Via can easily help you figure out the contractors hourly rate as an employee. Setting a new payment rate might be the most difficult step when deciding how to transition contractors to full-time employees, since you will need to consider other forms of compensation, like PTU, equity, payroll taxes, and health care.
Employers take on a lot more expenses for their full-time employees, and we can help you figure out what expenses are required for employees in Mexico.
Employment taxes
Using an EOR like Via can help you determine exactly what taxes need to be deducted from your employee’s paychecks.Remember, in Mexico, tax practices and withholdings are completely different for full-time employees and contractors. Contractors have to deduct their own self-employment taxes.
Required employment taxes in Mexico:
7.85% for social security (IMSS)
Income taxes ranging from 1.92%-30%
State income taxes are levied at the individual state level and range from 1%-3%
Profit sharing
Employers are also required by law in Mexico to profit share with their employees. This means that 10% of the total taxable income made by a business has to be shared with all employees (some exceptions apple).
Determine benefits and bonuses
Another crucial component when converting contractors to employees is determining their benefits and bonuses. As a global EOR service, we know exactly what additional compensation and benefits full-time employees are entitled to in Mexico.
Examples of mandatory benefits in Mexico include:
Social security
Aguinaldo (Christmas bonus)
Sick leave
Paid maternity and paternity leave
Health care
Our on-the-ground experts can help you figure out a competitive salary for contractors that you want to convert to full-time employees.
Why companies partner with Via
Hiring in Mexico can prove to be a difficult task without guidance. The country has strong labor and employment laws that favor contractors and employee rights. Without help, you may find yourself at the other end of a fine or a lawsuit.
At Via, we make onboarding workers in Mexico seamless. With our-easy-to-use platform, Via manages the local HR processes for global employment such as work visas and permits, benefits, payroll, background checks, and more. As your employer-of-record/entity in Mexico, Via assumes full responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
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