Located at the southern end of North America, Mexico is one of the most important economic partners to the United States and Canada. Mexico’s rich history and its ever growing economy has turned the country into an appealing destination for digital nomads. The country’s strong university system also makes Mexico one of the best places to recruit developers, marketers, and other knowledge workers.
Businesses looking to set up payroll in Mexico need to carefully observe both state and federal regulations, especially following the country’s 2021 labor reform laws.
Here’s a look at everything global companies need to know about establishing and performing payroll in Mexico.
Companies must be registered with a number of institutions in order to perform employment payroll in Mexico. While the process varies slightly from state to state, in general businesses must take the following steps:
Register the business with the Public Registry of Property and Commerce (Registro Público de la Propiedad y el Comercio)
Register with the National Foreign Investment Bureau (Secretaría de Economía)
Apply for a Tax ID from the federal taxpayer registration (Registro Federal de Contribuyentes)
Secure the Advanced Electronic Signature (Firma Electronica Avanzada) in order to file tax returns
Register with the Mexican Social Security Institute (IMSS) so that your employees can receive key benefits, such as basic healthcare and pension
Register for local sales or payroll tax, when applicable
Establish a bank account in Mexico in order to pay employees in accordance with Mexican payroll laws. Mexican tax revenue legislation passed in 2017 requires employee’s net pay to be paid in Mexican pesos only
Registration with some of these institutions can take up to 90 business days or longer, especially given ongoing delays from Covid-19.
Companies looking to employ individuals in Mexico need to keep in mind that they cannot start paying employees compliantly until they have completed these steps.
When setting up payroll taxes and deductions in Mexico, businesses need to keep in mind a number of factors, including federal taxes, state taxes, sales tax, and employee withholding tax.
In Mexico, individual federal income tax rates range anywhere between 1.92% and 30%. Those in Mexico on work permits and visas pay between 15% and 30% at the federal level and help with general resources for both the state and country.
State income taxes are levied at the individual state level and range from 1%-3%, depending on the individual state’s laws. These taxes are withheld directly by the employer.
In Mexico, the corporate income tax is a flat rate of 30%. The 30% corporate income tax rate is the same in each state, as well as Mexico City.
Sales tax throughout most of Mexico is a flat 16% (Value-Added Tax). However, in some areas closer to the border, the Value-Added Tax is 11%.
For employees in Mexico, the social security withholding rate is 1.65%. For the employer's social security contribution, the rate is 7.85%. Social security taxes cover a number of things for employees with the main portion covering their health insurance.
You can use a Mexican payroll deduction calculator to estimate an individual’s take-home pay.
Most calculators offer both simple and advanced features to calculate income tax deductions.
If you’re looking to estimate your employee’s salary based on the withholding features above, you can check out the Mexico Salary Calculator for 2022-2023.
In 2021, the Mexican government passed new labor legislation that made it more difficult for companies to outsource payroll to third-party services.
This means that when companies start hiring in Mexico, they usually have to set up an entity and manage payroll themselves.
While companies can quote salaries for Mexican employees in foreign currencies such as the US dollar, employees in Mexico must be paid 1) by a Mexican bank and 2) in the national currency, the Mexican peso (MXN). The company must operate an entity in Mexico.
Many companies based in Mexico want to hire talent in different countries, but aren’t exactly sure how to go about onboarding and paying employees across borders compliantly. Maybe you want to hire a software engineer based in Colombia, or a designer living in Canada.
With Via, we help you hire, onboard, and pay remote employees across the world. As your employer-of-record abroad, we take care of the local HR logistics, such as payroll, benefits, and taxes. Maintaining compliance is our responsibility. You simply focus on building your team and running your business.