Mexico, one of the largest economies in Latin America, coupled with its rich cultural heritage, enables it to attract business from all across the world. Companies in the US and Europe alike looking to bolster their workforce without compromising on existing quality are all looking to Mexico as the latest haven for top-quality employees.
However, if you want to do this, you must set up a payroll before onboarding your Mexican employees. Payroll taxes are among the hardest things to understand about employing in Mexico.
Employer Contributions to Payroll Taxes
Payroll taxes in Mexico are state-level taxes, meaning they vary from state to state; hence, they are straightforward. Payroll taxes are charged as a percentage of the entire payroll, and the employer must pay it. The rate changes between 1% and 3% of salaries, depending on the state of the business.
An overview of Employer tax responsibilities in Mexico as far as payroll taxes are concerned is highlighted below:
| Employer Contributions | Figures |
| 17.00% | Social Security Contributions (IMSS), and this includes Retirement and National Housing Fund (A Maximum annual contribution of 160,215 MXN) |
| (1 – 3)% | State Payroll Tax |
| Bi-Monthly | Payroll Frequency |
| 2.775% | Employee Costs |
| 20% | Total Employment Costs |
Social Security Contributions
Regarding employer payroll taxes in Mexico, social security contributions must be considered. There are several social security systems in Mexico. Still, the most important is the Mexican Social Security Institute (IMSS) and the Institute of Security and Social Services for State Workers (ISSSTE).
The social security system is a host of schemes providing workers various benefits. Sickness, Maternity, Medical care, Occupational risks, Retirement, etc. Mexican workers spend an average of 20.1% of their salaries on taxes and social security contributions. The Breakdown is as follows:
| BENEFIT | PERCENTAGE OF EMPLOYEE’S GROSS SALARY |
| Illness and Maternity | 20.4% |
| Disability and Life | 2.375% |
| Childcare and Social Benefits | 1% |
| Retirement | 2% |
| Severance at Advanced Age and Old Age | 4.275% |
| Occupational Risks | Based on Corresponding Premium |
| Infonavit | 5% |
Healthcare and Other Benefits
Mexico employer tax obligations effectively cover employee benefits, which are mandatory according to several labor laws in the country. These laws guarantee a range of statutory benefits for employees. If you are employed in Mexico and do not offer these benefits, you could face punishment from the government.
Mexican employers contribute 25 – 35% to the IMSS in addition to their salaries. This contribution covers healthcare amidst other benefits like work-risk insurance, Disability Pay, Sick Leave, Childcare, Social housing, Pension plans, etc.
Read more: Employee Benefits in Mexico
Employee Payroll Tax Deductions
As for withholding taxes in Mexico, employers play a crucial role. Generally, Payments to resident corporations and PEs are not subjected to withholding tax rates. Payments by resident corporations to resident individuals are subject to withholding taxes.
Mexico employers are responsible for federal income tax withholding and remittances, state payroll tax payments, social security withholding, and contributions. An income tax of 40% with no deductions must be withheld on most Mexican-source payments made to foreign-related parties.
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Income Tax Deductions from Salaries
Here is how income tax deductions work in Mexico. Every Mexican or foreign nationals resident abroad who earns income in Mexico is required to pay income tax. Employees must pay value-added tax when they obtain income from the same goods or the lease of real estate other than their homes.
Legal entities or individuals that make payments to residents abroad for the provision of goods and services to be used in Mexico and for tangible or intangible goods are mandated to pay tax at a 16% rate in line with VAT laws. If an employee is not resident in Mexico, the employer may not pay the value-added tax directly.
Social Security Deductions from Employee Pay
Regarding employer contribution to Social Security, contributions to the existing schemes within the Mexican government it is divided as follows:
For Sickness and Maternity – 20.40% of the UMA (Unidad de Medida y Actualizacion) is a newly approved means of calculating wages, payments, obligations, or even penalties owed to the government.
- For Sickness and Maternity is 20.40% of the UMA, with 1.10% of the amount over 3 UMAs, plus 1.75% of the monthly wage.
- For Social Services and Nursery – 1% of the worker’s monthly wage
- For Disability and Life Insurance – 1.75% of the worker’s monthly wage
- For insurance for employees’ work injuries, 2.033% of workers’ monthly wages.
Read more: Leave Policies in Mexico: Including Maternity Leave and Employer of Record in Mexico
Calculation of Payroll Taxes in Mexico
Calculating Payroll taxes in Mexico is better understood using a step-by-step procedure; we will take you through that in this section. The state where the business is situated determines payroll taxes since payroll tax rates in Mexico are state-based.
Calculating payroll taxes on a state-by-state level helps prospective companies effectively assess their hiring budget and determine the best location for business. The Payroll tax guide in Mexico is further explained in the next section.
Examples of Payroll Tax Calculations
To understand payroll tax calculations, let’s take the example of a hypothetical employee, Miguel, who works with a software company based in Campeche and earns $10,000. To calculate his payroll tax, the tax rate in Campeche, which is 3%, is factored in here.
Campeche’s Tax Rate = 3%
Miguel’s Monthly Salary = $10,000
This makes Miguel’s Tax Due = $300.
Compliance and Reporting Requirements
Payroll taxes and paying taxes for foreign businesses in Mexico can be very tasking. Complying with strict labor laws and ensuring business growth. In Mexico, employers must be responsible for remittances, federal income tax withholding, social security withholding, and state payroll tax payments.
Common Challenges and Solutions
Business payroll taxes in Mexico also come with challenges, but the solutions are as handy as possible. Some of the challenges can also be linked to the need for efficient local knowledge to navigate payroll tax issues and strengthen the position of your business.
Mexican payroll tax compliance can be a very tough nut to crack. Some challenges involve the following;
- Difficulty in staying compliant with dynamic labor laws.
- Adapting to the local laws and knowledge of conducting business
- The Laborious process of filing tax returns or payroll taxes as an employer.
- Businesses face challenges businesses face in the Mexican economy: choosing a payroll platform, determining your prospective employee’s status, and capturing your new hires Mexican Payroll information.
Regardless of these challenges, Globy has strategically positioned itself as an all-encompassing solution to them.
- By helping to conduct an effective hiring process to get new and top-quality hires
- Ensuring the effective management of company payroll by its partners and deploying the help of automation and technology.
- All of these while ensuring you are armed with all the local business knowledge you need to succeed.
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Conclusion
Managing taxes in Mexico as a new entrant into the Mexican economy can be demanding. Payroll taxes come with complexities that necessitate an experienced hand or representatives who can serve as a steadying hand as you expertly navigate the many demands of the Mexican state.
With its expertise due to years of helping foreign businesses from the US and Europe recruit ‘top of the shelf’ employees and also help ease business conduct, Globy readily comes in handy in this situation. We can be your strategic partner in ensuring you get new hires. We are always ready to start with you until you fully learn the ropes and can continue independently.
FAQ
Payroll taxes are a specific form of commitment employers in Mexico make to their employees. It is contributed to allied authorities in a lump sum to settle employee benefits. Employers in Mexico are also mandated to make social security contributions to aid their employees’ standard of living.
Both employers and employees need to make contributions to the social security of employees. They are calculated as a percentage of the base listed salary. For sickness and maternity insurance, 0.625 of the worker’s monthly wage is added to 0.40% of that amount, which is more than 3 UMASs.
The Mexican Social Security system and the IMSS cover medical and social needs for all Mexican Workers, and employers contribute between 25 to 35% in addition to employees’ salaries to the IMSS. The percentages between healthcare and other benefits only vary. Healthcare contributions are over 20%, while the other benefits have much smaller percentages.
It is mandated for employees to pay an income tax on their salaries in Mexico. The country follows a progressive tax model where the tax is levied on the salary ranges, ranging between 0% to 35%.
Employee social security deductions are directly withheld on salary payments and sent to the Mexican Social Security Institute. The employer also makes contributions calculated at varying percentages, all based on multiples of the average minimum wage.
This is straightforward, as payroll taxes in Mexico are state-based, and they are always charged as a percentage of the total payroll. It is the employer’s tax duty to pay them. It ranged between 1% to 3%, depending on the state the business is located.
The laws governing payroll taxes are complex. Keeping up-to-date payroll tax payments, record-keeping, a lack of confidentiality, and managing employee information and timesheets can be challenging. Hence, a credible solution to solving these issues is to have a solid platform that can serve as a credible interface to help navigate these pitfalls and ensure business growth.
