Tips for navigating Mexico payroll taxes

February 2, 2021

Mexico payroll taxes

With a low cost of living and historically strong trade relations with the United States and Canada, Mexico is an attractive market for companies looking to expand internationally. But navigating local tax regulations can be a challenge—especially when you’re new to the market.

Here’s what you need to know about Mexico payroll taxes and how to build a compliant tax foundation for local operations.

Mexico payroll taxes—an overview

In Mexico, employers are responsible for federal income tax withholding and remittances, social security withholding and contributions, and state payroll tax payments. Foreign workers and residents receive the same protections and legally mandated benefits.

The federal government in Mexico enacts and enforces income and social taxes on a country-wide basis, across all 31 states and federal districts which also assess payroll taxes on employers. In some states, there are tax agreements in place to avoid double taxation.

Federal income tax rates are levied on a progressive scale, with rates for residents ranging from 1.92% to 35% and rates for nonresidents ranging from zero to 30%.

The tax year in Mexico is the calendar year, January 1 to December 31, and employers must file annual tax returns for the previous year beginning in January. The tax deadline is March 15.

Most states require employers to file with the tax authority monthly or quarterly, and filing methods can vary with some states requiring payments at offices, banks or online.

Records are auditable for a period of five years.

COVID-19 support

Support is available for employers struggling to make employer social tax deposits to the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, IMSS). Qualifying businesses may arrange to make installment payments of up to 80% employer social taxes owed over a period of up to four years, subject to interests ranging from 1.26% to 1.82%.

Tips for building a compliant payroll tax foundation in Mexico

Your payroll tax infrastructure needs to be in place before you hire your first employee in Mexico. Here are some tips for ensuring compliance with Mexico payroll taxes.

Determine regional requirements

Companies need to understand business-specific and tax-specific considerations at both the national and local levels. State payroll taxes are collected on the following payments in Mexico:

State payroll taxes in Mexico

Collected
  • Wages and salaries
  • Commissions
  • Seniority premium payments
  • Social Security premium payments
  • Employee profit-sharing programs
  • Employer savings-fund participation
  • Bonuses
  • Incentives
  • Advances
  • Payments made to administrators, commissioners, members of the supervisory or management boards of companies or associations
Not collected
  • Pensions
  • Retirements
  • Funeral expenses
  • Workers’ union dues
  • Compensation for occupational risks and diseases
  • Employee association dues
  • Compensation derived from the dismissal or termination of the employment relationship
  • Benefits from the Workers’ Housing Fund
  • Work instruments such as tools and clothing
  • Participation of workers in company profits
  • Food pantries
  • Educational and sports scholarships for workers

 

Understand your business obligations

Employers in Mexico need to understand their obligations on both the organizational and individual employee level. Different types of organizations, as defined by the Mexican government, have varying payroll requirements and tax obligations.

For instance, resident employees of religious institutions and other nonprofit institutions are taxed at different income tax rates than employees of corporations. Low-income employees must receive a monthly subsidy toward their income tax liability.

Comply and register with the appropriate regulatory bodies

Employers must first register with the Tax Administration Service (Servicio de Administración Tributaria, SAT) to receive a tax identification number, or RFC number, before registering themselves and employees with the IMSS for the collection of social taxes.

To register with IMSS, employers must submit a Notice of Employer Registration in the Obligatory Regime through the IMSS website. Following this process, employers complete the registration process at the IMSS office.

Employers must enroll workers with the IMSS five business days or eight days, whichever comes first, after the date of hire. Furthermore, employers must keep employee data up to date. Employers with more than 300 employees must have a certified public accountant certify that the employer is complying with IMSS regulations.

Work with a payroll partner in Mexico

One of the ways to prevent potential compliance challenges is to work with a payroll provider that has regional expertise where you are doing business.

Payroll taxes are tough, if not impossible, to manage manually with precision. Rather than reinvent the wheel, businesses can save time and eliminate unnecessary complexity by working with a partner that specializes in Mexico payroll taxes.

Speak with a global payroll expert to learn more about how we can ensure your workers in Mexico are paid accurately and in compliance with all local tax withholding requirements.

 

The information provided on or through this website is for informational purposes only and does not constitute legal advice. Safeguard Global expressly disclaims any liability with respect to warranty or representation concerning the information contained herein, including the lost essence, interpretation, accuracy and/or completeness of the information in transit and language translation.

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