Mexican withholding tax is the amount a company retains from its employees’ pay to pass over to the Mexican tax authorities. Therefore, employees remain compliant with their tax payments without needing to hire an accountant.
Indeed, when starting a business in Mexico, you probably will need to hire employees. So, it is important that you know how this works. Not just because your company will be obliged to retain it, but also because it affects the amount that the employee will earn.
Basically, most employees think that the amount they get is what they are being paid. Therefore, to negotiate a salary, you will probably need to understand this.
Basically, in this article, we talk about the amount of income taxes that Mexican companies need to withhold from employees. However, this is not the entire picture when it comes to the payroll burden of Mexican companies. Therefore, in our article Payroll Taxes in Mexico: Understanding How It Works, we talk more in-depth about all of the concepts related to payroll taxes in Mexico and how to calculate them.
So, let’s see how the Mexican withholding tax works.
Mexican Withholding Tax: employees’ income Tax
Firstly, let’s begin with the income tax that employees have to pay for the income that they are receiving. Basically, it is a tax that employees pay on their income.
Certainly, the law requires that employers deduct the proportional amount of income tax contributions from their employees’ paycheck. Then the employer must submit this amount to the government each month. Hence, the term Mexican withholding tax.
So, let’s get legal. Article 96 of Mexico’s Federal Income Tax Law or Ley del Impuesto Sobre La Renta (LISR) explicitly stipulates that whoever pays a salary to an employee is obliged to withhold and pay a proportion of that salary. Following, these payments are considered provisional payments and will be credited against the employee’s annual tax payment.
Retentions are made according to the following table. Retentions are made according to the following table. While Mexican tax authorities update this table annually, you don´t have to worry. Because, if you bookmark this article, you can just come back and check it. Evidently, we update it every time it changes.
Income Tax Table For Individuals 2022
| Income Level | Lower Limit | Higher Limit | Fixed Fee | Surplus Tax Rate |
|---|---|---|---|---|
| I | $0.01 | $644.58 | $0.00 | 1.92% |
| II | $644.59 | $5,470.92 | $12.38 | 6.40% |
| III | $5,470.92 | $9,614.66 | $321.26 | 10.88% |
| IV | $9,614.66 | $11,176.62 | $772.10 | 16.00% |
| V | $11,176.62 | $13,381.47 | $1,022.01 | 17.92% |
| VI | $13,381.47 | $26,988.50 | $1,417.12 | 21.36% |
| VII | $26,988.50 | $42,537.58 | $4,323.58 | 23.52% |
| VIII | $42,537.58 | $81,211.25 | $7,980.73 | 30.00% |
| IX | $81,211.25 | $108,281.67 | $19,582.83 | 32.00% |
| X | $108,281.67 | $324,845.01 | $29,245.36 | 34.00% |
| XI | $324,845.01 | Onwards | $101,876.90 | 35.00% |
Ok but, how do you calculate it? Certainly, it’s quite easy. All you need to do is:
- Firstly, check the level of income where the salary ranks (the salary will be between the lower limit and higher limit).
- Secondly, subtract the lower limit from the salary. The difference obtained as a result is called a surplus.
- Thirdly, apply the tax rate of the salary’s level of income to the surplus. As a result, you obtain what we call surplus taxes.
- Lastly, you add the fixed fee according to the level of income to the surplus taxes and you get the Mexican withholding tax for that month.
So, let’s do it step-by-step.
Mexican Withholding Tax Calculation Example
So let’s do a calculation example. Basically, imagine that you start your business in Mexico and decide to hire your first employee, a talented manager by the name of Jorge. As a result of your negotiations, you offer him a monthly gross salary of MXN $18,000 in exchange for his services. He tells you that it doesn’t sound bad but he would like to know how much money will go into his pocket. Since you obviously bookmarked this article in your browser, you tell him that you will get back to him with his net salary.
So, let’s get to it.
Firstly, we need to locate Jorge’s Income Level in the Income Tax for Individuals Table. Evidently, we can find $18,000 on Income Level VI, between the lower limit of $13, 381.47 and the higher limit of $26,988.50.
Straightaway we have all the information we need to make Jorge’s Mexican withholding tax calculation. We know that, because of his level of income, we will need to withhold a fixed fee of $1,417.12. And, we also know that he will have to withhold 21.36% of Jorge’s surplus. So, secondly, let’s calculate that.
Certainly, that was easy. And, surely, we are almost done calculating Jorge’s Mexican withholding tax. Subsequently, the next step would be to apply the tax rate according to his level of income to Jorge’s surplus. So, let’s see how that’s done.
Lastly, all we have to do is to add Jorge’s income level fixed fee to his surplus taxes.
In the following table, you can see some examples for different levels of income.
| Income | $10,000.00 | $15,000.00 | $20,000.00 |
|---|---|---|---|
| (-) Lower Limit | $9,614.66 | $13,381.47 | $13,381.47 |
| (=) Surplus | 385.34 | 1,618.53 | 6,618.53 |
| (x) Tax Rate | 16.00% | 21.36% | 21.36% |
| (=) Surplus Taxes | $61.65 | $345.72 | $1,413.72 |
| (+) Fixed Fee | $772.10 | $1,417.12 | $1,417.12 |
| (=) Taxes to Pay | $833.75 | $1,762.84 | $2,830.84 |
Employment Subsidy in Mexican Withholding Tax
Additionally, in Mexico, the government grants a tax benefit to employees whose income is categorized as low. Indeed, it grants this benefit to them through their employers by lowering the Mexican withholding tax. Moreover, in some cases, employees can even get a tax refund.
So, let’s see how this works.
First, similarly to the income tax rates, there is a table categorizing different types of income levels between a lower limit and a higher limit.
Mexican Employment Subsidy Table 2022
| Level of Income | Lower Limit | Higher Limit | Monthly Employment Subsidy |
|---|---|---|---|
| I | $0,01 | $1.768,96 | $407,02 |
| II | $1.768,97 | $2.653,38 | $406,83 |
| III | $2.653,39 | $3.472,84 | $406,62 |
| IV | $3.472,85 | $3.537,87 | $392,77 |
| V | $3.537,88 | $4.446,15 | $382,46 |
| VI | $4.446,16 | $4.717,18 | $354,23 |
| VII | $4.717,19 | $5.335,42 | $324,80 |
| VIII | $5.335,43 | $6.224,67 | $294,63 |
| IX | $6.224,68 | $7.113,90 | $253,54 |
| X | $7.113,91 | $7.382,33 | $217,61 |
| XI | $7.382,34 | Onwards | $- |
Great. So, how do we calculate it? Let’s do an example then.
Mexican Employment Subsidy Calculation Example
Ok, Jorge was a manager, so we paid him MXN $18,000, which is a good salary by Mexican standards. Meanwhile, let’s think about Raul, an employee that will help us with office cleaning. Specifically, we offer Raul a monthly salary of MX $5,500.
Firstly, we need to calculate the amount of Mexican withholding tax we will be retaining. Since we already know how to do this, I will just summarize that part in the following table.
| Raul's Monthly Income | $5,500 |
|---|---|
| Income Level | III |
| (-) Lower Limit | $5,470.00 |
| (=) Surplus | $30 |
| (x) Tax Rate | 10.88% |
| (=) Surplus Taxes | $3 |
| (+) Fixed Fee | $321.26 |
| (=) Taxes to Pay | $324.52 |
Now that we know the amount of Mexican withholding tax we should retain for Raul, let’s calculate how much subsidy he gets from the government.
First, we need to locate his salary in the employment subsidy table so we know in which level of income it’s categorized.
So, because of the level of income that Raul receives, he gets a subsidy of $294.63, now all we have to do is subtract that amount from his income tax calculation.
In conclusion, we know that the Mexican withholding tax we need to retain for Raul is just $29.89. Since this amount is positive, we need to retain it and pass it over to the tax authorities. Whereas, if this amount would be negative, he would get a tax refund. Undeniably, this is a small amount of income tax to pay in comparison to not having the subsidy.
Conclusion
So, as discussed, Mexican withholding tax is the amount that the employee has to pay for his income. However, it is the company’s obligation to retain that tax payment from his paycheck and pass it over to the Mexican tax authorities.
Do you still have questions? Leave them in the comments below!
