Payroll Taxes in Mexico: How It Works

Payroll taxes in Mexico is one of the hardest things to understand when establishing your nearshore operation. Although there is one single employer payroll tax, this article talks about all of the taxes involved in payroll, including social security and withholding taxes.
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Payroll taxes in Mexico is one of the hardest things to understand when establishing your nearshore operation. Although there is one single employer payroll tax, this article talks about all of the taxes involved in payroll, including social security and withholding taxes. 

Therefore, we can divide it into two parts; the taxes that the employee has to pay and the taxes that the company has to pay. In our article Mexican Withholding Tax: How Much To Retain, we talk about the part that the employee pays and the company withholds. Similarly, in our article Social Security In Mexico: The Whole Picture, we take an in-depth look at how social security works and all of the specific concepts of the contributions. 

In this article, we talk about payroll taxes in a comprehensive way. Hence, we explain both the burden to the company and how much the employee truly gets into his/her pocket.

To make things easy for you, we created a tool called Mexico’s Payroll Taxes Calculator. Certainly, we advise that you read on to understand these concepts and be aware of what is going on. However, with this tool, you can easily know how much it will cost you to have employees in Mexico.

So, let’s get to it.

To easily navigate this guide you can use the following table of content:

Table of Contents

Employer Payroll Tax in Mexico: A State Level Tax

Firstly, Mexico has federal-level taxes and state-level taxes. The federal-level taxes are the same all over Mexico and the state-level taxes, as you can probably guess, vary according to the state in which the business is located.

Employer payroll tax in Mexico is a state-level tax, and it’s pretty straightforward. It is charged as a percentage of the entire payroll and is the employer’s duty to pay it. The rate ranges between 1% and 3% of salaries, depending on the state your business is located. 

 

Mexican Employer Payroll Tax Rate By State

StateTax RateStateTax Rate
Aguascalientes2%.Morelos2%.
Northern Baja California1.8%.Nayarit3%.
Southern Baja California2.5%.Nuevo Leon3%.
Campeche3%.Oaxaca3%.
Coahuila2%.Puebla3%.
Colima2%.Querétaro3%.
Chiapas2%.Quintana Ro3%.
Chihuahua4%.San Luis Potosi3%.
Mexico City3%.Sinaloa3%.
Durango2%.Sonora2%
Guerrero2%.Tabasco2.5%
Guanajuato3%.Tamaulipas3%.
Hidalgo3%.Tlaxcala3%.
Jalisco2.5%.Veracruz3%.
Mexico State3%.Yucatán3%.
Michoacán3%.Zacatecas3%.

Mexican Withholding Tax

As we said, in this article, we cover all of the taxes involved in payroll in Mexico. This part talks about the income tax that employees pay to the Mexican government. However, it is the company’s responsibility to withhold it and pass it over to the SAT (Mexican tax authorities)

If you wish to have an in-depth understanding of how this works you can check out this article on Mexican Withholding Tax, although here we will provide a summary. 

Firstly, as stated before, this is the income tax that employees pay as individuals. So, the first thing we need to know is how much income tax individuals get charged in Mexico.

The following table summarizes it.

Income LevelLower LimitHigher LimitFixed FeeSurplus Tax Rate
I$0.01$644.58$0.001.92%
II$644.59$5,470.92$12.386.40%
III$5,470.92$9,614.66$321.2610.88%
IV$9,614.66$11,176.62$772.1016.00%
V$11,176.62$13,381.47$1,022.0117.92%
VI$13,381.47$26,988.50$1,417.1221.36%
VII$26,988.50$42,537.58$4,323.5823.52%
VIII$42,537.58$81,211.25$7,980.7330.00%
IX$81,211.25$108,281.67$19,582.8332.00%
X$108,281.67$324,845.01$29,245.3634.00%
XI$324,845.01Onwards$101,876.9035.00%

Step-by-step calculation:

  1. Check the level of income where the salary ranks between the lower limit and higher limit.
  2. Subtract the lower limit from the salary. The difference obtained as a result is called a surplus.
  3. Apply the tax rate of the salary’s level of income to the surplus. 
  4. Add the fixed fee according to the level of income to the surplus taxes.

Don’t worry, we do the full step-by-step calculation in an example ahead in this article. 

Employment Subsidy

Tax authorities grant a benefit to employees with low levels of income by subsidizing their income tax. So, in these cases, companies need to withhold less.

The following table summarizes how the subsidy is categorized.

Level of IncomeLower LimitHigher LimitMonthly 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$7.382,34Onwards$-

Step-by-step calculation:

  1. Check the level of income where the salary ranks between the lower limit and higher limit.
  2. Discount the subsidy from the employees income tax to pay.

Social Security: A Part of Payroll Taxes in Mexico

Social Security is a part of Mexican payroll taxes. If you wish to know more about this subject, you can read our in-depth article on social security in Mexico. Although, in this article, we will provide a basic summary.

Let us start with a little background.

The institution in charge of social security in Mexico is the Mexican Social Security Institute or IMSS (Instituto Mexicano del Seguro Social in Spanish). Its mission is to provide medical attention and social security to all Mexican workers or employees. Therefore, every Mexican employee in the private sector has the right to social security benefits. 

Both workers and companies need to make contributions to social security. However, it is the company’s responsibility to withhold this contribution and pay them to the IMSS.

INFONAVIT: Social Housing In Mexico

As a part of social security, employers need to contribute to workers’ social housing. Although social housing is managed by a different institute called the National Housing Fund Institute (INFONAVIT for its name in Spanish), it is a part of social security and is closely related to the IMSS.  

Employer-Employee Fees

The total amount that is paid to the IMSS is called Employee – Employer Fees or Cuotas Obrero – Patronales. The company (employer) has the responsibility of paying it. However, a proportion of the payment is contributed by the employee. The idea is that he is contributing, with a little proportion of his salary, to the payment of his social security. So, to properly calculate payroll taxes in Mexico, we need to understand the deductions that go to the IMSS and INFONAVIT.

Employer-Employee Fees Table

ConceptType of BenefitCompanyEmployeeCalculation Base
Work RiskIn-Kind and MoneyPremium according to Risk Category0.00%Base Listed Salary
Disease And Maternity InsuranceIn-Kind20.40 %0.00 %Monthly UMA
1.10 %0.40 %Difference between BLS and 3 times UMA
Medical Expenses for Pensioners And Their Beneficiaries.1.05 %0.375 %Base Listed Salary
In Money0.70 %0.25 %Base Listed Salary
Disablement and Life InsuranceIn-Kind & Money1.75 %0.625 %Base Listed Salary
Retirement; Advanced Age Severance and Old AgeOld Age2.00 %0.00 %Base Listed Salary
Advanced Age Severance3.150 %1.125 %Base Listed Salary
Nursery and Social BenefitsIn-Kind1.00 %0.00 %Base Listed Salary
INFONAVITIn Money5.00%0.00%Base Listed salary

Most of the concepts are calculated as a proportion of the Base Listed Salary, which is a concept we will see further ahead in this article.

Going from top to bottom, the first thing we need to find out is the Work Risk Premium.

So let’s take a look at this concept.

Work Risk Insurance

According to the type of risk that workers undertake in their jobs, the IMSS has categorized five different risk levels going from less dangerous to more.  Obviously, level I is assigned to administrative work in an office environment, and level V to the riskiest job you can imagine. The following tables show the levels of risk with their related risk premium.

Risk Category Premium
Class I
0.54355
Class II
1.13065
Class III
2.59840
Class IV
4.65325
Class V
7.58875

Secondly, the fixed part of Disease & Maternity Insurance is calculated as a proportion of Monthly UMA, and the other part as a proportion of the surplus of the worker’s salary over 3 times UMA. 

So let’s take a look at this concept.

UMA: The Measurement And Updating Unit

The Unidad de Medida y Actualización (UMA) is an economic reference unit. It is linked to inflation, and it’s used in Mexico to pay things like fines and social housing loans. The National Institute of Geography and Statistics (INEGI in Spanish) calculates the UMA. You can see it published here. Some social security deductions are made based on this unit. 

The following table shows both daily and monthly UMA.

ConceptMexican PesosUS Dollars
Daily UMAMXN $96.22US $4.83
Monthly UMAMXN $2,925.09US $146.82

The rest of the benefits are pretty straightforward and calculated directly from the Base Listed Salary, which I explain in a second.

How To Calculate Payroll Taxes In Mexico

In this section, we will show you step-by-step how to calculate payroll taxes in Mexico. We strongly recommend that you download our Mexico’s Payroll Tax Calculator and use these instructions to understand what’s going on. It will make things a lot easier for you. 

First, to calculate social security, we need to obtain the Base Listed Salary (BLS).

Calculating Social Security in Mexico

Base Listed Salary

First of all, Base Listed Salary is my own translation. The term in Spanish is Salario Base de Cotización (SBC). And the main difference with the regular salary is that it includes bonuses, commissions, etc.

Let’s get legal. Article 27 of Mexico’s Social Security Law stipulates that the Base Listed Salary is the amount on which social security benefits given to the employee are calculated and paid. 

The BLS is integrated by all payments made in cash regarding:

  • Daily Payment 
  • Gratifications
  • Premiums
  • Commissions
  • Payments in Kind
  • Any Other Retribution 

For practical purposes, we will think of an employee that only receives his regular salary.

Basically, to obtain the BLS, what you need to do is to integrate all the mandatory employee benefits i.e. vacations, vacations premium, and Aguinaldo (Christmas bonus) into the worker’s salary. 

If you would like to know more about these concepts, we recommend that you read our Employee Benefits In Mexico article.

Here’s a quick summary.

  • Vacations.  If an employee has worked for the company for more than one year, he is entitled to paid vacations every year. This period starts at six days and two days are added for each year of continuous employment in the company until the fifth year. After that, it is increased by two days every 4 years.
  • Vacation Premium. Vacation days are paid with an extra premium of 25% on top of the regular salary.
  • Christmas Bonus. If an employee has worked for the company for more than one year, he is entitled to a Christmas bonus of fifteen days of his salary.

The first step is to calculate the employee’s regular daily salary. Let’s see an example. Let’s think about Raul, a nice employee that has worked in the company for two and a half years and makes MXN $10,000 a month. 

 

 

Since Raul has continuously worked for your company for two years, he is entitled to 8 days of vacation. 

So, the way we calculate this is by first obtaining a factor.

Let’s see how it’s done.

  • Christmas Bonus 15 days.
  • Vacations 8 days.
  • Vacation Premium of 2 days (8 days * 25%). 

 

 

 

Now we multiply Raul’s daily salary times the integration factor in obtaining his daily BLS.

 

 

 

 

So, now we know that Raul’s daily BLS is $356.16, and all of the social security contributions will be applied to that amount. The next step is to find out what’s the risk premium. 

Since Raul is an administrative worker and works at an office, the risk premium would be Class I, with a premium of 0.54355%. 

 

 

 

 

Secondly, we need to calculate his surplus fee to calculate the In-Kind part of Disease and Maternity Insurance. Remember that the surplus is the difference between the worker’s monthly BLS and three times monthly UMA.

 

 

Surplus salary calculation for social security in Mexico

 

 

Now we have everything we need to calculate social security for our employee, Raul.

  • Monthly BLS = $10,684.80
  • Risk Premium = 0.54355%
  • Disease & Maternity Insurance Surplus = $1,909.53 

The rest is calculated directly from the BLS.

IMSS Calculation for a $10,000 Salary

Type of BenefitCompanyEmployeeCalculation BaseCompany ContributionEmployee Contribution
Work Risk0.54355%0.00%BLS$58.08$0.00
D. & M. Insurance In-Kind20.40%0.00 %Monthly UMA$596.72$0.00
1.10%0.40%Surplus$21.00$7.64
Medical Expenses for Pensioners And Their Beneficiaries.1.05%0.38%BLS$112.19$40.07
D. & M. Insurance In Money0.70%0.25%BLS$74.79$26.71
Disablement & Life Insurance1.75%0.63%BLS$186.98$66.78
Retirement Old Age2.00%0.00%BLS$213.70$0.00
Retirement Advanced Age Severance3.15%1.13%BLS$336.57$120.20
Nursery & Social Benefits1.00%0.00%BLS$106.85$0.00
INFONAVIT5.00%0.00%BLS$534.24$0.00
TOTAL$2,241.12$261.40
  • Company’s Contribution = $2,241.12
  • Employee’s Contribution = $261.40

Now, let’s move on to calculate the employer’s payroll tax in Mexico.

Calculating Employer Payroll Taxes in Mexico

This one is quite easy. Firstly we need to find the state where our company is located on the table. Remember that this is a state-level tax. Let’s assume that our company is based in Jalisco, so our employer payroll tax would be 2.5%. 

Employer Payroll Tax in Jalisco, Mexico

This 2.5% is applied directly to the regular salary, which, continuing with Raul’s example, is $10,000. And this part is fully paid by the company.

Employer Payroll Tax in Mexico Calculation for the state of Jalisco

  • Company’s Payroll Taxes = $250

Calculating Withholding Tax in Mexico

So by now, we have already calculated social security and employer’s payroll taxes in Mexico. All that’s left is to calculate the amount of income tax that we need to withhold for Raul.

Firstly, we need to find his level of income in the Income Tax For Individuals Table.

employee income tax level for Mexican payroll tax calculation

Step-by-step calculation:

  1. Check the level of income where the salary ranks between the lower limit and higher limit.
  2. Subtract the lower limit from the salary. The difference obtained as a result is called a surplus.
  3. Apply the tax rate of the salary’s level of income to the surplus. 
  4. Add the fixed fee according to the level of income to the surplus taxes.

Let’s do it step by step in the following table.

Income$10,000.00
(-) Lower Limit$9,614.66
(=) Surplus385.34
(x) Tax Rate16.00%
(=) Surplus Taxes$61.65
(+) Fixed Fee$772.10
(=) Taxes to Pay$833.75
  • Employee Income Tax: $833.75

So we know that we need to withhold $833.75 from Raul’s paycheck and pass it over to the tax authorities. Since he makes more than $7,382.34, he doesn’t get any subsidy. 

Now, let’s summarize all of the payroll taxes in Mexico for Raul’s $10,000 salary.

Payroll Taxes In Mexico For A $10,000 Salary

Concept

Company's Burden

Employee's Burden

Social Security

$2,241.12

$261.40

Payroll Tax

$250

$0

(Withholding) Income Tax

$0

$833.75

TOTAL

$2,491.12

$1,095.15

Conclusion

Payroll taxes in Mexico are complicated but it isn’t something impossible to understand. You just need to know the underlying concepts and the rates that are charged. At Start-Ops we help you by taking care of all of the administrative hassle implied in opening a nearshore office. We are experts at providing all-inclusive soft-landing solutions.  For everything your company needs to establish in Mexico, you can rely on us.

If your company is thinking about exploring nearshore options, get in touch with us. We can develop a business plan that takes into account all of the costs involved in moving a part of your business to Mexico.

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Roberto Cornejo
Roberto Cornejo

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