Payroll In Mexico: Local Employment and Tax Laws
If you're a manager or director of software engineering, and your company is looking to expand or hire in Mexico, there are a few things you need to know about the local employment and tax laws. In this blog post, we'll take a look at what you need to do to make sure your payroll processes are compliant with Mexican law. We'll also discuss some of the key benefits of outsourcing your software engineering work to Mexico. Read on to learn more about how to do business in Mexico.
What does the payroll process in Mexico involve?
In Mexico, the Federal Labor Law (Ley Federal del Trabajo) governs most employment relationships. This law regulates hiring practices, working hours, pay and benefits, termination of employment, and other important aspects of the employer-employee relationship.
The Federal Labor Law is supplemented by many other laws, including the Social Security Law (Ley del Seguro Social), the Federal Law on Population (Ley Federal de Población), the Federal Law on Migration (Ley Federal de Migración), and the Tax Code (Código Fiscal de la Federación). These laws establish additional requirements related to payroll, including social security contributions, income tax withholdings, and migrant workers' rights. The Social Security Law requires employers to make monthly contributions to the Mexican Social Security Institute (IMSS) on behalf of their employees. The IMSS uses these funds to provide health insurance, disability and death benefits, and retirement pensions.
To comply with all these laws, employers must maintain accurate records of their employees' hours worked, pay rates, and other information. They must also withhold the appropriate payroll taxes and social security contributions from their employees' paychecks and make the required payments to the government.
When you employ workers in Mexico, you must comply with the country's employment and tax laws. This includes:
- Register your company and employees with the IMSS and make monthly contributions.
- Withhold payroll taxes for Mexico from your employees' salaries and make monthly tax declarations and payments.
- Provide your employees with certain documents, such as their contracts of employment, payslips, and an annual tax certificate.
The specific requirements depend on the number of employees you have, whether they are Mexican citizens or foreigners, and whether they work full-time, part-time, or seasonally. If you have employees in Mexico, you will need to comply with the country's employment and tax laws.
What do you need to know about payroll in Mexico?
There are a few key things you need to know about payroll in Mexico:
Working hours in Mexico
The workweek in Mexico is typically from Monday to Saturday, and employees usually work 8 hours per day. Some companies may offer flexible working hours. This means workers do over 48 hours a week.
Overtime rules in Mexico
The Federal Labor Law regulates overtime in Mexico. Employees can only work a maximum of 48 hours per week and must have at least one day off per week. Overtime must be voluntary, and employees must be compensated proportionally for any overtime worked.
Minimum wage requirements in Mexico
The federal government sets the minimum wage in Mexico and reviews it every year.
As of 2022, the minimum wage is $172.87 Mexican pesos per day, which is about $8.67 U.S. dollars. This means that a full-time worker earning the minimum wage would earn a little over $200 U.S. dollars per month. As an employer, you must pay your employees at least the minimum wage.
Severance pay in Mexico
In Mexico, employers are required to provide severance pay to employees when they are terminated from their job. The amount of severance pay is based on the length of time the employee has been with the company and is typically one month's salary for each year worked. The exception to this is if the employee is terminated for cause, such as theft or fraud. The employer must then provide the employee with a written explanation of the cause for termination, and the employee is not entitled to severance pay. However, if there is no justifiable cause for termination, the employer must pay the employee severance.
Currency in Mexico
The official currency in Mexico is the Mexican peso. As of 2022, the exchange rate is about 20 Mexican pesos to 1 U.S. dollar. The exchange rate can fluctuate, so it's important to check the current rate before converting your currency.
Employee agreements in Mexico
The Federal Labor Law requires all employers in Mexico to have written employment agreements with their employees. The employment agreement must include the following information:
- The names of the employer and employee
- The address of the company
- The start date of employment
- The job title or position of the employee
- The salary or wage of the employee
- The work schedule of the employee
- The length of the employment contract (if it is a fixed-term contract)
- The termination procedures of the contract
- The signature of the employer and employee
As an employer, you are required to provide your employees with a copy of their employment agreement.
Work permits for foreigners in Mexico
If you want to hire a foreign worker in Mexico, they must have a work permit. The type of work permit they need depends on their nationality, the type of job they're doing, and how long they plan to stay in Mexico. Work permits are typically valid for one year and can be renewed.
Mexico payroll taxes and deductions
The first thing you need to know about payroll in Mexico is the local employment and tax laws. Mexico has a federal system, which means each state has its own employment and tax laws. This can complicate things for businesses with employees in multiple states. The best way to ensure compliance is to work with a payroll service provider that specializes in Mexico payroll.
There are two main types of taxes that you will need to withhold from your employees' salaries: income tax and social security tax. Income tax is a progressive tax, which means the more an employee earns, the higher their tax rate will be. The current income tax rates in Mexico range from 1.92% to 35%.
Employer contributions in Mexico
There are a few employer contributions that are mandatory by law in Mexico. The first is social security, which is calculated as a percentage of an employee's wages. The amount withheld from each paycheck will depend on the employee's salary, and the employer is also required to contribute a matching amount.
The second mandatory contribution is for Mexican public health insurance, which is also calculated as a percentage of an employee's wages. The amount withheld and the employer's contribution will again depend on the salary.
In addition to these two contributions, employers may also choose to contribute to private pension funds and/or severance pay funds. These are not required by law but can be beneficial to employees.
Employee contributions in Mexico
In addition to employer contributions, employees are also required to contribute to social security and Mexican public health insurance. The percentage of wages withheld depends on the employee's salary.
Employees may also contribute to private pension funds and/or severance pay funds. These are not required by law but can be beneficial to employees. The amount contributed is typically a percentage of the employee's salary. It is deducted from their paycheck before taxes are calculated.
Income tax withholding in Mexico
Income tax withholding in Mexico is calculated based on the employee's salary. The amount withheld depends on the employee's tax bracket. The current tax brackets are:
- Up to MXN $7,735: 1.92%
- From MXN $7,735.01 to $65,651.07: 6.40%
- From MXN $65,651.08 to $115,375.90: 10.88%
- From MXN $115,375.91 to $134,119.41: 16.00%
- From MXN $134,119.42 to $160,577.65: 17.92%
- From MXN $160,577.66 to $323,862.00: 21.36%
Employee leave entitlement in Mexico
Employees in Mexico are entitled to a number of different types of leave, including:
Public holidays in Mexico
All employees in Mexico are entitled to paid leave on public holidays. If an employee works on a public holiday, they are entitled to an additional day off or to receive double pay for their work.
Paid leave annual leave in Mexico
The Mexican Federal Labor Law establishes that all workers are entitled to paid annual leave, regardless of their length of service.
The entitlement is:
- Six working days after one year of service
- Eight working days after five years
- 12 working days after 10 years
In order to be entitled to annual leave, employees must have completed at least six months of continuous service with their employer. Annual leave must be taken within the year it is accrued, and any unused leave will be lost.
Maternity/paternity leave in Mexico
Female employees in Mexico are entitled to 12 weeks of paid maternity leave. The first six weeks must be taken before the baby is born, and the remaining six weeks can be taken after the baby is born. Male employees are entitled to two weeks of paid paternity leave.
Sick leave in Mexico
Employees in Mexico are entitled to paid sick leave. The amount of paid sick leave an employee is entitled to is 60% of their salary if the illness is not work-related. If the illness is work-related, the employee is entitled to 100% of their salary. The Mexican Social Institute covers the cost of the treatment from the healthcare contributions.
Breastfeeding leave in Mexico
Female employees who are breastfeeding are entitled to one hour of paid leave per day to breastfeed or express milk. This leave can be taken in addition to the employee's normal break times. The employer is further mandated to provide a private space for the employee to breastfeed or express milk.
Unpaid leave in Mexico
Employees in Mexico are entitled to take unpaid leave for a number of reasons, including:
- To care for a sick family member
- To get married
- To have a baby
Employees can also take unpaid leave for other reasons if they have the permission of their employer. However, there is no entitlement to unpaid leave by law. The decision to grant unpaid leave is at the employer's discretion.
Other leave allowances in Mexico
There are a number of other leave allowances that may be applicable in Mexico, depending on the employer and employee agreement. These include:
- Paid leave for jury duty
- Bereavement leave
- Military leave
- Leave to vote
When an employee takes leave, their entitlement to benefits, such as health insurance, should not be affected.
Mexico has a number of local employment and tax laws that need to be taken into account when processing payroll. It is important to check the local laws in Mexico when processing payroll to ensure that all entitlements are being met. Failure to do so could result in fines or other penalties. Payroll outsourcing Mexico can be a good solution to ensure compliance with all local laws. When outsourcing payroll, be sure to choose a reputable provider who has experience in processing payroll in Mexico.
Payroll compliance in Mexico
The Mexican government has a number of requirements for payroll compliance. These include:
- Registering employees with the Mexican Social Institute
- Making social security contributions
- Making healthcare contributions
- Withholding income tax from employee salaries
Employers who fail to comply with these requirements may be subject to fines or other penalties. Outsourcing payroll can help to ensure compliance with all of the relevant laws and regulations.
Payroll outsourcing in Mexico
If you're looking to outsource your payroll processing in Mexico, it's important to be aware of the local employment and tax laws. It can also be helpful to partner with a company that has experience navigating these waters. We’ve outlined the basics of how payroll processing works in Mexico, and some of the key things to keep in mind when choosing a payroll outsourcing company.
Of course, this is just a snapshot — for more detailed information and advice on setting up your Mexican payroll, be sure to check out our resources page or contact one of our experts. At Revelo, we believe that Latin America is home to some of the best engineering talent in the world, and we’re passionate about helping companies tap into that potential.
If you’re looking for help scaling your engineering team quickly and cost-effectively, get in touch — we’d love to chat with you about how Revelo can help.