Thinking of Expanding into Mexico: Payroll Essentials

February 15, 2022
5 mins read
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Mexico offers many enticements to organizations looking to expand globally. Affordable labor costs, an educated workforce and its proximity to the US, are according to industry experts just some of the reasons manufacturing companies are moving there. Plus in response to both the signing of the United States-Mexico-Canada Agreement (USMCA) and Covid-19 many US companies started to consider Mexico over China as best positioned for business partnerships and as part of the global supply chain.

In addition to these changing circumstances Mexico is attractive because it is currently the 15th largest economy in the world and 11th in terms of purchasing power.

If a move to Mexico is on the plans, here are some key payroll considerations.

Minimum wage

From January 1 2022 the general minimum wage is $172.87 pesos per work day and $260.34 pesos per work day  along the Northern Border Zone.

Setting up payroll in Mexico

To operate payroll in Mexico, you will need to follow these steps.

  1. Register your business by filing before a notary public and the National Registry of Foreign Investment.
  2. You’ll then receive a tax identification card from the Federal Taxpayers registry.
  3. You cannot pay your employees until you register with Mexican Social Security and get tax registration in the country.
  4. You need to establish bank accounts in Mexico before making payments to employees or the government.

Payroll Essentials

As noted in our Global Payroll Glossary,

  • The typical payment cycle is bi-weekly
  • 13th and 14th salaries are not required by law, but a common practice.
  • 48 hours max per week
  • Overtime – Employees can work up to 9 hours exempt per week. The following 9 hours will be paid at a rate of 200% salary and any hour beyond that at a rate of 300%.

Global Mobility

To get a work permit in Mexico a candidate needs to apply for a residence visa, which can be temporary resident visa (6 months to 4 years) or permanent. After that, a work permit can be obtained by applying to the Instituto Nacional de Migración (INM) for permission to work.

Personal Income tax rates for 2022

The following tax rates are effective for resident individuals for 2022

tax rates complying with employment law for payroll in Mexico

Source: PwC

If the employee is considered a non-resident for Mexican tax purposes, the tax rate applicable to compensation will vary from 15% to 30%. The first MXN 125,900 of employment income received in a 12-month floating period will be tax exempt.

The following tax table is applicable to individual income tax with respect to income earned by non-residents for the calendar year 2022:

income tax calculation rates for non native employees in Mexico

Source: PwC

Deductions

Employer contributions include Social Security, housing fund, and the retirement fund.

Social security contributions

Both the employee and the employer make income tax contributions to the Mexican Social Security Institute. The rates vary and it is critical to ensure that you are paying the correct amount for your industry and location.

Payroll taxes

Most Mexican states levy a relatively low rate of tax on salaries (but not on income in general), which in most cases is payable by the employer. For example Mexico City, imposes a 3% payroll income tax, but it is payable by the employer and constitutes a tax deductible expense for the employer.

Pensions

Decrease in the number of contribution weeks

In 2020 the Mexican government passed a pension reform initiative that revises the social security law and retirement savings system. One of the main changes is that the contribution weeks of workers decreases from 1,250 to 750 weeks. This is the now the number that the Mexican Institute of Social Security (IMSS) requests employees in Mexico have if they want to receive the benefits of the severance sector in advanced age (60 years) and old age (65 years), and will increase by 25 each year until reaching 1000 in 2031.

Increase in social security rate

Another significant change is that the contribution rate for social security increases to 15% of the base contribution salary. This is in addition to the rise in the minimum guaranteed pension from, on average, 3,289 to 4,345 pesos. This takes into account the worker’s SBC, the age at which it is requested, and the number of weeks quoted on the date of the procedure.

Changes to pension commissions

In addition, the commissions charged by pensions are capped at 0.54%, while the contribution increases from 5.15% to 13.88%. These are some of the reform points that fundamentally seek to address any current issues and support workers when paying their pension.

For more information on Mexico payroll including severance pay, maternity leave and local labor laws – download the Global Payroll Guide here.

The Immedis global payroll glossary provides information such as minimum wage, income tax, social security contributions

 

To learn about payroll requirements for other countries including US States and Canadian Provinces, visit our Global Payroll Glossary.

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