Last updated on November 20th, 2024 at 05:33 pm
Payroll taxes in Mexico are one of the hardest things to understand when establishing your business in Mexico. Regardless of whether you are starting a Mexican maquiladora through the IMMEX program or just a small software development firm, this article will be of help.
Although there is one employer payroll tax, this article talks about all the taxes involved in payroll, including social security and withholding taxes. All of these taxes are stated in the Mexican labor laws.
IMPORTANT: This article has been updated according to 2024’s state-level payroll tax changes.
We can divide payroll taxes in Mexico into two parts: the taxes that the employee has to pay and the taxes that the company has to pay. Our article Mexican Withholding Tax: How Much To Retain discusses the part 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 comprehensively talk about payroll taxes. Hence, we explain the burden to the company and how much the employee truly gets into his/her pocket.
To simplify things, we created a tool called Mexico’s Payroll Taxes Calculator. Indeed, we advise that you read on to understand these concepts and know what is happening. However, this tool lets you know how much it will cost to have employees in Mexico quickly.
If you wish to understand all taxes in Mexico, we recommend you read our Mexican taxes guide for foreigners.
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 where 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 in your business is located.
Mexican Employer Payroll Tax Rate By State
| State | Tax Rate | State | Tax Rate |
|---|---|---|---|
| Aguascalientes | 3% | Morelos | 2% |
| Northern Baja California | 4.25% | Nayarit | 3% |
| Southern Baja California | 4% | Nuevo Leon | 3% |
| Campeche | 3% | Oaxaca | 3% |
| Coahuila | 3% | Puebla | 3% |
| Colima | 2% | Querétaro | 3% |
| Chiapas | 2% | Quintana Ro | 4% |
| Chihuahua | 3% | San Luis Potosi | 3% |
| Mexico City | 3% | Sinaloa | 2.4 a 3% |
| Durango | 3% | Sonora | 3% |
| Guerrero | 2% | Tabasco | 3% |
| Guanajuato | 3% | Tamaulipas | 3% |
| Hidalgo | 3% | Tlaxcala | 3% |
| Jalisco | 3% | Veracruz | 3% |
| Mexico State | 3% | Yucatán | 3% |
| Michoacán | 3% | Zacatecas | 3% |
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 Level | Lower Limit | Higher Limit | Fixed Fee | Surplus Tax Rate |
|---|---|---|---|---|
| I | $0.01 | $746.04 | $0.00 | 1.92% |
| II | $746.05 | $6,332.05 | $14.32 | 6.40% |
| III | $6,332.06 | $11,128.01 | $371.83 | 10.88% |
| IV | $11,128.02 | $12,935.82 | $893.63 | 16.00% |
| V | $12,935.83 | $15,487.71 | $1,182.88 | 17.92% |
| VI | $15,487.72 | $31,236.49 | $1,640.18 | 21.36% |
| VII | $31,236.50 | $49,233.00 | $5,004.12 | 23.52% |
| VIII | $49,233.01 | $93,993.90 | $9,236.89 | 30.00% |
| IX | $93,993.91 | $125,325.20 | $22,665.17 | 32.00% |
| X | $125,325.21 | $375,975.61 | $32,691.18 | 34.00% |
| XI | $375,975.62 | Onwards | $117,912.32 | 35.00% |
Step-by-step calculation:
- Check the level of income where the salary ranks between the lower limit and higher limit.
- Subtract the lower limit from the salary. The difference obtained as a result is called a surplus.
- Apply the tax rate of the salary’s level of income to the surplus.
- 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 benefit employees with low-income levels, for example, workers making the minimum wage in Mexico by subsidizing their income tax. So, in these cases, companies need to withhold less.
The following table summarizes how the subsidy is categorized.
| Income Level | Lower Limit | Higher Limit | 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 | $324.87 |
| 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 | $0.00 |
Step-by-step calculation:
- Check the level of income where the salary ranks between the lower limit and higher limit.
- Discount the subsidy from the employees income tax to pay.
Social Security: A Part of Payroll Taxes in Mexico
Social Security is part of Mexican payroll taxes. To know more about this subject, 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 bit of background.
The Mexican Social Security Institute, or IMSS (Instituto Mexicano del Seguro Social in Spanish), is responsible for social security in Mexico. 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 contribute to social security. However, the company is responsible for withholding this contribution and paying it to the IMSS. At first sight, this may seem expensive, but it also has benefits. For example, when a working mother gets maternity leave in Mexico, the institute covers 100% of her salary for 12 weeks.
INFONAVIT: Social Housing In Mexico
Employers need to contribute to workers’ social housing as part of social security. Although social housing is managed by a different institute called the National Housing Fund Institute (INFONAVIT for its name in Spanish), it is part of social security and is closely related to the IMSS.
Employer-Employee Fees
The total amount paid to the IMSS is called Employee—Employer Fees or Cuotas Obrero—Patronales. The company (employer) is responsible for paying it. However, the employee contributes a proportion of the payment. The idea is that he is contributing a small 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.
| Concept | Type of Benefit | Company | Employee | Calculation Base |
|---|---|---|---|---|
| Work Risk | In-Kind and Money | Premium according to Risk Category | 0.00% | Base Listed Salary |
| Disease And Maternity Insurance | In-Kind | 20.40 % | 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 Money | 0.70 % | 0.25 % | Base Listed Salary | |
| Disablement and Life Insurance | In-Kind & Money | 1.75 % | 0.625 % | Base Listed Salary |
| Retirement; Advanced Age Severance and Old Age | Old Age | 2.00 % | 0.00 % | Base Listed Salary |
| Advanced Age Severance | 3.150 % - 11.88% | 1.125 % | Base Listed Salary | |
| Nursery and Social Benefits | In-Kind | 1.00 % | 0.00 % | Base Listed Salary |
| INFONAVIT | In Money | 5.00% | 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
|
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
According to Article 27 of Mexico’s Social Security Law, benefits are calculated based on the employees’ Base Listed Salary. 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.
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.
To obtain the BLS, you must integrate all the mandatory employee benefits, i.e., vacations, vacations premium, and Aguinaldo (Christmas bonus), into the worker’s salary.
If you want to know more about these concepts, we recommend reading our Employee Benefits In Mexico article.
Here’s a quick summary.
- Vacations. If an employee has worked for the company for over a year, he is entitled to paid vacations yearly. This period starts at 12 days, and two days are added for each year of continuous employment in the company until the fifth year when 20 days are reached. After that, it is increased by two days every four 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 over a 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, an excellent employee who has worked for two and a half years and makes MXN 10,000 a month.
Since Raul has continuously worked for your company for one year, he is entitled to 12 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 12 days.
- Vacation Premium of 3 days (12 days * 25%).
Then we multiply Raul’s daily salary times the integration factor in obtaining his daily & monthly BLS.
| Concept | Days |
|---|---|
| Annual Work Days | 365 |
| (+) Vacation Days | 12 |
| (+) Christmas Bonus Days | 15 |
| (+) Vacation Premium (25% * 12) | 3 |
| (=) Total Days | 395 |
| (/) Days in a year | 365 |
| Integration Factor = | 1.0822 |
| Concept | Amount |
|---|---|
| Daily Salary | 333.33 |
| (X) Integration Factor | 1.0822 |
| (=) Raul's Daily BLS | $360.73 |
| (X) 30 Days | |
| (=) Raul's Monthly BLS | $10,821.92 |
We know that Raul’s daily BLS is $360.73, and all social security contributions will be applied to that amount. The next step is to find out what’s the risk premium.
Calculating 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 the surplus fee for the In-Kind part of Disease and Maternity Insurance. The surplus is the difference between the worker’s monthly BLS and three times monthly UMA.
| Concept | Amount |
|---|---|
| Monthly BLS | $10,821.92 |
| (-) Monthly UMA * 3 | $9,901.59 |
| (=) Raul's Surplus | $920.33 |
Thirdly, we need to calculate the employer’s Advanced Age Severance Fee.
Calculating Employer’s Advanced Age Severance Fee
In December 2022, there was an amendment to the Article 168 of the Socia Security Law. This benefit is calculated from January 1st, 2023, according to the following table.
| From | To | Rate | |
|---|---|---|---|
| 1 | 0 | MXN $248.93 | 3.150% |
| 2 | MXN $251.42 | MXN $162.86 | 3.413% |
| 3 | MXN $163.94 | MXN $217.14 | 4.000% |
| 4 | MXN $218.23 | MXN $271.43 | 4.353% |
| 5 | MXN $272.51 | MXN $325.71 | 4.588% |
| 6 | MXN $326.80 | MXN $380.00 | 4.756% |
| 7 | MXN $381.08 | MXN $434.28 | 4.882% |
| 8 | MXN $435.37 | MXN $435.37 | 5.331% |
Since we know Raul’s daily BLS is 360.73, it ranks in category six. Therefore, we know the Advanced Age Severance fee is 9.57%.
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 = $1,369.82
- Advanced Age Severance Rate: 9.57%
The rest is calculated directly from the BLS.
IMSS Calculation for a $10,000 Salary
| Type of Benefit | Company | Employee | Calculation Base | Company Contribution | Employee Contribution |
|---|---|---|---|---|---|
| Work Risk | 0.54355% | 0.00% | BLS | $58.82 | $0.00 |
| D. & M. Insurance In-Kind | 20.40% | 0.00 % | Monthly UMA | $673.31 | $0.00 |
| 1.10% | 0.40% | Surplus | $10.12 | $3.68 | |
| Medical Expenses for Pensioners And Their Beneficiaries. | 1.05% | 0.38% | BLS | $113.63 | $40.58 |
| D. & M. Insurance In Money | 0.70% | 0.25% | BLS | $75.75 | $27.05 |
| Disablement & Life Insurance | 1.75% | 0.63% | BLS | $189.38 | $67.64 |
| Retirement Old Age | 2.00% | 0.00% | BLS | $216.44 | $0.00 |
| Retirement Advanced Age Severance | 9.57% | 1.13% | BLS | $1,035.66 | $121.75 |
| Nursery & Social Benefits | 1.00% | 0.00% | BLS | $108.22 | $0.00 |
| INFONAVIT | 5.00% | 0.00% | BLS | $541.10 | $0.00 |
| TOTAL | $3,022.43 | $260.70 |
- Company’s Contribution = $2,997.32
- Employee’s Contribution = $262.46
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%.
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.
- Company’s Payroll Taxes = $250
Calculating Withholding Tax in Mexico
So by now, we have already calculated social security and employer payroll taxes in Mexico. All that’s left is to calculate the amount of income tax we need to withhold for Raul.
Firstly, we need to find his level of income in the Income Tax For Individuals Table.
| Income Level | Lower Limit | Higher Limit | Fixed Fee | Surplus Rate |
|---|---|---|---|---|
| III | $6,332.06 | $11,128.01 | $371.83 | 10.88% |
Step-by-step calculation:
- Check the level of income where the salary ranks between the lower limit and the higher limit.
- Subtract the lower limit from the salary. The difference obtained as a result is called a surplus.
- Apply the tax rate of the salary’s level of income to the surplus.
- 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 | $746.05 |
| (=) Surplus | 9,253.95 |
| (x) Tax Rate | 6.40% |
| (=) Surplus Taxes | $592.25 |
| (+) Fixed Fee | $14.32 |
| (=) Taxes to Pay | $606.57 |
- Employee Income Tax: $606.57
So we know that we need to withhold $606.57 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 |
$2,997.32 |
$262.46 |
|
Payroll Tax |
$250 |
$0 |
|
(Withholding) Income Tax |
$0 |
$606.57 |
|
TOTAL |
$3,247.32 |
$869.03 |
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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