As a US employer thinking of hiring in Mexico, it’s imperative to understand the intricacies of the payroll tax system in the country. Mexico operates under a progressive tax system, meaning that as an employee’s income increases, so does their tax rate. This guide offers a comprehensive view of the payroll and progressive tax system in Mexico, helping you navigate through the complexities involved.
Progressive Income Tax: The Basics
The Mexican tax authority, known as the Servicio de Administración Tributaria (SAT), oversees the progressive income tax system. Employees’ income tax is withheld directly from their salaries by their employers and then remitted to the SAT. The income tax rates vary based on income brackets, ranging from 1.92% to 35%. Here’s an example of how these rates apply to different income levels:
| 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% |
These brackets are updated annually to reflect changes in economic conditions such as inflation, read the full guide and stay up to date here.
Employer Payroll Tax in Mexico: A State-Level Tax
Mexico imposes taxes at both the federal and state levels. While federal taxes are uniform throughout the country, state taxes differ based on the business’s location. One such state tax is the employer payroll tax, which is relatively simple to comprehend. This tax is levied as a percentage of the total payroll, and employers are responsible for its payment. The specific rate applied varies from state to state, typically ranging from 1% to 3% of employee salaries.
Mexican Employer Payroll Tax Rate By State
| State | Tax Rate | State | Tax Rate |
| Aguascalientes | 2%. | Morelos | 2%. |
| Northern Baja California | 1.8%. | Nayarit | 3%. |
| Southern Baja California | 2.5%. | Nuevo Leon | 3%. |
| Campeche | 3%. | Oaxaca | 3%. |
| Coahuila | 2%. | Puebla | 3%. |
| Colima | 2%. | Querétaro | 3%. |
| Chiapas | 2%. | Quintana Ro | 3%. |
| Chihuahua | 4%. | San Luis Potosi | 3%. |
| Mexico City | 3%. | Sinaloa | 3%. |
| Durango | 2%. | Sonora | 2% |
| Guerrero | 2%. | Tabasco | 2.5% |
| Guanajuato | 3%. | Tamaulipas | 3%. |
| Hidalgo | 3%. | Tlaxcala | 3%. |
| Jalisco | 2.5%. | Veracruz | 3%. |
| Mexico State | 3%. | Yucatán | 3%. |
| Michoacán | 3%. | Zacatecas | 3%. |
Employment Subsidy: Supporting Lower Income Levels
Mexico’s tax system includes an employment subsidy for employees earning lower incomes. This subsidy functions as a tax credit, effectively reducing the amount of income tax that these employees need to pay. The goal is to support workers with lower salaries by decreasing their tax burden.
Social Security Contributions
Both employers and employees contribute to social security in Mexico. These contributions fund various benefits, including healthcare, pensions, and disability insurance. The employer’s contribution is significantly higher than that of the employee, with companies paying between 26.5% and 33.58% for social security, while employees contribute approximately 1.65%.
Other Mandatory Contributions
In addition to social security, employers in Mexico must contribute to other funds:
- Retirement fund contributions: 5.15%
- National Housing Fund (INFONAVIT): 5%
These contributions ensure that employees have access to housing and are financially secure in retirement.
Understanding Payroll Deductions
Several deductions are made from an employee’s salary:
- Income Tax: This is the largest deduction and varies depending on the employee’s income bracket.
- Social Security: This includes contributions to healthcare, pensions, and other benefits.
- Other Contributions: These may include union fees or other obligatory payments.
Changes in 2023: What US Employers Need to Know
Several changes have been implemented in 2023 that directly impact payroll:
- Minimum Wage: The minimum wage has increased by 20%. As of 2023, the general minimum wage is MXN$207.44 per day, while in the Free Zone of the Northern Border, it’s MXN$312.41 per day.
- Income Tax (ISR): Individuals will pay less ISR in 2023 due to an update in the tax rates that considers inflation over the past two years.
- Vacations: The number of paid vacation days has increased from 6 to 12 continuous days from the first year of work. This period can be distributed as the worker requires.
Navigating Payroll in Mexico: Internal Setup vs. Outsourcing
When setting up payroll in Mexico, you have two primary options: managing payroll internally or outsourcing to a Professional Employer Organization (PEO) or an Employer of Record (EOR).
- Internal Payroll: This involves hiring an HR team within Mexico and handling all payroll duties in-house. It requires registering the business with various local and national entities and complying with Mexican labor laws.
- Outsourcing to a PEO/EOR: PEOs and EORs manage various HR processes, including payroll, while ensuring compliance with local laws. This option can save time and resources, especially for smaller businesses or those new to operating in Mexico.
Key Takeaways for US Employers
- Stay informed about the progressive income tax rates and understand the employment subsidy available for lower-income employees.
- Factor in social security and other mandatory contributions when calculating payroll costs.
- Keep abreast of changes in Mexican labor law, such as the recent increases in the minimum wage and vacation days.
- Choose the most suitable payroll management option for your business size and needs, considering both internal and outsourced solutions.
