Mexico is one of the largest economies in Latin America with a population of 128 million. The rich culture and heritage of the country have attracted several businesses from across the world. Due to its colorful diversity, Mexico has attracted businesses worldwide to serve customers with varying needs for products and services. Mexico has shown considerable growth in GDP, reaching $2.61 trillion (PPP, 2021). In 2019, the nation ranked 15th in the world in nominal GDP.
The country offers several tax incentives to businesses now expanding into Mexican boundaries. Mexico has also signed the Northern American Free Trade Agreement (NAFTA) with America and Canada to eliminate trade tariffs among the three countries.
If you are setting up business in Mexico, you can onboard diverse employees to work in your company. You must set up a payroll before onboarding employees to your company in Mexico. It is vital to have a standard payroll process if you have a company operating in Mexico. The payroll should comply with all rules and regulations of the country.
A Global PEO like Multiplier can help you navigate the entire process and set up a payroll system in Mexico.
How is Payroll Calculated in Mexico?
The payroll calculation in Mexico primarily depends on the employee’s salary structure and the type of employee, like full-time, part-time, etc. Consequently, it is crucial to set up payroll in Mexico while recruiting qualified personnel. The general payroll includes the gross salary and contributions.
Gross salary is the total amount an employee makes after offering their services to the company, which includes net pay and various contributions an employee has to make. After deductions, including social assistance and taxes, the takeaway salary is the net salary. Depending on the company, an employee’s gross salary is subject to several deductions, including:
Income tax
Mexico follows a progressive tax system where the rate of tax is directly dependent on the employee’s level of income. The income is taxed at the following rates:
- 0 – 5,952.84 pesos – 1.92%
- 5,952.85 – 50,524.92 pesos – 6.40%
- 50,524.93 – 88,792.04 pesos– 10.88%
- 88,793.05 – 103,218 pesos – 16%
- 103,218.01 – 123,580.20 pesos – 17.92%
- 123,580.21 – 249,243.48 pesos – 21.36%
- 249,243.49 – 392,841.96 pesos- 23.52%
- 392,841.97 – 750,000 pesos – 30%
- 750,000.01 – 1,000,000 pesos – 32%
- 1,000,000.01 – 3,000,000 pesos – 34%
- Above 3,000,000.01 pesos- 35%
The progressive tax rates can go up to 35% in Mexico.
Employee social security
Employees must pay a Social Security Rate of 1.65%. This includes contributions to unemployment, old-age insurance, and life and disability insurance.
Payroll tax
Unlike other countries, there is a payroll tax levied in every state in Mexico. The rate ranges between 1–3% of the salary. The amount is withheld at the employer’s end and remitted to concerned authorities in a lump sum.
Employers also make social security contributions to their employees. Employers pay an amount equivalent to 7.58% of the employee’s pay. This consists of pensions for retirement, maternity and health insurance, occupational risk, daycare, disability, and life insurance, as well as unemployment and old-age insurance.
When establishing the Mexican payroll process, you must adhere to the Mexican Federal laws that define the minimum wages, mandatory deductions, etc. You must also maintain a payroll record when making any employee payments.
Important Elements of Salary Structure in Mexico
Mexico’s salary structure consists of several components. These include:
CTC
Cost to Company, or CTC, is the collective term for all payroll-related items such as gross compensation, net salary, basic pay, allowances, and other deductions. It is distinct from the income that employees receive in cash. The CTC includes the cash components, taxes the employee needs to pay, and any benefits credited to the employee.
Gross Salary
Gross salary is the salary that employees get before any deduction or contribution. The employee’s gross salary includes basic pay, bonuses, and other differentials.
Net Salary
After deductions, this is the take-home pay that employees receive. Company policies decide whether any deductions arrive at the net salary amount.
Basic salary
35–50% of the gross compensation comprises the basic salary. It is determined before any increase or decrease (bonus, overtime, etc.). Employee designation determines it in the organization and the sector’s operations.
Allowances
The employees are entitled to several allowances throughout their employment. Different companies have different policies in place when it comes to allowances. The taxation of the benefits is pretty subjective. Some standard perks the company pays include:
- Meal allowance
- House allowance
- Transport allowance
- Medical allowance
Bonuses
All employees are entitled to this annual Christmas bonus (Aguinaldo) under the federal law of Mexico. It is also termed a thirteenth-month salary that employees receive by December 20th. If you don’t pay these bonuses to your employees, you might have to pay a fine of about 5000 times the employees’ minimum wage.
How to Set Up a Payroll in Mexico?
Establishing a few steps will help you develop a standard Mexico payroll process. You can start setting up your payroll as soon as you incorporate a business or set up a company in Mexico. Steps that are involved in the process are:
Step 1
It is essential to register your company with the notary and the National Registry of Foreign Investment.
Step 2
Once the company is registered, you need to open a bank account in a local Mexican bank or any foreign bank with a branch in Mexico. The account will help you remit payments like social security contributions to the employees’ bank accounts.
Step 3
Create profiles for various state and federal tax portfolios and collect workforce financial and tax information. Additionally, register your company with the country’s current tax systems.
Step 4
You need to check all your employees’ work days, hours, and leaves to determine their pay. This will help employers to determine final payment, which may include any overtime compensation, etc.
Step 5
Now, calculate all your employees’ gross and net salaries and factor in any deductions to consider.
Step 6
Now, you can start setting up the payroll structure in Mexico.
Step 7
Set the payment schedule for the various employee categories in your company.
Step 8
Decide on a time each month that you will pay your payroll taxes to the Mexican Government. Payroll tax payments must be made to the local tax office and payroll tax returns.
A Step-by-step Process of Payroll Processing in Mexico
The payroll processing in Mexico can be time-consuming. Here is the step-by-step guide to help employers process employee payroll:
Registering the employees to the payroll system:
Employees must initially register with the HR system of the company to access the business payroll system. The payroll system collects information from all employers so that it can be gathered, stored, and used by the Government. Employers must register by providing the following information about their workers:
- Employees working for the company
- The type of payroll application utilized
- Following a schedule for processing paychecks
- Names, birthdates, and other identifying details are shared about every employee.
Calculate the gross pay for all employees:
When employing someone new, the employer must disclose the gross compensation on the offer letter or employment contract.
Employers are required to include taxable fringe benefits when determining gross compensation. You must include these bonuses in your employees’ base pay, for instance, if you cover their parking or cell phone expenses.
Consider the deductions:
After estimating the gross salary, you must take all deductions into account. This frequently includes taxes, social security contributions, and other deductions.
Even health insurance premiums and other contributions are regarded as deductions.
Look for any possible errors:
Cross-check all relevant components before completing the payroll processing to avoid errors. You can complete the payroll reconciliation process by reviewing your tax records, general ledger, and payroll register. The payroll software system allows employers to view the employees’ pay slips generated by the system.
Share the payslips:
Employers must provide online payslips to their employees. The pay package for the employee, including base salary, bonuses, TDS, and other remuneration, must be specified in the payslip. It also lists the contributions and deductions made on the employee’s behalf. Most companies in Mexico use integrated payroll processing technologies that allow employees to view their monthly payslips.
Maintaining payroll records:
Once all payslips have been given out to the employees, employers must record every transaction in the payroll records for Mexico. If an employee payment dispute arises, payroll records will help you overcome the problem. Keep this document secure for at least five years. They provide evidence that all employees were paid fairly during their employment in the company.
Payroll Contributions
Several components make up the payroll contributions in Mexico. These components include:
Minimum wage
Employers must consider the minimum wage before creating an employee salary structure. All the companies operating in Mexico must at least pay an amount equivalent to the minimum wage as salary. The National Minimum Wage Commission revised the minimum wage rate in Mexico on December 1st, 2021. The minimum wage now stands at 172.87 Mexican Pesos per day. However, the rate for the Free Economic Zones of the Northern Border stands at 260.34 Mexican Pesos per day.
Overtime
Overtime is the additional hours the employees work beyond the regular hours as the Federal Mexican Laws define. An employee can work three extra hours per day as overtime for three consecutive days, but it cannot exceed 9 hours per week. Employees are paid at a regular wage rate for the extra time they work for the organization. However, if they work beyond 9 hours a week as overtime, they are paid at double the existing wage rate.
Taxes
The employees must pay an income tax on their salaries in Mexico. The tax rate levied on the salary ranges between 0%–35%. Mexico follows a progressive tax system where the rate of tax applicable on your income is determined by the amount employees make.
A progressive system ensures that the employees who earn more are paying more taxes to the Government. This system is followed in several other countries, including India.
Social Security Contributions
An employer and employee are liable to make the social security contributions. It includes permanent disability insurance, total pay for 78 weeks of disability, and old-age benefits. Additional advantages include pensions, death benefits, day nurseries, and paid maternity leave. The system also covers illnesses and accidents that aren’t related to work.
A company must register its employees with the Mexican Social Security Institute. Afterward, the employer withholds the employee contribution and remits it to the Mexican Social Security Institute.
Employees must only contribute up to MXN 23,804 per year. The maximum employer contribution is MXN 166,174 for mid-sized organizations. Employers’ limit for social security contribution can be higher given that employer’s contribution includes occupational risk premium. These maximum contribution limits apply to employees earning more than MXN 872,892 annually.
Payroll Cycle
Mexico employs a bi-weekly payroll cycle.Employees typically receive their bi-weekly paychecks on the 15th day and last day of each month.
Mexico Payroll Options for Companies
There are several payroll options for different companies in Mexico. You can compare all your options and pick the one suitable for your company. Some of these options are:
- Internal payroll: If you own a large company and want to build a strong presence in Mexico implementing a unified internal payroll is a great option. You must engage a complete HR team to manage such enormous payroll and ensure you have the required funding.
- Remote payroll: The first option is to put your Mexico employees on the parent company’s internal payroll. Each class of employees will be subject to a different set of payroll laws.
- Payroll processing company: You can work with a payroll processing company in Mexico to outsource your payroll. However, matters of compliance will remain your responsibility.
- Outsource: Another option is an outsourcing partner for your payroll policies. You can partner with global PEO services like Multiplier to get in touch with professionals. . Our team of experts will handle the payroll process and ensure everything meets compliance standards. As a result, you are relieved of the responsibility of managing payroll and devoting your time to expanding the business.
Entitlement and Termination Terms
Before hiring employees, it is always suggested to draft an employment contract. This contract must state all the benefits, entitlements, and termination terms of employment and position offered.
In Mexico, employees are entitled to take leave on the first day of December every 6 years. They also enjoy 7 mandatory leaves and 6 to 12 vacation days (depending on the length of service) every year.
Employers must also state an employee’s termination terms in an employment contract. Employment contracts may end for a variety of reasons, such as:
- Mutual understanding between parties, including the resignation
- Death of the employee
- Physical or mental disability of the employee
- By employer with justified reason
Employees who leave the company are entitled to termination payments, including unpaid earnings, accrued vacation time, extra vacation time, annual bonus, and other benefits.
Mexico Payroll Processing Company
Setting up payroll structures in a new country in compliance with local regulations can be challenging. It would be preferable if you sought guidance from business pioneers or organizations familiar with regional rules and have experience setting up payroll in Mexico.
There are several businesses out there that can guide you through the procedure. You can collaborate with a large PEO organization like Multiplier. You can consider all your options, choose one that satisfies your business needs, and simplify the payroll setup procedure in Mexico.
How Multiplier Can Help With Global Payroll?
Creating and managing Mexican payroll includes factors such as payroll, payroll cycle, and others. The procedure can be time-consuming and takes up a major chunk of the company’s financial resources. This is where Multiplier comes in.
A payroll outsourcing partner, Multiplier manages employment contract generation, payroll, and other services on your behalf. Multiplier has a solid reputation in Mexico for providing PEO services to multinational organizations in more than 150 nations. Our experts can manage payroll processing, employee onboarding, and other tasks.
Our SaaS-based PEO services ensure that your payroll operation in Mexico runs without a hitch.