Understanding Payroll in Mexico: What Global Companies Need to Know About Mexico Payroll

Feb 26, 2017  | Topic: Country Payroll

In today’s international climate, establishing operations in Mexico is a bold business move for multinational organizations. As an economic environment, Mexico poses many opportunities and advantages as an emerging market. PwC recently predicted Mexico would become the seventh largest economy in the world by 2050, and the latest World Bank's Global Economic Prospects report forecasted 1.8% growth in the country for 2017.

But while Mexico currently remains the United States’ third biggest trading partner and the world’s 11th largest economy in terms of purchasing power, an investment in establishing Mexican operations comes with plenty of risk. Unemployment reached a nine-year low in October 2016 at 3.6%, but many of the jobs recently created pay very low wages. The nation’s currency values also fluctuate regularly and have been negatively impacted by the election of U.S. President Donald Trump.

Yet for organizations looking to expand into a country with low labor costs, an active tourism environment, and strong economic ties to the rest of Latin America, Mexico can be a smart outpost for international operations. The first step: Incorporating the specifics of Mexico’s employment laws and payroll-related guidelines into a company’s global payroll strategy.

Getting Started

For global companies looking to establish long-term operations in Mexico, business setup is a three-step process – the first of which involves incorporating and registering the business by filing before a notary public as well as the National Registry of Foreign Investment. After registering the business, the company must obtain its tax identification card from the appropriate Federal Taxpayers registry.

In addition, the organization must register as an employer with Mexican Social Security and obtain tax registration from the governing bodies in the local jurisdiction. Once these matters have been addressed, the company should establish in-country bank accounts, which are mandatory for making payments to both employees and the government’s social security and taxation agencies.

To open a bank account in Mexico, a company must supply a Tax Identification Number (Registro Federal de Causantes or RFC) or equivalent, proof of address, banking or commercial references, and formal identification of the organization’s legal representatives or guarantees of a power of attorney.

Animated Podcast Banner

Employment Considerations

To comply with labor and social security legislation in Mexico, it is advisable to hire employees through a local subsidiary or a service entity. Generally, employers are able to hire foreign workers in Mexico to make up to the 10 percent of their personnel. However, regarding the hiring of directors, senior administrators, or general managers, up to 100 percent of such personnel can be foreign.

New employees can be hired either on a temporary or an indefinite basis, or through a number of contracts that include test periods, training periods, or seasonal work. When hiring a new employee, the worker must provide his or her personal documents, which are necessary for the preparation of employment agreements and to ensure employees can receive payments through the company’s bank account.

Employees must also be registered for social security and insurance, and failure to register new employees with the appropriate authorities on their day of hire will result in significant penalties. Mexico also legally recognizes workers’ right to form unions to defend their interests.

Note: It is difficult for many of Mexico’s mobile, underbanked workers to prove residency and open any kind of bank account for direct deposit of paychecks. In those instances, payroll cards are an option for employers looking to the fraud risk and other liabilities associated with cash payments.

Compensation & Bonus Guidelines

To combat the effects of a weak currency, rising fuel costs, and high interest rates, Mexico’s daily minimum wage was increased almost 10 percent to 80 Mexican pesos (about $4 USD) on January 1, 2017. Around 15% of Mexico’s 52 million workers earn minimum wage, according to government data.

Employee wages can be paid weekly, biweekly or monthly, depending on the conditions agreed upon in the employment contract. While payments can be made by electronic transfers, this is contingent on asking the new employee at the time of hire for permission to process a payroll bank account to make payments. Mexican law also mandates that employees receive a 13th month bonus at the end of the year, which must be paid by December 20. Some employers also pay a 14th month bonus, in which they share profits of the previous year; these payments must be made by May 31.

Generally, the working week in Mexico runs from Monday to Friday with employees working between 40 and 48 hours. Mexican labor laws stipulate that for every consecutive six days of work, employees are entitled to one paid day off. If that day isn’t Sunday, the employee is entitled to receive a Sunday premium equivalent to at least 25 percent of the daily wage.

Benefits & Severance

Employers in Mexico are obligated to pay workers a share of the profits based on their annual tax declaration, although workers can exempt themselves from participation. The National Profit Sharing Commission currently pegs the employer sharing rate at 10 percent of their taxable revenue.

Profit-sharing payments must be made to employees within 60 days of the date the employer makes its annual tax declaration (making the deadline May 31 according to Mexico’s tax year). Directors, administrators, and general managers of companies do not participate in profit sharing, and new companies are exempted during their first year of operation.

In addition, Mexico has defined guidelines around indemnities and severance and its Federal Labour Law (FLL) outlines the ‘justified causes’ for which either the employer or employee can terminate the working relationship without liability.

If an employee terminates the labor relationship arguing a justified cause, he or she will be entitled to receive a severance of 1.) three months' salary, 2.) 20 days of salary for each year worked, and 3.) the accrued and proportional benefits owed to the employer. If the employer terminates the labour relationship arguing a justified cause expressly address in the FLL, it will not be obligated to any payment except the accrued benefits owed to the employee.

Tax Collection & Withholding

Employers are required to deduct income tax contributions from their employees’ paychecks, and these payments must then be submitted to the government each month. Mexico has a progressive income tax rate, with the amount required from each employee determined by their salary.

Though the specific tax rates for each income bracket are updated each year, they currently range from 1.92 percent to 35 percent. It is also the employer’s responsibility to file an annual statement of wages and salaries paid each year by February 15 of the following year with the SAT (Servicio de Administración Tributaria), Mexico’s federal tax collecting administration.

In addition to income tax, the employer must also deduct social security contributions on behalf of their employees. While there is no exact percentage regarding the cost of these contributions, the amount depends on a number of factors, including the employee’s regular salary and the employer’s risk premium. In addition, there are no returns for social security, as, in exchange for the payment of fees, Mexico’s social security administration, Instituto Mexicano del Seguro Social (IMSS), provides medical service and payment of wages in case an employee is incapable of working as well as pensions for old age. All social security payments must be made to the IMSS via an authorized bank by the 17th of each month.

Holiday, Vacation & Leave Considerations

In addition to the mandatory weekly day off, Mexican employees are entitled to seven mandatory holidays and receive the first day of December off every six years (corresponding to the transfer of federal executive power). Workers are also entitled to 6-12 days of vacation time on a sliding scale, according to their length of service between 1 and 5 years. At the five-year mark, vacation days are accrued at a rate of two days for every five years of service.

Employees are also entitled to receive a ‘vacation bonus’ of at least 25 percent of the salary for their vacation days, independent of the salary they already receive for those days.

When an employee is pregnant, she is entitled to disability for 42 days prior to the estimated date of delivery, and 42 days following delivery. During this time, the employee receives social security subsidies equal to 100 percent of their salary. In addition to maternity leave, employers are required to give paternity leave of five working days following the birth or adoption of a child.

Regarding sick leave, when an employee suffers from illness that is not related to work for more than three days, they are given a subsidy equivalent to 60 percent of their salary. Should an accident or illness occur in connection with the job or commute to or from work, the employee will receive a subsidy of 100 percent of their salary.

Date Mexico's Public Holiday Schedule
 January 1st  New Years Day
 First Monday in February  Constitution Day
 Third Monday in March  Benito Juarez Birthday
 Thursday before Easter   Maundy Thursday
 Friday before Easter  Good Friday
 May 1st  Labour Day
 September 16th  Independence Day
 Third Monday in November  Revolution Day
 December 12th  Day of the Virgin of Guadalupe
 December 25th  Christmas Day

In Summary

Although complying with the many rules and regulations regarding payroll in Mexico can be challenging, employers shouldn’t be deterred from establishing operations in the country. With a full understanding of the processes and expectations involved in hiring, compensating, and providing benefits to employees, organizations can be confident in the administration of their Mexican operations.

To ensure their compliance with all applicable laws, rules, and regulations, organizations can benefit from working with a global payroll provider that can pair local knowledge in Mexico with global standards and expertise.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.