Mexico payroll taxes: Key tips and insights for compliance

With a low cost of living and historically strong trade relations with the United States and Canada, Mexico is an attractive market for companies looking to expand internationally. But navigating local tax regulations can be a challenge—especially when you’re new to the market.

Here’s what you need to know about Mexico payroll taxes and how to build a compliant tax foundation for local operations.

In Mexico, employers are responsible for federal income tax withholding and remittances, social security withholding and contributions, and state payroll tax payments. Foreign workers and residents receive the same protections and legally mandated benefits.

The federal government in Mexico enacts and enforces income and social taxes on a country-wide basis, across all 31 states and federal districts which also assess payroll taxes on employers. In some states, there are tax agreements in place to avoid double taxation.

Federal income tax rates are levied on a progressive scale, with rates for residents ranging from 1.92% to 35% and rates for nonresidents ranging from zero to 30%.

The tax year in Mexico is the calendar year, January 1 to December 31, and employers must file annual tax returns for the previous year beginning in January. The tax deadline is March 15.

Most states require employers to file with the tax authority monthly or quarterly, and filing methods can vary with some states requiring payments at offices, banks or online.

Records are auditable for a period of five years.

Support is available for employers struggling to make employer social tax deposits to the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, IMSS). Qualifying businesses may arrange to make installment payments of up to 80% employer social taxes owed over a period of up to four years, subject to interests ranging from 1.26% to 1.82%.

Your payroll tax infrastructure needs to be in place before you hire your first employee in Mexico . Here are some tips for ensuring compliance with Mexico payroll taxes.

Companies need to understand business-specific and tax-specific considerations at both the national and local levels. State payroll taxes are collected on the following payments in Mexico:

Employers in Mexico need to understand their obligations on both the organizational and individual employee level. Different types of organizations, as defined by the Mexican government, have varying payroll requirements and tax obligations.

For instance, resident employees of religious institutions and other nonprofit institutions are taxed at different income tax rates than employees of corporations. Low-income employees must receive a monthly subsidy toward their income tax liability.

Employers must first register with the Tax Administration Service (Servicio de Administración Tributaria, SAT) to receive a tax identification number, or RFC number, before registering themselves and employees with the IMSS for the collection of social taxes.

To register with IMSS, employers must submit a Notice of Employer Registration in the Obligatory Regime through the IMSS website. Following this process, employers complete the registration process at the IMSS office.

Employers must enroll workers with the IMSS five business days or eight days, whichever comes first, after the date of hire. Furthermore, employers must keep employee data up to date. Employers with more than 300 employees must have a certified public accountant certify that the employer is complying with IMSS regulations.

One of the ways to prevent potential compliance challenges is to work with a payroll provider that has regional expertise where you are doing business.

Payroll taxes are tough, if not impossible, to manage manually with precision. Rather than reinvent the wheel, businesses can save time and eliminate unnecessary complexity by working with a partner that specializes in Mexico payroll taxes.

Learn more about our payroll services in Mexico and how we can ensure your workers are paid accurately and in compliance with all local tax withholding requirements.