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Mexican Payroll Requirements Focus on National, State Taxes

May 15, 2019, 2:45 PM

Employers paying employees in Mexico face a variety of national and state income, social, and payroll taxes, as well as other requirements, an international payroll consultant said May 14.

Tax responsibilities for employers in Mexico include withholding federal income tax, social tax contributions, housing-fund contributions, and paying state payroll taxes, Tim Kelsey, MCIPP, managing director of Kelsey’s Payroll Services, said. Employers also must report employee pay and tax withheld to the government, certify each employee’s pay electronically each day, and ensure pay complies with labor laws, he said.

Mexico’s tax authority is the Tax Administration Service (Servicio de Administraction Tributaria, abbreviated as SAT), Kelsey said at the American Payroll Association’s annual congress in Long Beach, Calif. The SAT assigns to individuals and employers tax identification numbers for the Federal Registry of Taxpayers (Registro Federal de Contribuyentes, abbreviated as RFC), and the numbers must be included on payroll reports, he said.

Employers also must register for social taxes with the Mexican Social Security Institute (Instituto Mexicano del Seguro Social, abbreviated as IMSS) and the Institute of the National Housing Fund for Workers (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, abbreviated as INFONAVIT), as well as the tax authority in the states where the employers are based for state payroll taxes, he said.

Income Tax

Mexican employers must calculate income tax withholding using weekly, biweekly, or monthly tax tables, Kelsey said.

Employees must complete a tax return if they earn more than 415,150 Mexican pesos (U.S. $21,670.36) a year, or if they earned less than 415,150 Mexican pesos and worked for at least two employers in a year, Kelsey said.

For 2019, Mexico has eleven tax brackets with rates ranging from 1.92% to 35%, Kelsey said.

Gross pay includes salary, overtime, bonuses, commissions, seniority premiums, and any other cash benefits from employment, Kelsey said. Some fringe benefits are provided tax-free, the most common of which are food coupons, he said.

Examples of taxable fringe benefits include interest-free or low-interest loans, as well as employer-provided vehicles, Kelsey said.

An employment subsidy reduces the tax bill of low-income employees who earn up to twice the minimum wage, Kelsey said. The subsidy may cover an employee’s entire tax bill, in which case it is paid to the employee and the employer may subtract the subsidy from their remitted income tax, he said. The amount of the subsidy ranges from zero to 407.02 Mexican pesos (U.S. $21.25) a month, Kelsey said.

Expense reimbursements of at least 2,000 Mexican pesos (U.S. $104.40) must be paid from the employer’s bank account and must have an electronic invoice in PDF or XML format, Kelsey said. If the requirements are not met, the reimbursement becomes taxable income to the employee, he said. Certain reimbursements, such as for fuel and travel, should be prepaid by the employer, Kelsey said.

Social Taxes

A total of seven different kinds of social tax contributions are administered by the IMSS, Kelsey said. IMSS contributions, except for sickness and maternity leave, are assessed up to a limit known as the base contribution salary (salario base de cotización, abbreviated as SBC), which is 25 times the minimum wage, Kelsey said. Some payments are not included in the SBC, such as overtime up to three hours a day or nine hours a week, he said.

The IMSS also administers work accident insurance, which is an employer contribution paid at a rate depending on which of five risk levels the employer is categorized into when registering as a business, Kelsey said.

Payments to INFONAVIT, which are 5% of each employee’s base salary, must be made every two months by the 17th of each month, instead of the monthly schedule used for other social taxes, Kelsey said.

State Payroll Taxes

Each Mexican state assesses a payroll-based tax on employers, Kelsey said. The tax rates vary between states, but the general calculation method is the total pay to employees minus eight times the minimum wage, he said.

State payroll tax returns and payments are filed with the state where the employer is based, Kelsey said.

Wage and Hour

Mexico’s daily minimum wage received a substantial increase for 2019, to 102.68 Mexican pesos (U.S. $5.36) a day, up from 88.36 Mexican pesos (U.S. $4.61), Kelsey said.

The Northern Border Free Zone (Zona Libre de la Frontera Norte, abbreviated as ZLFN), which includes all of the state of Baja California and the northern parts of other states bordering the U.S., has a separate daily minimum wage beginning in 2019, which is 176.72 Mexican pesos (U.S. $9.22), Kelsey said.

Profit-Sharing

Employers with an annual profit of at least 300,000 Mexican pesos (U.S. $15,569.66) are required to provide employees 10% of the company’s profits in the form of a bonus (Participación de los Trabajadores en las Utilidades, abbreviated as PTU), Kelsey said. The bonus, which must be paid from April 1 to May 30 of each year, is divided into two parts, one distributed based on each employee’s days worked, and another based on each employee’s base salary, he said.

The bonus is exempt from income and social taxes up to a limit of 15 times the unit of measure and update (unidad de medida y actualización, abbreviated as UMA), which is the daily maximum contribution limit for social taxes, and is otherwise taxable, Kelsey said.

More information regarding payroll in Mexico is available in Bloomberg Tax’s Mexico Payroll Primer.

To contact the reporter on this story: Jamie Rathjen in Washington at jrathjen@bloombergtax.com

To contact the editors responsible for this story: Michael Trimarchi at mtrimarchi@bloombergtax.com and Michael Baer at mbaer@bloombergtax.com

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