Doing payroll in Mexico will present you with some challenges and nuances you don’t face domestically. Because running international payroll means you have to abide by another country’s laws that you may not be familiar with, you must take your time and set yourself up for success.
This guide is focused on handling payroll for Mexico employees, not independent contractors. If you plan on doing the latter, then you’ll need a strong independent contractor agreement to outline the scope of work. Since they are not employees, they’re not entitled to time off, healthcare, and other benefits. And, your company won’t be responsible for withholding taxes, either—that’s all on them. If you’re looking to partner with independent contractors in Mexico instead of employees, then check out our guide on how to pay independent contractors.
Use these seven steps as a guide on how to do payroll for workers in Mexico.
Step 1: Set Up Your Business as an Employer
Before running your first payroll in Mexico, you have to register your business. Mexico does not allow foreign companies to hire and pay employees inside Mexico. Foreign companies can partner with and pay independent contractors, but Mexico takes worker misclassification seriously, so do not attempt to skirt the laws by classifying an employee as an independent contractor.
To set up your business legally in Mexico so you can hire and pay employees, you must select your business name and register it with the Mexican Secretariat of Economy. This is a complex process, and you’d be wise to speak with legal counsel or work with an employer of record (EoR) authorized to do business in Mexico.
If you’re doing this yourself, you’ll need to first select your business structure. Ideally, you’ll match your US business structure or choose a limited liability company (LLC) setup. Once you’ve determined that, register your business name. Then, you’ll need to submit several documents to the Public Registry of Property and Commerce, such as:
- A notarized original copy of your business’s Articles of Incorporation
- A notarized original copy of your company bylaws
- A notarized original copy of your business registration form to the Secretariat of Economy
- Your company’s business address in Mexico
- A letter from a bank in Mexico showing you have a business bank account and are a customer in good standing
Submitting these documents correctly is crucial to being registered in Mexico. You’ll also need to include a payment of 16.3% of the estimated business income for the first year. This is a one-time fee.
After you’ve registered your business, you’ll need to get a business license and a Mexican tax identification number, just like you would in the US. You’ll need to apply to the local Tax System Administration (SAT) office.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process to follow so you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? Note that Mexico requires employers to pay employees at least every two weeks unless they’re labor workers, such as for manufacturing, in which case, they must be paid every week.
- Type of employees: Full time vs part time? Note that all workers in Mexico are subject to labor laws and there is no exemption like in the US.
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
To ensure your company processes payroll in Mexico effectively, you should also have policies on:
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Mexico is much less than in the US, currently about 65% as much. As a result, salaries are often much less in Mexico than in the US. In 2021, the average Mexican worker made ₱323,345 ($16,490) per year. When determining what you’re going to pay your Mexican workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having Mexican workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
A note about currency: Mexico’s currency is the Mexican Peso (MXN, ₱). For comparison purposes, we’ll note the equivalent US Dollar (USD) figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 MXN = 0.051 USD. Make sure you check current conversion rates to ensure accurate calculations.
Payroll & Employment Law Compliance
Mexico has similar employment and payroll compliance laws to the US, codified in the Mexican Federal Labor Law—but some go further, providing additional benefits to employees. It’s vital that you understand these differences so you remain compliant.
The minimum wage in Mexico is listed by day, not by hour like in the US. For 2022, the minimum wage in Mexico is ₱172.87 per day ($8.82). However, in the Free Economic Zone of the Northern Border, the minimum wage is ₱260.34 per day ($13.28). The Free Economic Zone of the Northern Border includes the following municipalities, all sharing a border with the US:
- Baja California Norte
- Nuevo Leon
2023 Update: Mexico’s Labor Minister has announced a 20% increase in the minimum wage beginning Jan. 1, 2023. The new minimum wage will be ₱207 per day ($10.56). For companies operating in the Free Economic Zone, the minimum wage will increase to ₱312 per day ($15.91).
Under the Mexican Federal Labor Law, paying employees a 13th-month salary is mandatory. It’s a bonus payment made in full no later than Dec. 20 each year. It’s calculated as 15 days of the employee’s regular pay. Employers may also include an additional bonus in this pay.
Working hours in Mexico cannot exceed 48 hours in one week, and employees are entitled to one full day of rest per week. Your company can have official working hours of less than 48 if you wish, but these hours must be specified in the employment agreement with your employees, which is a requirement in Mexico. These contracts can specify a term of employment, but if it doesn’t, it’s assumed the term is indefinite. You can include a trial period in your employment agreements but it cannot exceed 30 days.
Mexico officially recognizes three work shifts:
- Day shifts starting at or after 6 a.m. and ending at or before 8 p.m., capped at 48 hours per week
- Night shifts starting at or after 8 p.m. and ending at or before 6 a.m., capped at 42 hours per week
- Mixed shifts, capped at 45 hours per week
All time worked by an employee beyond the hours stated above must be paid as overtime. The first nine hours of overtime are paid at twice the employee’s regular rate of pay. Every hour after that, employees must be paid three times their regular rate of pay.
After one year of employment with a company, workers are entitled to at least six days of paid leave per year, plus an additional two days per year of service. Companies may have time off policies that are more generous.
Mexico has several holidays where employees are not required to work. If an employer requires someone to work, they’ll need to pay triple time. Here are the Mexican federal holidays:
- New Year’s Day (Jan. 1)
- Constitution Day (Feb. 5)
- Benito Juarez Day (Third Monday in March)
- Holy Thursday (Thursday before Easter)
- Good Friday (Day after Holy Thursday)
- Labor Day (May 1)
- Anniversary of the Battle of Puebla (May 5)
- Independence Day (Sept. 16)
- Day of the Race (Oct. 12)
- All Souls’ Day (Nov. 2)
- Revolution Day (Third Monday in November)
- Lady of Guadalupe Day (Dec. 12)
- Christmas Day (Dec. 25)
Mexico doesn’t require employers to provide paid sick leave. However, Mexico has a federal program for sick leaves under their social security system. Employees who cannot work because of a medical condition may receive up to 52 weeks of paid leave, paid at 60% of their regular salary. If they are unable to work because of a work-related injury, they will receive their full pay.
Mexico provides both maternity and paternity leave. Maternity leave consists of 12 weeks of paid leave, half of which must be taken before a baby is born. Paternity leave is limited to five days. Both kinds of leave are paid at full salary, where 60% of the pay comes from the Mexican Institute of Social Security (IMSS) and the other 40% comes from the employer.
Adoptions are different from natural birth, however. For an adoption, a mother is entitled to only six weeks of paid leave starting on the day of the adoption. Fathers are still limited to five days.
At-will employment does not exist in Mexico so employers cannot terminate an employee without cause. In fact, the Mexico Federal Labor Law lists allowed reasons for termination:
- Falsifying work qualifications
- Sexual harassment
- Alcohol use at work
- Breach of an employer’s policies on dishonesty or disobedience
- Breaching employer confidentiality, like disclosing trade secrets
- Failure to comply with an employer’s safety procedures
- Four or more unexcused absences in a rolling 30-day period
When an employer terminates an employee, it is required to provide the employee with written notice of termination that explains the misconduct that led to the termination. This notice does not have to be given on the day of termination, however, and can be provided to the employee up to 30 days after their termination.
If an employer terminates an employee without cause, severance pay is required. This amount should be at least three times their regular salary for one month or three months of regular salary. For employees with over 15 years of employment, you’ll need to add an additional 20 days’ pay for every additional year of service.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your Mexican employees. This will be collected in the form of your employment agreement with each employee. Your employment contract must contain the following:
- Name, nationality, age, sex, marital status, and address of the employee
- The employee’s Federal Taxpayer Registry code issued by the SAT
- The business address in Mexico
- The type of labor relationship between the employee and the employer
- Whether there is a training period
- The specific services the employee will provide
- The physical address of where work will be performed, if different from the business address
- The hours the employee will work
- The amount of pay and frequency of payments
- What day of rest the employee will receive and if the employee will be required to work any Mexican federal holidays
- Designation of beneficiaries for payment of wages should the employee die
Other documents may also be required to establish an employment relationship. You’ll need to verify the employee’s identification through official documentation like a passport, and receive proof of their address.
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, they often use paper timesheets. We don’t recommend this, as it’s ripe for errors and misuse. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve timesheets before they get to your payroll team for processing.
Once payroll gets the timesheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your Mexican payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from Mexican government agencies.
Type of Payroll Deduction
7.58% of the employee’s pay (this includes pension and unemployment funds, health, disability, and other government insurances)
1.65% of the employee’s pay
State Payroll Tax
1 to 3% of the employee’s pay
Mexico City Payroll Tax
3% of the employee’s pay
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Here are the current tax brackets in Mexico.
Income Tax Withholding
Up to ₱7735.00
₱7735.01 to ₱65,651.07
₱65,651.08 to ₱115,375.90
₱115,375.91 to ₱134,119.41
₱134,119.42 to ₱160,577.65
₱160,577.66 to ₱323,862.00
₱323,962.01 to ₱510,451.00
₱510,451.01 to ₱974,535.03
₱974,535.04 to ₱1,299,380.04
₱1,299,380.05 to ₱3,898,140.12
For reference, the top tax bracket here is equal to about $200,000. It’s also important to note that while tax brackets routinely change, there is currently no change scheduled in these brackets for 2023.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined and put into your employee’s contracts.
If you have just a single or handful of employees in Mexico, you may want to outsource your payroll to a local provider. They will be licensed and familiar with Mexican payroll laws and processes. While you’ll pay them a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your Mexican workforce, you may want to hire an international payroll and HR expert to handle payroll in-house, depending on cost differences. If you opt not to outsource, make sure you or your payroll team are familiar with Mexican payroll laws and deductions to ensure you’re making the right deductions from employees’ paychecks and sending tax payments to the right Mexican government authorities.
Step 7: Document & Store Your Payroll Records
Records can be audited in Mexico for up to five years, so it’s wise to ensure your payroll records are kept for at least that amount of time. At a minimum, your records should include:
- Each employment contract for each employee
- The dates of employment and rate of pay
- The frequency of pay
- Total regular and overtime pay
- Net employee pay
If you want an easier way to handle your Mexico payroll, then check out our guide to the best international payroll services to find a provider that can handle it for your business.
Doing payroll in Mexico for the first time is overwhelming but it can be done. If you’ve determined that adding Mexican employees is right for your business, make sure you stay compliant by following this guide.