Mexico offers many enticements to organizations looking to expand globally. Affordable labor costs, an educated workforce and its proximity to the US, are according to industry experts just some of the reasons manufacturing companies are moving there. Plus in response to both the signing of the United States-Mexico-Canada Agreement (USMCA) and Covid-19 many US companies started to consider Mexico over China as best positioned for business partnerships and as part of the global supply chain.
In addition to these changing circumstances Mexico is attractive because it is currently the 15th largest economy in the world and 11th in terms of purchasing power.
If a move to Mexico is on the plans, here are some key payroll considerations.
From January 1 2022 the general minimum wage is $172.87 pesos per work day and $260.34 pesos per work day along the Northern Border Zone.
To operate payroll in Mexico, you will need to follow these steps.
As noted in our Global Payroll Glossary,
To get a work permit in Mexico a candidate needs to apply for a residence visa, which can be temporary resident visa (6 months to 4 years) or permanent. After that, a work permit can be obtained by applying to the Instituto Nacional de Migración (INM) for permission to work.
The following tax rates are effective for resident individuals for 2022
Source: PwC
If the employee is considered a non-resident for Mexican tax purposes, the tax rate applicable to compensation will vary from 15% to 30%. The first MXN 125,900 of employment income received in a 12-month floating period will be tax exempt.
The following tax table is applicable to individual income tax with respect to income earned by non-residents for the calendar year 2022:
Source: PwC
Employer contributions include Social Security, housing fund, and the retirement fund.
Both the employee and the employer make income tax contributions to the Mexican Social Security Institute. The rates vary and it is critical to ensure that you are paying the correct amount for your industry and location.
Most Mexican states levy a relatively low rate of tax on salaries (but not on income in general), which in most cases is payable by the employer. For example Mexico City, imposes a 3% payroll income tax, but it is payable by the employer and constitutes a tax deductible expense for the employer.
In 2020 the Mexican government passed a pension reform initiative that revises the social security law and retirement savings system. One of the main changes is that the contribution weeks of workers decreases from 1,250 to 750 weeks. This is the now the number that the Mexican Institute of Social Security (IMSS) requests employees in Mexico have if they want to receive the benefits of the severance sector in advanced age (60 years) and old age (65 years), and will increase by 25 each year until reaching 1000 in 2031.
Another significant change is that the contribution rate for social security increases to 15% of the base contribution salary. This is in addition to the rise in the minimum guaranteed pension from, on average, 3,289 to 4,345 pesos. This takes into account the worker's SBC, the age at which it is requested, and the number of weeks quoted on the date of the procedure.
In addition, the commissions charged by pensions are capped at 0.54%, while the contribution increases from 5.15% to 13.88%. These are some of the reform points that fundamentally seek to address any current issues and support workers when paying their pension.
For more information on Mexico payroll including severance pay, maternity leave and local labor laws – download the Global Payroll Guide here.
To learn about payroll requirements for other countries including US States and Canadian Provinces, visit our Global Payroll Glossary.