Mexico’s federal constitution covers numerous and extensive rights and privileges for workers, which range from payroll to holidays and even an employee housing fund.
Taxation rules in Mexico
Mexico operates under a progressive income tax that ranges up to 35% based on an employee’s salary.
Employers must register employees in the social security on the start date of employment, or face significant penalties. Employers are also required to deduct income tax contributions from workers’ paychecks and submit them to the government in Mexico every month.
Social security is part of payroll taxes, and both workers and employers make contributions to it. Employer fees may vary depending on social security benefits type and type of work risk, and social housing (INFONAVIT). Employer contribution is equivalent to 5% of the base salary.
Retirement savings system is a social security benefit that employers are obligated to pay monthly, including contributions equivalent to 2% of the corresponding base salary for social security. Contributions are deposited in individual accounts (AFORE) for each worker in financial institutions. Unemployment and old age employer contributions are equivalent to 3.15% to its top 11.875% of the base salary.
Employer payroll taxes are a state tax charged as a percentage of eligible pay elements with rate ranges between 1% to 3% of payroll, depending on the state.
How to establish a payroll in Mexico
The first step in setting up Mexico payroll is to register the business by filing before a notary public and the National Registry of Foreign Investment. Companies will then receive a tax identification card from the Federal Taxpayers registry.
Employers cannot pay employees until they are registered with the Mexican Social Security Institute and get tax registration in the country. Mexico rolled out new Tax Revenue regulations in 2017 that require all employees’ net pay to be received in official Mexico banks and paid in pesos. Therefore, companies need to establish bank accounts in Mexico before making payments to employees or the government.
Before hiring an employee, it is best practice to draft an employment contract with entitlement and termination terms. Employees receive 8 mandatory holidays and can take off election days, which are considered statutory holidays when designated by federal and local law. Employees are also entitled to progressive vacation days, from 12 days for the first year/anniversary. For every year thereafter, employees will accrue 2 additional days. As of the sixth year of service, employees will accrue 2 additional vacation days for every 5 years of service. Make sure these entitlements are spelled out in the contract.
Employment agreements can be terminated for reasons including:
- Mutual understanding, including resignation.
- Employee death.
- Employee’s physical or mental incapacity or disability.
- For cause.
- Employees that are terminated without cause are entitled to any outstanding salary and accrued benefits (vacations, bonus, saving funds, etc.), 90 days pay, seniority premium equal to 12 days of salary per year of service, and 20 days wage entitlement per year of service.
- Employees terminated with cause are entitled to outstanding salary and accrued benefits, and seniority premium of 12 days of salary per year of service only if the employee has at least 15 years of continuous service with the same employer.
- Employees that voluntarily resign are entitled to outstanding salary and accrued benefits, and seniority premium of 12 days of salary per year of service only if the employee has at least 15 years of continuous service with the same employer.
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