Mexico has advanced technological processes when it comes to delivering payroll. Javier Garciasancho, partner at BDO Mexico, looks at the implications for both employees and employers in Mexico.
The terms of each employment relationship between employee and the employer has to be supported by a contract. There are obligations and benefits for both parties.
For employees
Employees are required to pay their personal Income tax and Mexican Social Security Institute (IMSS) contributions. This is done through a withholding performed by the employer. Individual income tax can go from 0 per cent to 35 per cent, depending on the level of income.
The social security is a small portion of the total of the contribution for the employee - the employer is the one who has to contribute the biggest percentage.
Employees receive mandatory benefits by law such as:
• A Christmas bonus - a payment of at least 15 days’ salary paid in December.
• Holiday pay, plus a 25 per cent ‘prime’. There is a specific schedule of days of vacations that the employee is entitled to relating to the years they have worked for the company.
• Profit sharing - employees in Mexico are entitled to receive 10 per cent of the profits of the company they work for. There is a specific formula to determine the base to be shared. Fifty per cent of the base amount is shared among employees according to the time worked in the year for the entity and the other half is distributed according to the amount of salary. There are some exemptions where individuals are not eligible for profit sharing.
• Overtime - if the employee is required to stay additional time over the weekly limit of legal hours, then the employer has to pay overtime. There are specific rules and procedures to determine the hourly amount to be paid as overtime.
There are other non-mandatory benefits including life insurance, private medical insurance, food coupons etc that can be given to the employee. The employer is free to decide if these benefits will be part of the compensation plan of the employees or not.
For employers
The employer must register all employees at the IMSS.
Monthly and bi-monthly contributions paid by employers can include public medical service, retirement savings funds and housing funds. All social contributions are calculated in the IMSS’ software platform. Contributions are deductible for corporate income tax purposes if all requirements specified by the law are properly fulfilled.
All calculations for social security contributions are based on the official minimum general daily wage published by the Mexican authorities.
In some states there is a special state payroll tax that the employer must pay on a monthly basis. The general rate is 3 per cent. This state tax is deductible for corporate income tax purposes.
For benefits other than the mandatory ones, there is a specific procedure to determine the percentage that can be deducted for corporate income tax, as not all are 100 per cent deductible.
The tax laws say that salaries must be paid in electronic wires or cheques in the name of the employee and directly to his/her bank account. It is not permitted to pay cash in amounts higher than 130 US dollars
Pay slips/receipts must be issued electronically and sent via email to the address of the employee. The payroll slip must be issued using an authorised platform that will create a CFDI, or Fiscal Digital Receipt. The CFDI is compounded by two electronic files. If the employer does not follow these rules, it will not be possible to deduct payroll for income tax purposes and will implicate a possible tax cost of 30 per cent.
Some local state governments in Mexico, which are in the process of economic development and where employment is a key factor, have created tax incentive programmes, for example, exemption from the state payroll tax for a certain period of time or for new hires.
The federal government has been involved with federal programmes, for example, credits to salary, applying a tax credit for the amount of the employee income tax. Specific procedures must be fulfilled.
As the payroll process improves in Mexico, there are more opportunities for employers to be competitive in the international market.
By Javier Garciasancho, partner at BDO Mexico.
Mexico has advanced technological processes when it comes to delivering payroll. Javier Garciasancho, partner at BDO Mexico, looks at the implications for both employees and employers in Mexico.
The terms of each employment relationship between employee and the employer has to be supported by a contract. There are obligations and benefits for both parties.
For employees
Employees are required to pay their personal Income tax and Mexican Social Security Institute (IMSS) contributions. This is done through a withholding performed by the employer. Individual income tax can go from 0 per cent to 35 per cent, depending on the level of income.
The social security is a small portion of the total of the contribution for the employee - the employer is the one who has to contribute the biggest percentage.
Employees receive mandatory benefits by law such as:
• A Christmas bonus - a payment of at least 15 days’ salary paid in December.
• Holiday pay, plus a 25 per cent ‘prime’. There is a specific schedule of days of vacations that the employee is entitled to relating to the years they have worked for the company.
• Profit sharing - employees in Mexico are entitled to receive 10 per cent of the profits of the company they work for. There is a specific formula to determine the base to be shared. Fifty per cent of the base amount is shared among employees according to the time worked in the year for the entity and the other half is distributed according to the amount of salary. There are some exemptions where individuals are not eligible for profit sharing.
• Overtime - if the employee is required to stay additional time over the weekly limit of legal hours, then the employer has to pay overtime. There are specific rules and procedures to determine the hourly amount to be paid as overtime.
There are other non-mandatory benefits including life insurance, private medical insurance, food coupons etc that can be given to the employee. The employer is free to decide if these benefits will be part of the compensation plan of the employees or not.
For employers
The employer must register all employees at the IMSS.
Monthly and bi-monthly contributions paid by employers can include public medical service, retirement savings funds and housing funds. All social contributions are calculated in the IMSS’ software platform. Contributions are deductible for corporate income tax purposes if all requirements specified by the law are properly fulfilled.
All calculations for social security contributions are based on the official minimum general daily wage published by the Mexican authorities.
In some states there is a special state payroll tax that the employer must pay on a monthly basis. The general rate is 3 per cent. This state tax is deductible for corporate income tax purposes.
For benefits other than the mandatory ones, there is a specific procedure to determine the percentage that can be deducted for corporate income tax, as not all are 100 per cent deductible.
The tax laws say that salaries must be paid in electronic wires or cheques in the name of the employee and directly to his/her bank account. It is not permitted to pay cash in amounts higher than 130 US dollars
Pay slips/receipts must be issued electronically and sent via email to the address of the employee. The payroll slip must be issued using an authorised platform that will create a CFDI, or Fiscal Digital Receipt. The CFDI is compounded by two electronic files. If the employer does not follow these rules, it will not be possible to deduct payroll for income tax purposes and will implicate a possible tax cost of 30 per cent.
Some local state governments in Mexico, which are in the process of economic development and where employment is a key factor, have created tax incentive programmes, for example, exemption from the state payroll tax for a certain period of time or for new hires.
The federal government has been involved with federal programmes, for example, credits to salary, applying a tax credit for the amount of the employee income tax. Specific procedures must be fulfilled.
As the payroll process improves in Mexico, there are more opportunities for employers to be competitive in the international market.
By Javier Garciasancho, partner at BDO Mexico.
