Employment taxes in Mexico

Employment taxes and regulations in Mexico

Employers and employees in Mexico are subject to detailed employment tax obligations and labor laws. These regulations cover payroll taxes, social security, employee rights, and leave entitlements.

This overview presents key compliance requirements for companies with workers in Mexico.

Employer contributions and social insurance

Mexico operates a mandatory social security system managed by the Mexican Social Security Institute (IMSS) for private sector employees and ISSSTE for federal employees.

• Occupational risk insurance
• Sickness and maternity insurance
• Disability and life insurance
• Retirement, severance, and old age insurance
• Childcare and social benefits
• Infonavit (housing fund) contributions

Employers contribute approximately 10.5 percent of the employee’s salary towards social security. Employees contribute about 1.2 percent.

Rates may vary by salary level and employer risk classification.

Employee income tax

Individuals working in Mexico are subject to a progressive income tax. Both Mexican residents and non-residents earning income in Mexico must pay this tax.

Income tax is withheld by the employer and paid to the tax authority. The average effective rate for employees is about 8.4 percent, though actual rates depend on income levels.

• Taxable income brackets determine the percentage withheld
• A system of employment subsidies applies for lower-income employees

Other payroll taxes

Employers and employees may also encounter value-added tax (VAT) obligations, particularly when paying for services rendered by foreign entities in Mexico.

• The standard VAT rate in Mexico is 16 percent
• Employers must withhold and remit VAT on payments abroad for local use

Working hours

The standard workweek in Mexico is eight hours per day and up to 48 hours per week for adults.

Overtime is permitted under specific limits but must be compensated at higher rates. Night work and mixed shifts have stricter duration limits.

Leave entitlements

Employees in Mexico are entitled to paid leave under the Federal Labor Law.

• Annual leave: At least 12 days after one year of service, increasing with seniority
• Maternity leave: 12 weeks (generally six weeks before and after childbirth)
• Paternity leave: 5 working days
• Public holidays: Employees are entitled to rest on official public holidays

Employee rights and protections

Mexico’s labor laws provide various protections for employees.

• Mandatory written employment contract
• Non-discrimination and equality at work
• Severance and termination pay requirements
• Right to social security benefits

Probation and termination

Probation periods for new hires are typically up to 30 days and may be extended for certain positions.

Termination must follow strict procedures, including written notice and justification. Severance pay is owed except in cases of just cause defined by law.

Visas and work permits

Foreign nationals need legal authorization to work in Mexico. Employers must sponsor work permits and meet government requirements before hiring foreign workers.

Visa categories depend on the duration and nature of the employment.

Employer compliance requirements

• Register employees with IMSS and comply with reporting obligations
• Withhold and remit payroll taxes
• Maintain accurate payroll and employment records
• Issue written employment agreements
• Provide occupational health and safety protections

FAQs

What are the main social security contributions in Mexico?

Employers contribute to health, maternity, disability, life, retirement, childcare, and accident insurance through the IMSS. Employees make payroll contributions as well. The rates are regulated and shared between employer and employee.

How much annual leave must be offered to employees in Mexico?

Employees are entitled to a minimum of 12 days of paid annual leave after one year of service. This entitlement increases with each subsequent year worked. Additional vacation premium and public holidays also apply.

How are employees taxed on income in Mexico?

Employees pay a progressive income tax based on their earnings. Employers withhold tax from salaries and remit it to tax authorities. Subsidies are available for lower incomes, and tax rates increase with higher income levels.

What are the rules for terminating employment in Mexico?

Terminating an employee requires following lawful procedures. Severance pay obligations arise unless dismissal is for just cause defined in the labor law. Notice and documentation must comply with statutory requirements.

Are foreign employees required to pay taxes in Mexico?

Foreign employees working in Mexico must pay income tax on Mexican-source earnings. Residency status and tax treaties may affect the tax rate or coverage. Employers must ensure compliance when hiring foreign staff.