Employee Tax Withholding in Mexico (2026 Guide)

What is Employee Tax Withholding in Mexico

Employee tax withholding in Mexico refers to the mandatory deductions taken from an employee’s salary and paid to the government on the employee’s behalf.

These amounts are not optional, negotiable, or employee-managed. Under Mexican law, withholding is a core payroll obligation that must be handled correctly every pay period by the legal employer.

• Definition of employee tax withholding in Mexico
  Employee withholding includes income tax (ISR) and the employee portion of social security contributions. These amounts are deducted from gross salary and remitted to Servicio de Administración Tributaria and Instituto Mexicano del Seguro Social according to strict deadlines and reporting rules.
  
  

• Difference between employee withholdings vs employer payroll taxes
  Employee withholdings are deducted from salary, while employer payroll taxes are paid on top of salary. Both are mandatory, calculated separately, and reported independently, but only the employer can legally handle either.
  
  

• Why withholding compliance matters in Mexico
  Incorrect or missed withholdings trigger audits, fines, back payments, and employee claims. Employee consent does not protect the employer from liability.
  
  

• Who is legally responsible for withholding and remittance
  Only the legal employer of record in Mexico is responsible. This duty cannot be transferred to the employee or a foreign company without a local employer structure.
  
  

In Mexico, withholding is a legal function of employment, not an administrative preference. Proper handling protects both the employee’s rights and the employer’s compliance position.

Authorities Governing Employee Tax Withholding

Employee tax withholding in Mexico is regulated by multiple government authorities, each with a defined legal role. Payroll compliance is not handled through a single agency.

Employers must interact with tax, social security, housing, and retirement systems at the same time. Missing registration with any authority makes payroll noncompliant from day one.

• Role of Servicio de Administración Tributaria (SAT)
  The SAT oversees income tax withholding (ISR), payroll tax reporting, and electronic payroll receipts (CFDI). Employers must calculate, withhold, report, and pay employee income tax through the SAT on a recurring basis.
  
  

• Role of Instituto Mexicano del Seguro Social (IMSS)
  IMSS manages social security contributions, healthcare coverage, disability benefits, and workplace risk insurance. Employers withhold the employee portion and pay both employee and employer contributions monthly.
  
  

• Role of INFONAVIT and retirement institutions (SAR / AFORE)
  INFONAVIT administers housing fund contributions, while SAR and AFORE manage mandatory retirement savings. Employers calculate, withhold, and remit these amounts as part of payroll obligations.
  
  

• Why registration with all authorities is mandatory before payroll
  Payroll cannot legally run without active registrations. Paying employees without full registration exposes the employer to fines, audits, and retroactive liabilities.
  
  

In Mexico, payroll only exists when all authorities are properly registered and linked. Partial compliance is treated as noncompliance.

Federal Income Tax (ISR) Withheld From Employees

Federal Income Tax, known as ISR, is the main tax withheld from employee salaries in Mexico. It is calculated on earned income and deducted directly from payroll before payment.

ISR withholding is mandatory and must be recalculated every pay period based on actual earnings, not estimates or annual projections.

• ISR as the primary employee tax withholding
  ISR applies to salaries, wages, bonuses, and most cash compensation. It represents the largest portion of employee tax deductions and must be withheld by the legal employer.
  
  

• Progressive ISR tax brackets (1.92% to 35%)
  Mexico uses progressive rates, meaning higher income is taxed at higher percentages. Rates start at 1.92% and increase up to 35% as income rises.
  
  

• How ISR withholding is calculated using official SAT tables
  ISR is calculated using official tables published by Servicio de Administración Tributaria. These tables define lower limits, fixed quotas, and marginal rates for each pay range.
  
  

• Taxable income components subject to ISR
  Taxable income includes base salary, overtime, bonuses, commissions, allowances paid in cash, and certain benefits that exceed tax-exempt limits.
  
  

• Pay period impact on ISR calculation (weekly, biweekly, monthly)
  ISR tables change based on pay frequency. Using the wrong table results in under or over withholding and immediate compliance exposure.
  
  

ISR withholding in Mexico is calculation-driven and frequency-specific. Precision is required every payroll cycle to remain compliant.

Example table

Types of Employee Income Subject to Withholding

In Mexico, employee tax withholding applies to most forms of compensation paid through payroll. Withholding is not limited to base salary. Any income classified as taxable remuneration must be evaluated each pay period and included in the withholding calculation using official rules.

• Base salary
  Base salary is fully subject to withholding. ISR and employee social security contributions are calculated on the salary amount earned during the pay period.
  
  

• Overtime
  Overtime pay is taxable income. While limited exemptions may apply in specific cases, most overtime must be included in the ISR and social security base.
  
  

• Bonuses and commissions
  Bonuses, performance incentives, and commissions are taxable when paid. These amounts often push employees into higher ISR brackets for that pay period.
  
  

• Christmas bonus (Aguinaldo)
  Aguinaldo is partially tax exempt up to the legal threshold. Any excess above the exempt limit is subject to ISR withholding.
  
  

• Vacation pay and vacation premium
  Vacation pay is taxable. The vacation premium has a partial exemption, but the taxable portion must be included in withholding calculations.
  
  

• Other cash and taxable compensation
  Allowances, cash benefits, stipends, and non-exempt perks are taxable unless explicitly excluded by law. Misclassification creates immediate audit risk with Servicio de Administración Tributaria.
  
  

In Mexico, withholding is based on income type, not intent. Every payment must be reviewed for tax treatment before payroll is processed.

Social Security Contributions Withheld From Employees

Social security contributions in Mexico are mandatory payroll deductions handled through the IMSS system. A portion of these contributions is withheld directly from the employee’s salary, while the rest is paid by the employer.

IMSS withholding applies to all employees registered in Mexico and must be calculated and remitted every payroll cycle.

• Employee portion of IMSS contributions
  Employees contribute a legally defined percentage of their integrated daily salary. This amount is withheld from payroll and paid to Instituto Mexicano del Seguro Social along with the employer portion.
  
  

• What IMSS employee deductions cover
  Employee deductions fund healthcare, disability and life insurance, retirement benefits, childcare services, and social welfare protections provided by IMSS.
  
  

• Difference between employee share and employer share
  The employee share is withheld from salary. The employer share is paid on top of salary. Both are mandatory, calculated separately, and reported together.
  
  

• Why IMSS withholding is mandatory regardless of salary level
  IMSS registration and withholding apply even to low salaries or part-time roles. There is no opt-out based on income or private insurance.
  
  

IMSS withholding is a legal condition of employment in Mexico. Failure to withhold correctly exposes the employer to fines, back payments, and employee claims.

Retirement and Savings Withholdings (SAR / AFORE)

Retirement and savings contributions in Mexico are part of the mandatory social security system and are processed through payroll. These contributions are linked to the employee’s registration and salary base and are split between the employee and the employer. They are not optional benefits or private plans.

• Employee retirement contributions
  A small percentage of the employee’s salary is withheld to fund individual retirement savings accounts managed by Administradoras de Fondos para el Retiro under the SAR system.
  
  

• Employer vs employee contribution structure
  Employees contribute a limited portion through payroll withholding, while employers contribute the majority of retirement funding on top of salary.
  
  

• How retirement withholdings are deducted via payroll
  Employee contributions are automatically deducted each pay period and reported together with IMSS contributions as part of the payroll submission.
  
  

• Why retirement deductions are linked to IMSS registration
  Retirement accounts cannot exist without IMSS registration. Salary reporting to Instituto Mexicano del Seguro Social drives retirement contribution calculations and account funding.
  
  

Retirement withholding is a statutory obligation tied to employment. Payroll accuracy directly affects an employee’s long-term pension rights.

INFONAVIT Housing Fund Contributions

INFONAVIT is Mexico’s national housing fund system that provides mortgage access and housing benefits to employees. While INFONAVIT is part of payroll reporting, it is important to understand how it differs from employee tax withholdings.

• What INFONAVIT is
  INFONAVIT is a government housing fund that allows employees to accumulate credit for home loans through their employment history.
  
  

• Clarification that INFONAVIT is employer-paid, not employee-withheld
  INFONAVIT contributions are paid entirely by the employer. No amount is withheld from the employee’s salary for standard INFONAVIT funding.
  
  

• Why INFONAVIT still appears in payroll calculations
  INFONAVIT is calculated based on reported salary and IMSS data, so it appears in payroll summaries even though it is not deducted from pay.
  
  

• Common confusion employers have about INFONAVIT
  Foreign employers often assume INFONAVIT is an employee deduction. Treating it as a withholding is incorrect and leads to payroll misreporting.
  
  

INFONAVIT is a mandatory employer obligation, not an employee tax. Proper classification is essential for compliant payroll in Mexico.

State Payroll Tax Clarification (What Is NOT Employee Withholding)

Mexico imposes a state-level payroll tax that is often confused with employee withholding. This tax is called Impuesto Sobre Nóminas and it applies to employers only. It is not deducted from employee salaries and does not reduce take-home pay. Treating it as a withholding is a compliance error.

• Explanation of impuesto Sobre Nóminas
  Impuesto Sobre Nóminas is a local tax charged by each Mexican state on total payroll expenses. It is calculated on gross remuneration paid to employees.
  
  

• State payroll tax ranges by state (2–5%)
  Rates vary by state, typically between 2% and 5%. The employer must apply the correct rate based on the employee’s work location.
  
  

• Clear distinction between employee withholding vs employer tax
  Employee withholding reduces salary and is paid on the employee’s behalf. State payroll tax is paid entirely by the employer and never deducted from wages.
  
  

• Why this tax is often misunderstood in Mexico
  Foreign companies often assume all payroll-related taxes are withholdings. This misunderstanding leads to incorrect payroll calculations and reporting errors to local authorities.
  
  

State payroll tax is a cost of employing staff in Mexico, not an employee deduction. Mixing the two creates avoidable compliance exposure.

Examples of ISN Rates by State (Approximate)

Withholding Rules for Non-Resident Employees in Mexico

In Mexico, non-resident employee taxation is governed by the Income Tax Law (LISR and enforced by Servicio de Administración Tributaria.

When a non-resident performs subordinate personal services inside Mexican territory, that income is considered Mexican-source and becomes subject to mandatory withholding, even if the employer is foreign or payment is made abroad.

• Determination of Mexican-source income
  Income is taxable in Mexico when the work is physically performed in Mexico. Remote work from Mexico for a foreign company is taxable, and cross-border roles may require payroll withholding for the Mexico-based portion of work.
  
  

• Progressive withholding rates for non-residents
  Non-residents do not use standard monthly ISR tables. The first MXN 125,900 earned annually is exempt, income up to MXN 1,000,000 is taxed at 15%, and income above that threshold is taxed at 30%.
  
  

• Employer withholding obligations
  The Mexican payer or Employer of Record must calculate and withhold ISR at payment, issue payroll CFDIs, and remit tax. In most cases, this withholding is considered final tax for the non-resident.
  
  

• Permanent Establishment risk for foreign companies
  Hiring or allowing non-residents to work from Mexico can trigger Permanent Establishment exposure. Using an Employer of Record such as Human Resources Mexico mitigates this risk by acting as the local legal employer.
  
  

• Statutory benefits and social security coverage
  Once on Mexican payroll, non-resident employees are entitled to full statutory benefits, including Aguinaldo, vacation premium, and mandatory registration with Instituto Mexicano del Seguro Social and INFONAVIT.
  
  

Non-resident withholding in Mexico is territory-based, not nationality-based. Missteps often create tax exposure, labor liability, and permanent establishment risk.

Payroll Calculation Mechanics in Mexico

Payroll calculations in Mexico follow rigid, formula-based rules defined by tax and labor authorities. Withholdings are not estimated or averaged. Every payroll run must apply official tables, correct salary integration, and the proper pay frequency to remain compliant.

• Use of official SAT tax tables
  Income tax withholding must be calculated using current tables published by Servicio de Administración Tributaria. Using outdated or unofficial tables leads to under or over withholding.
  
  

• Impact of payroll frequency on withholding amounts
  ISR tables differ for weekly, biweekly, and monthly payrolls. Applying the wrong frequency changes the tax outcome and creates immediate compliance exposure.
  
  

• Integration of benefits into taxable base
  Certain benefits and allowances must be included in the taxable base when they exceed exemption limits. Excluding them incorrectly reduces withholding unlawfully.
  
  

• Importance of accurate daily integrated salary (SDI)
  SDI determines social security, retirement, and benefit calculations. Errors in SDI affect IMSS, SAR, and long-term employee entitlements.
  
  

Payroll mechanics in Mexico are precision-driven. Small calculation errors compound quickly across taxes, benefits, and reporting.

Payroll Reporting and CFDI Requirements

Mexico requires all payroll activity to be reported digitally through electronic tax receipts. Payroll is not legally recognized unless it is properly documented and transmitted to tax authorities using the official CFDI system.

• Mandatory electronic payroll receipts (CFDI de Nómina)
  Every payroll payment must be supported by a CFDI de Nómina issued and validated through the SAT system. Payments without CFDIs are treated as non-compliant.
  
  

• Required information shown on employee paystubs
  CFDIs must include gross salary, each withholding item, employer contributions, net pay, tax bases, and employee identifiers.
  
  

• How withholding must be reported digitally
  Withheld ISR and social security amounts are embedded in the CFDI and cross-checked by authorities against monthly filings and payments.
  
  

• Consequences of incorrect CFDI reporting
  Errors can invalidate payroll deductions, trigger audits, block tax deductibility, and expose the employer to fines and retroactive liabilities.
  
  

In Mexico, payroll compliance exists only when calculations and digital reporting align. Correct CFDIs are as important as correct withholding.

Monthly and Annual Remittance Obligations

Withholding in Mexico does not end at payroll calculation. Employers must remit withheld amounts to the correct authorities within strict timelines. Late or incorrect payments are treated as compliance violations, even if payroll calculations were accurate.

• Monthly ISR remittance deadlines
  Withheld income tax must be paid monthly to the Servicio de Administración Tributaria, generally by the 17th day of the following month.
  
  

• Monthly IMSS payment obligations
  IMSS contributions, including both employee withholdings and employer portions, must be paid monthly to Instituto Mexicano del Seguro Social within established deadlines.
  
  

• Annual employee withholding statements
  Employers must issue annual summaries showing total income and withholdings. These statements support employee tax reviews and audits.
  
  

• Employer responsibility for accuracy and timing
  The employer is fully responsible for correct amounts and on-time payments. Errors or delays cannot be shifted to employees.
  
  

In Mexico, withholding is only compliant when amounts are correctly remitted on time. Payroll accuracy without timely payment still creates liability.

Employee Rights and Transparency

Mexican labor and tax laws place strong emphasis on employee transparency. Employees have the right to understand how their salary is calculated, what is withheld, and to challenge errors when they occur.

• Employee access to paystubs and tax details
  Employees must receive their CFDI payroll receipts, showing gross pay, withholdings, contributions, and net salary.
  
  

• Right to challenge incorrect withholdings
  Employees can formally question incorrect deductions and request clarification or correction from the employer.
  
  

• Correction procedures for payroll errors
  If an error is identified, the employer must recalculate payroll, adjust taxes, and correct authority filings as required.
  
  

• Employer obligation to reissue corrected CFDIs
  Incorrect CFDIs must be canceled and reissued with corrected data. Leaving errors uncorrected exposes the employer to audits and employee claims.
  
  

Transparency is a legal requirement in Mexico. Employees are entitled to clear payroll records and timely correction of any withholding errors.

Common Payroll Withholding Mistakes in Mexico

Payroll withholding errors in Mexico usually come from misunderstanding how rigid and enforcement-driven the system is. Most mistakes are not technical glitches. They are structural compliance failures that expose employers to audits and retroactive liabilities.

• Incorrect ISR bracket application
  Using the wrong ISR table or pay frequency causes under or over withholding. SAT does not allow corrections through estimates or annual adjustments.
  
  

• Misclassification of taxable vs non-taxable income
  Treating bonuses, allowances, or benefits as exempt when they exceed legal thresholds leads to illegal under-withholding.
  
  

• Missing or late SAT filings
  ISR may be withheld correctly but still considered non-compliant if not reported and paid on time to the Servicio de Administración Tributaria.
  
  

• IMSS registration errors
  Late registration, incorrect salary reporting, or wrong SDI calculations result in fines and retroactive social security assessments by Instituto Mexicano del Seguro Social.
  
  

• Contractor misclassification risks
  Paying individuals as contractors while treating them as employees triggers reclassification, back taxes, and severance exposure.
  
  

In Mexico, payroll mistakes are cumulative. Small errors quickly become systemic compliance failures.

Compliance Risks, Penalties, and Audits

Mexico enforces payroll compliance through coordinated audits between tax and social security authorities. Penalties are applied retroactively and often include interest, fines, and mandatory corrections.

• SAT penalties for incorrect withholding
  SAT can impose fines, interest, and deny tax deductibility for payroll expenses when ISR withholding or reporting is incorrect.
  
  

• IMSS audits and retroactive assessments
  IMSS audits frequently result in back payments for unpaid contributions, recalculated SDI, surcharges, and penalties.
  
  

• Financial exposure for foreign employers
  Foreign companies face compounded risk including tax liability, labor claims, and permanent establishment exposure when payroll is mishandled.
  
  

• Why software-only payroll models fail in Mexico
  Payroll in Mexico requires legal employer authority, registrations, and human oversight. Software platforms alone cannot assume employer liability or resolve enforcement actions.
  
  

Mexico’s payroll system is enforced, not theoretical. Compliance depends on legal structure, accurate withholding, and real local accountability.

How Proper Withholding Is Managed Under an EOR

Mexico requires that every employee have one single legal employer. Tax withholding, social security, and labor compliance cannot be split between entities or handled informally.

An Employer of Record structure exists to meet this requirement when a foreign company does not have a Mexican legal entity.

• Why Mexico requires a single legal employer
  Mexican labor law does not allow co-employment. One entity must be fully responsible for contracts, payroll, tax withholding, social security, and employee rights.
  
  

• How HRM manages withholding, remittance, and compliance
  Human Resources Mexico acts as the legal employer, calculates ISR and social security withholdings, issues CFDIs, and remits payments to SAT, IMSS, and related authorities on time.
  
  

• Separation of operational control vs legal employer responsibility
  The client supervises day-to-day work and performance. The EOR retains full legal responsibility for employment, payroll, withholding, and compliance enforcement.
  
  

• Risk reduction for foreign companies
  Using an EOR removes exposure to misclassification, payroll errors, audit failures, and permanent establishment risk while ensuring employees receive full statutory protections.
  
  

In Mexico, proper withholding relies on the authority of the legal employer. An EOR structure provides operational flexibility while ensuring full regulatory compliance. If you want to hire in Mexico and stay compliant, reach out today to get a custom hiring proposal for your needs.

FAQs

Do foreign companies need to withhold employee taxes in Mexico?

Yes. If an employee performs work in Mexico, tax withholding is mandatory, even if the employer is foreign. Mexican law requires ISR and social security to be withheld through a legal employer structure. Foreign companies cannot shift this obligation to employees or avoid it through contracts or offshore payroll arrangements.

Can employees pay their own taxes instead of employer withholding?

No. Employee self-payment is not allowed for salaried employment in Mexico. The legal employer must calculate, withhold, and remit taxes and social security contributions. Even if an employee agrees to handle their own taxes, the employer remains fully liable before the authorities for any non-compliance.

What happens if employee withholding is calculated incorrectly?

Incorrect withholding can trigger audits, fines, interest, and retroactive payments. Authorities such as Servicio de Administración Tributaria and Instituto Mexicano del Seguro Social may reassess payroll going back several years. Employees can also file claims if deductions or benefits are miscalculated.

Is payroll software alone enough to manage withholding in Mexico?

No. Payroll software can calculate numbers, but it cannot assume legal employer responsibility. In Mexico, withholding requires a registered employer, valid tax IDs, IMSS enrollment, CFDI issuance, and legal accountability. Software-only models often fail during audits because no local employer stands behind the payroll.

How does an Employer of Record handle employee tax withholding?

An Employer of Record such as Human Resources Mexico becomes the legal employer. The EOR calculates and withholds ISR, manages IMSS and retirement contributions, issues CFDIs, and remits payments to all authorities. The client company focuses on operations without assuming payroll or tax liability.

Can incorrect withholding create permanent establishment risk?

Yes. Improper payroll handling, contractor misclassification, or unmanaged withholding can signal that a foreign company is operating in Mexico without a compliant structure. This may trigger permanent establishment exposure, leading to corporate tax obligations, penalties, and expanded audits beyond payroll alone.