Payroll in Mexico is highly regulated and notoriously complex. Employers must calculate salaries, withhold taxes, register employees with IMSS, pay INFONAVIT contributions, and stay compliant with state payroll taxes. Mistakes can trigger penalties, audits, and reputational damage.

To manage these challenges, companies often explore two solutions: outsourcing payroll or working with an Employer of Record (EOR). Payroll outsourcing supports companies that already have a legal entity, while an EOR allows global companies to hire and pay employees without establishing one.

This guide explains how payroll outsourcing works, when it makes sense, and why many foreign companies ultimately find EOR the safer, faster, and more compliant option for operating in Mexico.

What Is Payroll Outsourcing in Mexico?

Payroll outsourcing in Mexico refers to hiring a specialized third-party provider to manage payroll operations for companies that already have a registered Mexican legal entity. The provider takes over payroll administration, ensuring salaries, taxes, and benefits are calculated and reported in line with Mexican law.

Scope of services typically includes:

• Payroll calculations based on gross and net salary agreements.
  
  

• Tax filings with SAT to comply with federal requirements.
  
  

• Social security contributions through IMSS and INFONAVIT payments.
  
  

• Preparation of CFDI electronic payroll receipts, required for every employee.
  
  

• Regulatory compliance with federal and state authorities to avoid penalties.
  
  

The 2021 outsourcing reform significantly restricted subcontracting, allowing outsourcing only for specialized or non-core business activities. Payroll outsourcing remains valid because it is considered a support function, but only when the provider is properly registered and compliant.

However, for businesses without a local entity, payroll outsourcing is not an option. In those cases, an Employer of Record (EOR) is the only legal solution.

Legal Requirements for Payroll Outsourcing

Companies that want to outsource payroll in Mexico must meet strict legal requirements, and so must their providers. The framework is designed to ensure compliance with Mexican tax and labor authorities.

• Mexican Entity Requirement: Only companies with a registered legal entity can legally outsource payroll. Foreign companies without one cannot use payroll outsourcing and must rely on an Employer of Record (EOR).
  
  

• REPSE Registration: The 2021 outsourcing reform requires payroll outsourcing providers to be listed in the government’s REPSE registry. This ensures they are authorized to deliver specialized services.
  
  

• Tax Compliance: Payroll providers must calculate and file income tax withholdings (ISR) to the SAT and provide accurate electronic reports.
  
  

• Social Security: IMSS registration and contributions are mandatory for every employee. Providers must manage filings on time to ensure coverage.
  
  

• Housing Contributions: Employers must contribute to INFONAVIT, which provides housing credits for employees. This is also managed by the payroll provider.
  
  

• State Obligations: Payroll outsourcing must also account for local payroll taxes, which vary across Mexico.
  
  

Outsourcing beyond permitted activities can lead to severe risks, including fines, contract invalidation, and tax liabilities. Companies must verify that their provider is REPSE compliant and legally authorized to operate.

Payroll Process Outsourced in Mexico

When payroll is outsourced in Mexico, the provider manages the entire cycle from salary calculation to tax filings. This ensures employees are paid correctly and compliance obligations are met at every stage.

• Payroll Cycle Management: Providers typically run payroll on a bi-monthly or monthly schedule, depending on the employer’s policies and collective agreements.
  
  

• Salary Calculations: Payroll includes gross-to-net calculations, withholding of income tax (ISR), and contributions to IMSS, INFONAVIT, and state payroll taxes.
  
  

• Benefits Administration: Providers calculate and manage mandatory benefits such as aguinaldo (Christmas bonus), paid vacation with premium, and PTU profit sharing.
  
  

• CFDI Pay Slips: Every employee must receive an official electronic CFDI payroll receipt, filed through SAT and delivered each pay cycle.
  
  

• Compliance Checks: Payroll providers monitor legislative updates to ensure filings meet the latest labor and tax requirements.
  
  

However, the company remains the legal employer and ultimately responsible for compliance. This is why foreign companies without a Mexican entity cannot use payroll outsourcing and instead must partner with an EOR.

Risks and Limitations of Payroll Outsourcing

Payroll outsourcing in Mexico can be effective, but it comes with significant risks and limitations that companies must consider before choosing this model.

• Legal Entity Requirement: Payroll outsourcing is only available to companies that already have a registered Mexican legal entity. Foreign companies without one cannot use this option and must look to an Employer of Record (EOR).
  
  

• Restricted Scope After Reform: The 2021 outsourcing reform banned subcontracting of core activities. Payroll outsourcing is allowed as a support service, but only when handled by a REPSE-registered provider. Using unregistered providers exposes companies to fines and invalid contracts.
  
  

• Provider Dependency: The company depends heavily on the provider’s accuracy. Errors in calculations, late filings, or failure to stay compliant with SAT, IMSS, or INFONAVIT requirements fall back on the company, not the vendor.
  
  

• Data Security Risks: Payroll providers handle sensitive employee information. Weak security measures can expose companies to breaches, regulatory violations, and reputational damage.
  
  

While outsourcing can reduce administrative workload, the risks highlight why companies must carefully select providers and, for many foreign firms, consider an EOR as the safer alternative.

Why EOR Is the Best Alternative for Global Companies in Mexico

For global companies looking to hire in Mexico, an Employer of Record (EOR) offers a safer and more efficient solution than payroll outsourcing.

Unlike outsourcing providers, an EOR becomes the official legal employer of record under Mexican law. This model is designed specifically for foreign firms without a local entity.

• No Local Entity Required: An EOR eliminates the need to incorporate in Mexico, saving months of setup time and significant costs.
  
  

• Comprehensive Coverage: The EOR handles everything — compliant Spanish-language contracts, payroll calculations, SAT filings, IMSS registration, INFONAVIT contributions, state payroll taxes, and statutory benefits such as aguinaldo, vacation, and PTU profit sharing.
  
  

• Faster Market Entry: With an EOR, companies can hire employees within weeks (or even in days) instead of waiting months for legal incorporation and registrations.
  
  

• Guaranteed Compliance: The EOR ensures full compliance with the Federal Labor Law, social security obligations, and the 2021 outsourcing reform that restricts subcontracting.
  
  

• Reduced Liability: Because the EOR is the legal employer, it absorbs compliance risks, reducing exposure to penalties, back pay, and audit issues.
  
  

We at Human Resources Mexico (HRM) are the only Mexico-dedicated EOR with over 16 years of experience. Unlike global competitors, HRM operates exclusively in Mexico, offering REPSE compliance, third-party audits, transparent pricing, and no hidden fees.

With HRM, U.S. and global companies gain faster hiring, full compliance with Mexican labor law, and dedicated local expertise. Contact us today for a custom proposal.