What the Mexico Payroll Tax System Is

Mexico’s payroll tax system is a group of mandatory payments that an employer must calculate and send to the authorities when hiring workers. These payments protect the employee’s legal rights and ensure the company follows labor, tax, and social security rules.

The system is strict because payroll and benefits are directly tied to Mexico’s labor laws.

• Clear definition of payroll taxes
  Payroll taxes in Mexico include social security contributions, income tax withholding, housing fund payments, and state payroll tax. Each part is based on the employee’s actual salary and benefits.
  
  

• Who pays what
  Employers cover most costs, including social security, housing fund contributions, and local payroll tax. Employees mainly pay income tax and a small share of social security, which the employer withholds from payroll.
  
  

• Connection with labor and social security
  Payroll rules come from the Federal Labor Law, IMSS Social Security Law, and state tax laws. Proper payroll reporting activates legal protections like healthcare, pension, vacation pay, and severance.
  
  

This system ensures both the employer and the employee stay fully compliant under Mexico’s strict labor framework.

Key Components of Mexico’s Payroll Tax System

Mexico’s payroll system is built from several mandatory contributions that employers must calculate correctly each pay period. Each component supports a different part of the employee’s legal protections, from healthcare to housing to retirement.

Understanding these elements is essential because Mexico monitors payroll compliance very closely, and every payment must match the employee’s true salary.

• Federal Income Tax (ISR) withholding
  Employers must withhold ISR directly from the employee’s salary based on SAT tax tables. The employee pays this tax, but the employer is responsible for calculating, withholding, and reporting it accurately every month.
  
  

• Social Security (IMSS) contributions
  These payments fund healthcare, maternity leave, disability coverage, and workplace risk insurance. Employers pay most of the cost, while employees contribute a smaller portion through payroll deductions.
  
  

• INFONAVIT housing fund contributions
  Employers must contribute a fixed percentage of the employee’s salary to support access to housing loans. Employees do not pay into this fund directly.
  
  

• Retirement and pension contributions
  Employers and employees contribute to AFORE accounts, which support retirement savings, old-age benefits, and disability pensions.
  
  

• State Payroll Tax (ISN)
  This employer-only tax is paid to the state where the employee works, with rates usually between 2 and 5 percent.
  
  

Together, these components create a structured and transparent payroll system that protects employees and ensures employers follow Mexico’s legal requirements.

Federal Income Tax (ISR): How It Works

Income tax in Mexico, known as ISR, is a progressive tax that increases as an employee earns more. Employers must calculate ISR using SAT’s official tax tables and deduct the correct amount from each paycheck. This ensures employees pay the right amount and employers remain compliant with federal rules.

• Progressive ISR rate structure
  Mexico applies a progressive tax system with brackets rising from low rates up to about 35 percent. Employers must always use SAT’s updated tables for accurate calculations.
  
  

• Employee-side deduction only
  ISR is paid only by the employee. The employer does not contribute to this tax, but must calculate, withhold, and report it correctly every pay period.
  
  

• What counts as taxable income
  Taxable income includes salary, bonuses, commissions, incentives, and other cash benefits. Only specific allowances approved by SAT can be treated as exempt.
  
  

• How employers calculate and remit ISR
  Employers use SAT tax tables to determine the correct withholding each period and then submit payments through SAT’s electronic system. Tools like the ISR Calculator help estimate monthly tax values more easily.
  
  

Correct ISR handling is essential because mistakes directly affect compliance and employee take-home pay.

Employer Social Security Contributions (IMSS)

IMSS is one of the most important parts of payroll in Mexico because it funds healthcare, workplace insurance, disability coverage, and other essential benefits. Employers must register every employee with IMSS and calculate contributions based on the employee’s real salary.

These payments are closely monitored by the government, so accuracy is a key part of compliance.

• Employer responsibilities under IMSS
  Employers must register employees, calculate contributions, report salary changes, and submit payments on time. They are responsible for keeping records updated and ensuring each employee receives full social security coverage.
  
  

• Employer and employee share
  IMSS is a mixed system. Employers pay the largest portion, covering health insurance, maternity care, disability, and work risk insurance. Employees contribute a smaller amount through payroll deductions that the employer withholds.
  
  

• Contribution ranges and formulas
  IMSS payments are based on the employee’s “base salary for contribution,” which includes salary and certain benefits. Rates vary by category, such as work risk, health, and disability. Work risk rates change depending on the employer’s risk classification.
  
  

• Benefits covered by IMSS
  IMSS provides medical care, maternity leave, disability coverage, work accident benefits, retirement support, daycare services, and long-term healthcare protection.
  
  

Overall, IMSS ensures employees are protected while employers meet their legal social security obligations.

Mandatory Employer Funds: INFONAVIT + Retirement

Mexico requires employers to contribute to two major long-term funds that protect an employee’s housing and retirement future. These payments are calculated on the employee’s real salary and must be made every pay cycle.

Together, they form a significant part of the total cost of employment and are mandatory for all legally hired workers in Mexico.

• 5 percent INFONAVIT housing contribution
  Employers must pay 5 percent of the employee’s base salary to INFONAVIT, the federal housing fund. This money helps employees qualify for housing loans, interest subsidies, and other home-related benefits. Employees do not contribute directly to this fund.
  
  

• Retirement, pension, and old-age insurance obligations
  Employers must contribute to the AFORE system, which manages retirement savings. These payments include old-age insurance, disability support, and long-term pension funding. Employees also contribute a smaller percentage, but the employer covers most of the cost.
  
  

• How these contributions affect total employment cost
  Since both INFONAVIT and retirement funds are employer-funded percentages, they increase the overall cost of hiring in Mexico. These contributions must be included in payroll budgeting and compliance planning to avoid gaps or penalties.
  
  

These funds ensure long-term financial protection for employees and form a core part of Mexico’s payroll structure.

State Payroll Tax (ISN): Rates by Location

State Payroll Tax, known as ISN, is a mandatory employer-only tax charged by each state in Mexico. It applies to all salaries paid to employees working in that state.

Because the tax is controlled locally, every state sets different rules and percentages. This makes ISN an important part of planning payroll costs, especially for companies hiring in multiple cities.

• What ISN is and who pays it
  ISN is a state-level tax applied to payroll, and only the employer pays it. Employees do not contribute. The employer must calculate the tax monthly based on the taxable salary and submit payments to the state authority.
  
  

• Typical rate range
  Most states charge between 2 percent and 5 percent of taxable payroll. The rate depends on the state and may change according to local economic policies.
  
  

• The importance of state differences
  Since each state sets its own ISN rate, employers must monitor regional rules carefully. A company hiring in several locations may face different tax obligations for each employee.
  
  

Examples of ISN Rates by State (Approximate)

ISN is a major cost factor because hiring the same position in different states can lead to different tax totals.

What Counts Toward the Payroll Tax Base

Mexico calculates payroll taxes using a specific group of payments called the “taxable base.” This base includes all regular and additional earnings an employee receives.

Understanding what belongs in the payroll tax base is essential because mistakes directly affect IMSS, ISR, INFONAVIT, and state payroll tax calculations. Each item must reflect the employee’s real compensation to stay compliant with Mexican labor and tax laws.

• Salary: The employee’s fixed monthly or biweekly salary forms the core of the taxable base. All other calculations begin from this amount.
  
  

• Commissions: Any commission tied to performance or sales must be included because it represents taxable personal income.
  
  

• Bonuses, including Aguinaldo: Annual bonuses like Aguinaldo (Christmas Bonus) and other cash bonuses are taxable and must be added to the base for accurate ISR and social security.
  
  

• Vacation bonus: The vacation bonus, usually 25 percent of vacation pay, is partially taxable and must be calculated correctly.
  
  

• Performance incentives: Cash incentives, productivity payments, and rewards are treated as taxable income.
  
  

• In-kind benefits: Non-cash benefits such as food vouchers or transportation allowances can be partially taxable depending on SAT rules.
  
  

Accurately defining the payroll tax base ensures employers calculate contributions correctly and avoid compliance issues.

Mandatory Bonuses and Benefits That Impact Payroll Taxes

Mexico requires several mandatory benefits that directly affect payroll taxes. These payments are part of the employee’s legal rights, and each one changes the taxable base used for ISR, IMSS, INFONAVIT, and state payroll tax. 

Understanding how these benefits work is essential because Mexico enforces strict rules on how employers calculate and report them.

• Aguinaldo (Christmas bonus)
  Employers must pay at least 15 days of salary each December. A portion of Aguinaldo is tax exempt, but the rest becomes taxable income and must be included when calculating ISR and social security.
  
  

• Profit-sharing (PTU)
  Employees are entitled to 10 percent of the company’s taxable profits. PTU is partially exempt for tax purposes, but any amount above the exempt limit becomes taxable and affects ISR calculations.
  
  

• Vacation days and vacation premium
  Employees receive paid vacation and a 25 percent vacation premium. The premium is partially taxable, so employers must calculate the exempt and taxable portions correctly.
  
  

• Seniority premiums
  These payments apply during termination or special cases. Part of the premium is exempt, but any excess becomes taxable income.
  
  

Each of these benefits changes the taxable base, so correct treatment is essential for full payroll compliance in Mexico.

Payroll Frequency and Operational Requirements

Payroll in Mexico must follow specific timing rules so employers can stay compliant with tax, social security, and labor regulations. While companies may choose different pay cycles, every payment must align with government filing deadlines. 

Payroll timing affects when taxes are calculated, withheld, and submitted, so accurate scheduling is essential for compliance.

• Common pay cycles
  Employers typically choose one of four standard pay periods: Monthly (Mensual), Semi-Monthly (Quincenal), Biweekly (Bisemanal), or Weekly (Semanal). Weekly cycles are often used for operational roles, while Quincenal or Mensual cycles are common for office and professional staff. The selected cycle must remain consistent unless formally changed.
  
  

• Government requirements for filings
  Even if payroll is processed weekly or biweekly, government filings are usually monthly. ISR, IMSS, and INFONAVIT reports follow monthly schedules, while state payroll tax (ISN) depends on each state’s monthly rules. Payroll data must align with these reporting periods.
  
  

• How timing affects tax remittance
  Payroll dates determine when ISR withholding is calculated and when social security contributions are finalized. Delays in payroll can delay tax payments, leading to penalties or compliance risks.
  
  

Choosing the correct payroll frequency helps employers manage costs while meeting all legal reporting deadlines in Mexico.

Registration Steps Before Running Payroll

Before any company can run payroll in Mexico, it must complete several mandatory registrations with federal institutions. These steps create the legal foundation that allows an employer to hire workers, pay taxes, and provide social security benefits.

Missing any part of the registration process can lead to delays, fines, or incorrect tax calculations later.

• Registering the employer with SAT
  Every company must obtain its RFC (tax ID) from SAT. This allows the employer to issue CFDI payroll receipts, calculate ISR, and report taxes electronically.
  
  

• Registering with IMSS
  Employers must register with IMSS to receive an employer Social Security number. This number connects the company to the social security system and allows contributions to be paid correctly.
  
  

• Obtaining employer identification numbers
  After IMSS registration, employers also obtain INFONAVIT and state payroll tax identification numbers. Each number is required to process housing fund payments and state payroll taxes.
  
  

• Employee registration with IMSS
  Every employee must be registered with IMSS before their first day of work. This activates healthcare, work-risk coverage, and all social security benefits.
  
  

• Why proper registration matters
  Correct registration ensures payroll taxes are calculated legally and prevents penalties, audits, or delayed employee benefits.
  
  

Completing these steps ensures payroll can run smoothly and fully comply with Mexico’s strict labor and tax systems.

Monthly Payroll Filings and Deadlines

Mexico requires employers to follow strict monthly filing schedules for all payroll-related taxes and contributions. These deadlines ensure the government receives accurate reports and employees receive proper benefits.

Missing a deadline can trigger penalties, so companies must maintain a clear filing calendar and submit all digital documents on time.

• ISR remittance deadlines
  Employers must submit withheld income tax (ISR) to SAT each month. The deadline is generally between the 17th and the last business day of the following month, depending on SAT rules and electronic filing schedules.
  
  

• IMSS payments
  Social security contributions must be paid monthly using the SUA system. IMSS deadlines usually fall around the 17th of the month, and late payments generate surcharges and interest.
  
  

• INFONAVIT payment cycle
  Housing fund contributions are paid monthly through the INFONAVIT portal. Employers use their IMSS data to calculate accurate amounts for each employee.
  
  

• State payroll tax filing frequency
  ISN is paid monthly in most states, though exact dates vary by location. Employers must check each state’s rules to stay compliant.
  
  

• Required digital records (CFDI payroll receipts)
  Every payroll run must generate a CFDI electronic payslip. These digital tax receipts must be issued, stamped, and stored according to SAT requirements.
  
  

Following these monthly filings keeps payroll accurate and ensures full compliance with Mexico’s strict tax and social security systems.

Special Situations Employers Should Know

Some employment situations in Mexico require extra attention because they affect payroll taxes, social security, and legal obligations.

These cases often involve different rules for registration, tax treatment, and documentation. Employers must understand how each scenario works to stay compliant and avoid unexpected liabilities.

• Hiring foreign employees in Mexico
  Foreign workers must have the correct immigration status before being added to payroll. Once authorized, they receive the same social security coverage and tax treatment as Mexican nationals.
  
  

• Remote employees based in Mexico
  Even if a company has no office in Mexico, remote employees living in the country must be registered for IMSS, INFONAVIT, ISR, and state payroll tax. Their physical work location determines the tax obligations.
  
  

• Employees working cross-border
  If an employee performs activities in more than one country, Mexico may require payroll registration for the portion of work done within Mexico. This can create dual reporting responsibilities.
  
  

• Temporary vs permanent contracts
  Payroll taxes apply to both types, but permanent contracts carry additional obligations like seniority rights and full benefit accrual. Temporary contracts still require complete payroll compliance.
  
  

• Variable pay structures
  Commissions, incentives, and bonuses must be added to the taxable base. Employers must calculate the correct taxable and exempt portions for ISR and IMSS.
  
  

Understanding these special situations helps employers stay compliant in complex scenarios.

Common Payroll Mistakes Foreign Companies Make

Many foreign companies struggle with Mexico’s payroll system because it is different from U.S. and European models. Payroll taxes are tied directly to labor law, social security, and mandatory benefits, so even small errors can lead to penalties or employee complaints.

Understanding these common mistakes helps prevent compliance issues when hiring in Mexico.

• Not understanding the Mexican mandatory bonuses
  Benefits like Aguinaldo (Christmas), vacation premium, and profit-sharing (PTU) are required by law. Missing or miscalculating these amounts leads to incorrect payroll tax calculations and legal claims.
  
  

• Assuming contractor payments are legal
  Many global companies think they can hire Mexican workers as contractors. If the person works under direction or supervision, this is illegal and creates major risks such as retroactive IMSS, severance, and fines.
  
  

• Missing local state payroll tax obligations
  ISN rates vary by state. Foreign companies often use the wrong rate or forget to register in the employee’s work location, causing underpayment.
  
  

• Using software that doesn’t comply with CFDI rules
  Mexico requires digital tax receipts for every payroll run. Using non-compliant software leads to rejected filings and audit risks.
  
  

• Trusting shell-entity EORs with no real presence
  Many global EOR platforms operate through undisclosed third-party partners. This exposes companies to legal risk, especially after Mexico’s REPSE requirements.
  
  

Avoiding these mistakes is essential for maintaining proper payroll and tax compliance in Mexico.

How Payroll Taxes Work When Using an EOR in Mexico

When a foreign company wants to hire in Mexico without opening a legal entity, an EOR becomes the official employer for payroll, taxes, and social security.

This allows the company to operate legally while avoiding the heavy administrative and compliance burden. The EOR manages all payroll tax obligations under Mexico’s strict labor and tax system.

• EOR handles all payroll tax compliance
  The EOR calculates ISR, IMSS, INFONAVIT, state payroll tax, and all mandatory employer contributions. It issues CFDI payroll receipts, files monthly reports, and ensures every payment matches Mexican law.
  
  

• No legal entity required
  The EOR structure allows foreign companies to hire immediately without forming a Mexican entity or dealing with complex registrations.
  
  

• The Client Company still supervises daily work
  While the EOR is the legal employer, the foreign company manages daily tasks, goals, performance, and project supervision. This keeps business operations unchanged.
  
  

• Prevents misclassification risks
  EORs eliminate the danger of incorrect contractor use, one of the most common mistakes made by global platforms operating in Mexico.
  
  

• Benefits of EOR vs setting up an entity
  Using an EOR removes the need for tax registration, IMSS setup, accounting infrastructure, and ongoing compliance management. It is faster, cheaper, and removes the risk of administrative errors.
  
  

• Why using a non-REPSE provider is a legal risk
  Mexico requires REPSE authorization to provide labor services. Non-REPSE providers and shell entities expose the foreign company to fines, misclassification issues, and potential shutdowns.
  
  

Human Resources Mexico (HRM) is a REPSE-registered EOR in Mexico. We act as the legal employer, registering employees, calculating contributions, handling payroll filings, and ensuring the correct treatment of bonuses, benefits, and taxable income.

Using expert EORs like HRM is the safest way for foreign companies to hire employees in Mexico without setting up a local entity. Contact us today to get your custom proposal.

Frequently Asked Questions

What is the employer tax burden in Mexico?

The employer tax burden includes IMSS social security, INFONAVIT housing contributions, retirement funding, and state payroll tax. These costs can range from 25 to 40 percent on top of salary, depending on benefits and risk classification. Employers must calculate each component accurately to stay compliant with Mexican law.

What payroll taxes apply to foreign workers?

Foreign employees in Mexico follow the same payroll tax rules as Mexican nationals. They must be registered with IMSS, INFONAVIT, and included in ISR withholding and state payroll tax. Once they hold legal work authorization, all standard employer and employee payroll obligations apply without exceptions.

Do contractors pay payroll taxes?

Independent contractors do not pay payroll taxes, but they must issue CFDI invoices and handle their own income tax through SAT. If a company misclassifies an employee as a contractor, the company becomes liable for retroactive IMSS, INFONAVIT, ISR, and severance, creating serious compliance risks.

What happens if a company does payroll wrong?

Incorrect payroll can trigger fines, audits, delayed benefits, and retroactive payments. SAT, IMSS, and INFONAVIT can require employers to correct errors and pay interest or penalties. Serious mistakes may also affect employee rights, which can lead to legal claims or labor disputes.

What is the difference between payroll tax and corporate tax?

Payroll taxes are tied to employee earnings and cover ISR, IMSS, INFONAVIT, and state payroll tax. Corporate tax applies to the company’s profits, not employee wages. Both are separate obligations, and proper payroll compliance does not replace the need to meet annual corporate tax requirements.

Is Mexico expensive for employers compared to other countries?

Mexico’s employer costs are higher than many countries because social security, housing, and mandatory bonuses add significant contributions. However, salaries are often lower compared to the United States or Europe, balancing the overall cost. Many foreign companies use EORs to manage these expenses more efficiently.