Managing payroll in Mexico is often complex due to strict labor regulations, frequent tax updates, and mandatory employee benefits. Companies must calculate wages accurately, withhold taxes, and handle contributions to social security and housing funds, all while staying compliant with Federal Labor Law.

These challenges lead many businesses, especially foreign firms without local expertise, to explore payroll outsourcing. By relying on specialized providers, companies can reduce compliance risks, ensure timely payments, and free up resources to focus on growth rather than administrative burdens.

What is Payroll Outsourcing in Mexico?

Payroll outsourcing in Mexico means delegating payroll management to a specialized provider that handles calculations, tax withholdings, social security contributions, and compliance with labor regulations. This ensures employees are paid correctly and all obligations are met with the authorities.

Many foreign companies partner with Employer of Record (EOR) providers such as Human Resources Mexico to manage payroll. By doing so, they avoid administrative complexity, reduce compliance risks, and ensure their teams in Mexico receive proper benefits while the business focuses on growth.

How Payroll Outsourcing Works in Mexico

Payroll outsourcing in Mexico is designed to simplify a Client company’s responsibilities while ensuring strict compliance with labor and tax laws. The process starts with the client providing accurate employee information, and the payroll provider manages the rest of the workflow.

The steps usually include:

• Employee data collection: Client companies submit records such as employee contracts, working hours, overtime, bonuses, and benefit details. This ensures calculations are based on complete and accurate information.
  
  

• Payroll calculations: Providers calculate gross and net salaries, applying mandatory deductions like income tax (ISR), state payroll tax, and social security contributions. Accuracy here is critical to avoid penalties.
  
  

• Tax and contribution withholdings: Payments are prepared for institutions like IMSS for healthcare and pensions, INFONAVIT for housing benefits, and SAT for federal taxes.
  
  

• Compliance reporting: Payroll firms generate and submit reports to tax and labor authorities, providing proof of compliance with all regulations.
  
  

• Payment execution: Employees are paid on time, and authorities receive the correct employer contributions and withholdings.
  
  

By outsourcing these steps, businesses minimize risks of calculation errors, avoid regulatory fines, and guarantee employees receive their wages and benefits without delay, creating a stable and compliant workplace.

Compliance Requirements in Mexican Payroll

Payroll in Mexico is governed by strict rules that require employers to meet tax, labor, and social security obligations. Failure to comply can lead to fines, lawsuits, or even restrictions on business operations. An outsourced payroll provider ensures all obligations are met consistently.

Key compliance requirements include:

• IMSS and INFONAVIT contributions: Employers must register employees with the Mexican Social Security Institute (IMSS) and make contributions for healthcare, pensions, and workplace risk coverage. Contributions to INFONAVIT are also mandatory, supporting employee housing credits.
  
  

• ISR income tax withholdings: Employers must calculate and withhold income tax (ISR) from employees’ salaries and submit it to the federal tax authority (SAT). Accurate calculation is crucial, as errors can result in penalties.
  
  

• State-level payroll taxes: In addition to federal taxes, each Mexican state applies its own payroll tax. Rates vary by location, and employers must file and pay on time to remain compliant.
  
  

• SAT and CFDI electronic pay slips: All payroll payments must be reported to SAT and issued as CFDI (Comprobante Fiscal Digital por Internet) electronic invoices, which serve as official proof of payment.
  
  

• Labor law obligations: Employers must respect minimum wage, overtime rules, and working hour limits. Statutory benefits like vacation pay, aguinaldo (Christmas bonus), and profit-sharing (PTU) must also be provided.
  
  

Meeting these requirements demands precision and local expertise, making payroll outsourcing a practical solution for many companies.

Mandatory Employee Benefits in Payroll

Mexican labor law requires employers to provide a wide range of benefits to employees, which must be included in payroll. These benefits ensure worker protections and are strictly enforced by authorities.

Key mandatory benefits include:

• Christmas Bonus (Aguinaldo): Employees must receive at least 15 days of salary by December 20 each year. Many employers choose to pay more to remain competitive.
  
  

• Paid Vacation and Vacation Bonus: After the first year, employees receive a minimum of 12 vacation days, which increase with seniority. In addition, a 25% vacation premium must be paid on top of their regular salary during this period.
  
  

• Profit Sharing (PTU): By law, companies must distribute 10% of their annual taxable profits among eligible employees. This benefit is mandatory and closely monitored.
  
  

• Social Security (IMSS): Employers and employees contribute to IMSS, which covers healthcare, pensions, life insurance, and disability protection.
  
  

• Weekly Rest Day and Sunday Premium: Workers are entitled to one full paid rest day per week. If they work on Sunday, they must receive an additional 25% premium.
  
  

• National Holidays: Certain days are designated as paid holidays. If employees work on those days, they must be compensated at triple pay.
  
  

• Overtime Pay: Extra hours must be paid at double rate, and triple rate if overtime exceeds nine hours per week.
  
  

• Maternity and Paternity Leave: Mothers are entitled to 12 weeks of paid leave, while fathers receive five paid days.
  
  

• Severance Pay: If employment ends, severance may apply. In cases of unjust dismissal, employees are entitled to 90 days’ salary plus accrued benefits.
  
  

These benefits are mandatory and central to payroll compliance in Mexico.

Payroll Cycles in Mexico

Mexican labor law establishes rules for how frequently employees must be paid. The timing of payroll is not only a matter of the Client company’s preference but also a legal requirement designed to protect workers’ rights. Employers must choose a payroll cycle that complies with the Federal Labor Law and matches the type of work being performed.

The most common payroll cycles in Mexico include:

• Weekly (Semanal): Employees are paid every 7 days. This is common for manual labor or trade roles, where the Federal Labor Law requires wages at least once per week.
  
  

• Biweekly (Bisemanal): Employees are paid every 14 days. While less common, some companies adopt this model to align with international practices.
  
  

• Semi-Monthly (Quincenal): Employees are paid twice per month, usually on the 15th and the last day of the month. This is the most common payroll cycle in Mexico and ensures a predictable cash flow for employees.
  
  

• Monthly (Mensual): Employees are paid once per month, typically on the last calendar day. If payday falls on a weekend or holiday, payment must be advanced to the prior business day. This cycle is usually reserved for salaried professionals and executives.
  
  

Regardless of the cycle chosen, all payroll must include accurate calculations, mandatory deductions, and benefits to ensure compliance with Mexican labor and tax laws.

Benefits of Payroll Outsourcing in Mexico

Outsourcing payroll in Mexico offers significant advantages for Client companies navigating the country’s complex labor and tax regulations. By shifting administrative responsibilities to a specialized provider, businesses gain efficiency while reducing risk.

Key benefits include:

• Cost savings and efficiency: Managing payroll in-house requires dedicated staff, software, and compliance resources. Outsourcing reduces overhead by consolidating these functions into a service fee, often resulting in lower costs and fewer internal burdens.
  
  

• Reduced errors and compliance assurance: Mexican payroll involves strict rules for taxes, IMSS, INFONAVIT, and benefits. Mistakes can lead to penalties or disputes. Outsourced providers apply expert knowledge, automated systems, and compliance checks to minimize errors and keep Client companies aligned with legal requirements.
  
  

• More focus on core business activities: Payroll is essential but not strategic. By outsourcing, leadership teams and HR departments can devote more energy to recruiting, training, and driving business growth, rather than managing calculations, filings, and reporting.
  
  

For international companies, outsourcing payroll in Mexico ensures both compliance and peace of mind. It transforms payroll from a high-risk task into a reliable process managed by experts.

Payroll Outsourcing vs EOR in Mexico

When expanding into Mexico, companies often confuse payroll outsourcing with the Employer of Record (EOR) model. While both simplify compliance, they apply to very different situations.

• Payroll outsourcing: This service is designed for companies that already have a registered legal entity in Mexico. The business remains the official employer of record, responsible for its workforce, but delegates payroll management to a specialized provider. The outsourcing firm handles salary calculations, tax withholdings, IMSS and INFONAVIT contributions, and reporting to SAT. This reduces administrative work while keeping the legal employer relationship intact.
  
  

• Employer of Record (EOR): This option is for foreign companies that do not have a legal entity in Mexico but want to hire local staff. In this model, the EOR becomes the sole legal employer. It signs employment contracts, manages payroll and benefits, and ensures compliance with labor and tax laws. The client company directs daily work but is not the legal employer.

Choosing the right model matters because using the wrong approach can lead to compliance issues. Businesses with a local entity should consider payroll outsourcing, while those without an entity must use an EOR to remain fully compliant.

Choosing a Payroll Outsourcing Provider in Mexico

Selecting the right payroll outsourcing provider in Mexico is critical to ensure compliance and efficiency. Since payroll is tied to sensitive employee rights and strict tax obligations, businesses must carefully evaluate their partners.

Important factors to consider include:

• Legal registration and STPS compliance: Providers must be formally registered and compliant with Secretaría del Trabajo y Previsión Social (STPS) regulations. This ensures their operations are legally recognized and protects employers from liability.
  
  

• Technology and data security: Payroll involves sensitive employee and financial data. A reliable provider should use secure systems, encrypted processes, and digital reporting tools to maintain confidentiality and accuracy.
  
  

• Transparency in pricing: Employers should avoid providers that charge hidden fees. Clear contracts with predictable costs prevent disputes and allow accurate budgeting.
  
  

• Experience with state-level variations: Payroll taxes and requirements vary across Mexico’s states. An experienced provider understands local rules and ensures compliance in each jurisdiction. At Human Resources Mexico, we bring over 16 years of experience managing these variations, giving companies confidence in their payroll operations.
  
  

By considering these elements, companies can choose a partner that not only handles payroll but also strengthens compliance and employee satisfaction. Human Resources Mexico is an example of a trusted EOR with proven expertise in supporting global companies operating in Mexico.

Impact of Outsourcing Reform on Payroll Outsourcing

In April 2021, Mexico introduced a major labor reform that reshaped outsourcing practices across the country. The goal was to eliminate abusive subcontracting schemes where companies shifted employees to third parties to avoid tax and benefit obligations.

Key changes included:

• Ban on subcontracting core activities: Companies can no longer outsource employees who perform essential business functions. These employees must be hired directly or through a legally compliant Employer of Record (EOR).
  
  

• Specialized service registration: Outsourcing is only allowed for specialized services that are not part of a company’s core activity. Providers must be registered with STPS.
  
  

• Payroll outsourcing remains legal: The reform did not eliminate payroll outsourcing. Companies with legal entities in Mexico can still delegate payroll management, including salary calculations, ISR withholdings, IMSS and INFONAVIT contributions, and reporting.
  
  

The reform clarified the distinction between labor outsourcing (largely prohibited) and payroll outsourcing (still permitted). By working with compliant providers, companies continue to streamline payroll while remaining aligned with Mexico’s stricter labor standards.

Transitioning to Payroll Outsourcing

Shifting from in-house payroll management to an outsourced provider in Mexico requires careful planning.

Key steps in the transition process include:

• Migrating payroll data: Employee records, salary structures, benefits, tax information, and historical data must be transferred accurately to the provider’s system. This ensures the new process starts on a clean and accurate foundation.
  
  

• Correcting past errors: Payroll providers often identify mistakes from previous cycles, such as incorrect tax withholdings, missing IMSS or INFONAVIT contributions, or misapplied benefits. These issues are corrected during the transition to ensure compliance moving forward.
  
  

• Ensuring smooth employee experience: Employees must continue receiving pay on time and with accurate deductions. A good provider will communicate clearly with employees, provide electronic pay slips (CFDI), and resolve questions quickly to build trust in the new system.
  
  

When handled correctly, transitioning to payroll outsourcing creates long-term efficiency. Companies gain accuracy, compliance assurance, and peace of mind while employees experience seamless payroll continuity.

Conclusion

Payroll outsourcing in Mexico provides accuracy, compliance, and efficiency in navigating complex labor and tax requirements. It is ideal for companies with a legal entity that want to reduce administrative burdens and ensure employees are paid correctly.

If you’re considering an EOR in Mexico, choose a partner with deep local experience. At Human Resources Mexico, we bring 16+ years of expertise, third-party compliance audits, full legal compliance, and transparent pricing.

We are focused only on Mexico, offering EOR services without setup fees or deposits. Get in touch today to see how we can simplify your HR, payroll, and compliance.

FAQs

Is payroll outsourcing legal in Mexico?

Yes, payroll outsourcing is legal in Mexico. The 2021 outsourcing reform prohibited subcontracting core business activities but allowed payroll outsourcing. Companies with a legal entity can delegate payroll tasks such as salary calculations, IMSS and INFONAVIT contributions, and ISR tax withholdings to specialized providers, as long as the provider is fully compliant with STPS registration.

Who should use payroll outsourcing in Mexico?

Payroll outsourcing is best for companies with a legal entity in Mexico that want to simplify payroll compliance. It is useful for businesses scaling quickly, managing employees across multiple states, or reducing administrative costs. Foreign firms without an entity should use an Employer of Record (EOR) instead, since payroll outsourcing alone is not sufficient.

What services are included in payroll outsourcing?

Payroll outsourcing providers handle the full payroll cycle. Services include salary calculations, tax withholdings, social security and housing fund contributions, and electronic CFDI payslips. Providers also prepare compliance reports for SAT and state authorities. Some firms offer employee onboarding support, error correction, and ongoing advisory to ensure compliance with evolving Mexican labor and tax laws.

What are the risks of handling payroll in-house?

Managing payroll in-house in Mexico is risky due to complex tax and labor requirements. Errors in ISR withholdings, IMSS registration, or INFONAVIT payments can lead to penalties, lawsuits, or reputational damage. Small mistakes in electronic CFDI slips may trigger audits. Outsourcing reduces these risks by ensuring experts manage compliance accurately and consistently.

How much does payroll outsourcing cost in Mexico?

Costs vary depending on provider, workforce size, and services included. Most providers charge a per-employee monthly fee that covers salary calculations, filings, and compliance reporting. While outsourcing adds a service cost, it often saves money long-term by reducing in-house HR expenses, avoiding fines, and ensuring employees receive accurate pay and benefits on time.

Why choose Human Resources Mexico for payroll processing?

Human Resources Mexico specializes in accurate and compliant payroll processing for companies with a legal entity in Mexico. With over 16 years of experience, third-party compliance audits, and transparent pricing, HRM ensures that salaries, taxes, and benefits are calculated and paid correctly. The team navigates state-level differences and frequent tax law updates, giving companies confidence that employees receive timely, accurate pay while maintaining full legal compliance.