What Is ISR and Why Does It Exist?

Impuesto sobre la Renta (ISR) is Mexico’s federal income tax applied to the earnings of individuals and companies. It is one of the most important taxes in the country because it funds public operations such as infrastructure, education, healthcare, and social programs.

ISR applies to salaries, professional income, business profits, and other taxable earnings. All employers must calculate and withhold ISR correctly each payroll cycle.

• Clear definition of ISR: ISR is Mexico’s mandatory income tax charged on all taxable income earned by individuals and legal entities. For employees, the employer must withhold ISR directly from wages each pay period.
  
  

• Purpose of ISR: ISR helps the government fund essential public services. The tax ensures that individuals and businesses contribute fairly to national spending and development.
  
  

• Who administers ISR: ISR is regulated by the Ley del Impuesto sobre la Renta (LISR) and administered by Mexico’s tax authority, the Servicio de Administración Tributaria (SAT). SAT oversees calculation rules, withholding obligations, and tax reporting.
  
  

ISR exists to ensure a stable tax system, consistent revenue, and legal compliance for everyone earning income in Mexico.

Who Must Pay ISR in Mexico?

ISR applies to anyone who earns taxable income connected to Mexico. The law covers residents, non-residents, companies, employees, and independent earners.

The goal is simple: if income is generated from Mexican sources, ISR must be paid according to the rules in the Income Tax Law (LISR). SAT enforces compliance for both individuals and businesses.

• Mexican residents (individuals and companies): Residents must pay ISR on worldwide income. This includes salaries, business profits, investments, and rental income. Companies registered in Mexico must also report and pay ISR on all taxable earnings.
  
  

• Non-residents earning Mexican-source income: Anyone who earns income from activities in Mexico must pay ISR, even without residency. This includes service fees, rents, interest, and digital platform income tied to Mexico.
  
  

• Foreign companies with permanent establishment: If a foreign company has a permanent establishment in Mexico, it must pay ISR on local operations. SAT determines when activities qualify as a permanent establishment.
  
  

• Employees receiving salary income: Employers withhold ISR from employee wages every payroll period. This is mandatory for all formal employment relationships.
  
  

• Freelancers, contractors, landlords, and investors: Individuals earning income independently must calculate and pay ISR based on invoices, rentals, capital gains, or professional services.
  
  

ISR applies broadly to ensure all taxable income related to Mexico is properly reported and paid.

What Types of Income Are Taxed Under ISR?

ISR covers a wide range of income earned by individuals and companies. If money is generated in Mexico, or received by a Mexican resident, it is generally taxable unless the law provides a specific exemption.

The Income Tax Law (LISR) lists all taxable categories, and SAT requires accurate reporting for each one. Understanding income types helps employers, workers, and businesses stay compliant.

• Salaries and wages: All employment income is taxable under ISR. Employers must calculate and withhold the correct amount each payroll cycle using SAT tax tables. This includes bonuses, overtime, commissions, and any compensation paid to employees, and employers must issue the corresponding payroll CFDI for each payment.
  
  

• Business and professional income: Individuals with business activities or professional services must pay ISR based on invoiced income. This includes freelancers, consultants, contractors, and small businesses issuing CFDI invoices.
  
  

• Rent and real estate income: Rental income from residential or commercial property in Mexico is taxable. Landlords must report rent payments and may deduct certain expenses.
  
  

• Dividends: Dividends received from Mexican companies are subject to ISR withholding. Additional rates may apply for residents and non-residents.
  
  

• Interest income: Interest from savings accounts, investments, loans, or financial instruments is taxable. Banks often perform withholding automatically.
  
  

• Capital gains: Profits from selling shares, real estate, or assets are taxed under ISR. Special rules apply for primary residence sales and stock market transactions.
  
  

• Royalties: Payments for intellectual property, licensing, or technology use are taxable and often withheld at source.
  
  

• Foreign-source income for residents: Mexican tax residents must report worldwide income, including earnings generated outside Mexico.
  
  

ISR applies to nearly all forms of income through the CFDI, to ensure fair taxation and proper reporting to SAT.

How ISR Is Calculated in Mexico

ISR is calculated by determining the taxable base and applying the correct tax rates set by the Income Tax Law (LISR). The taxable base depends on the type of taxpayer, the income earned, and the deductions allowed.

Individuals and companies follow different calculation rules, and SAT requires monthly and annual reporting. Understanding how ISR is calculated helps avoid errors, penalties, and unexpected tax balances.

• Tax base = income minus authorized deductions: ISR is calculated on net taxable income. Individuals may deduct authorized expenses such as social security, certain medical payments, and business-related costs. Companies deduct operating expenses, payroll, depreciation, and other allowable deductions to determine taxable profits.
  
  

• Different regimes for individuals vs companies: Employees follow SAT payroll tables, freelancers use business activity regimes, and small taxpayers may use simplified schemes. Companies calculate ISR based on taxable profit using the corporate tax rate.
  
  

• Monthly provisional payments and annual adjustment: Most taxpayers are required to make monthly provisional ISR payments, subject to their applicable tax regime. At year-end, they file an annual return to reconcile income, deductions, and credits to determine final tax owed or refund due.
  
  

• Employer withholding for employees: Employers calculate and withhold ISR each payroll period. This prevents employees from needing to file monthly declarations.
  
  

• When individuals must self-declare: Freelancers, landlords, investors, and anyone earning income outside payroll must file monthly and annual ISR declarations.

ISR calculations ensure all taxpayers contribute correctly and consistently under SAT’s rules.

If you want to estimate your tax quickly, you can use this ISR calculator. It helps you see how monthly or annual ISR applies to your income based on SAT rules.

ISR Tax Rates in Mexico

ISR rates depend on whether the taxpayer is an individual or a company. Individuals are taxed using progressive income brackets, while companies pay a fixed corporate rate. SAT sets these rates and updates them when needed.

ISR Rates for Individuals (Progressive Table)

ISR for individuals is calculated using a progressive table where higher income is taxed at higher rates. SAT publishes monthly and annual tables that include a fixed quota plus a marginal percentage. This system ensures fair taxation based on each person’s ability to pay.

• Progressive brackets: ISR uses income brackets that increase gradually as taxable income rises.
  
  

• Highest and lowest rates: Rates generally range from 1.92 percent to 35 percent, depending on income level.
  
  

• Fixed quota + marginal rate: Taxpayers pay a fixed amount for their bracket plus a percentage applied only to the income exceeding the bracket’s minimum.
  
  

• Payroll withholding: Employers calculate ISR automatically using SAT payroll tables each pay period.
  
  

Example Table (Simplified)

SAT’s progressive structure ensures individuals contribute fairly based on income.

ISR Rate for Companies

Companies in Mexico pay ISR using a flat corporate rate applied to taxable profit. This system is designed to simplify compliance and ensure consistent taxation across businesses of all sizes. Taxable profit is calculated using the accrual method, meaning income is taxed when earned.

• Standard corporate rate: Companies pay a 30 percent ISR rate on taxable profit.
  
  

• Taxable profit calculation: Revenue minus authorized deductions such as payroll, depreciation, lease costs, and operational expenses.
  
  

• Accrual basis: Income is taxed when earned, not when collected, which affects timing and reporting.
  
  

• Monthly + annual obligations: Companies make provisional monthly payments and file an annual return to reconcile final tax.
  
  

Corporate ISR Summary Table

Accurate accounting and proper documentation are essential for complying with corporate ISR requirements.

Authorized Deductions and Exemptions Under ISR in Mexico

ISR allows specific deductions and exemptions that help reduce the taxable base for both individuals and companies. These deductions must meet SAT requirements and be supported with proper CFDI invoices.

Using them correctly can lower annual tax liability, but incorrect or undocumented deductions can trigger audits. Understanding what qualifies is essential for accurate tax planning and full compliance with LISR rules.

Deductions for Individuals

• Medical expenses: Individuals may deduct doctor visits, hospital bills, dental care, diagnostic studies, and prescribed medications when included in a qualifying medical invoice. Payments must be made electronically and supported with CFDI invoices in the taxpayer’s name.
  
  

• School tuition: Tuition for basic education levels can be deducted within SAT limits. The institution must issue CFDI invoices, and only tuition (not books or supplies) qualifies.
  
  

• Retirement contributions: Voluntary retirement savings made to Afore or approved pension plans are deductible. These contributions help reduce taxable income while building long-term savings.
  
  

• Housing loan interest: Interest paid on mortgage loans issued by authorised lenders is deductible for individuals. Only interest, not principal, qualifies.
  
  

• Donations: Donations to SAT-authorised nonprofit organisations are deductible when documented properly.
  
  

• Partial exemptions for Aguinaldo and vacation bonus: Employees receive limited ISR exemptions on Aguinaldo and vacation premium according to SAT rules.
  
  

Deductions for Companies

• Business deductions for companies: Companies may deduct payroll, rent, equipment, depreciation, utilities, and other operational costs.
  
  

• Documentation required: All deductions require valid CFDI invoices, electronic payments, and complete annual reporting.
  
  

These deductions help taxpayers reduce ISR legally while staying aligned with SAT compliance standards.

ISR in Mexico for Employees (Payroll Withholding)

Employees in Mexico pay ISR through employer withholding. The employer is responsible for calculating, deducting, and paying ISR directly to SAT during each payroll cycle. This system ensures employees stay compliant without filing monthly declarations, only the annual return.

ISR withholding must follow SAT tax tables, CFDI rules, and annual adjustments. Incorrect withholding can create tax debts, fines, or payroll disputes, so accuracy is essential.

• Employers must calculate and withhold ISR each pay run: Using SAT’s updated payroll tables, employers calculate ISR based on salary, bonuses, overtime, and other taxable income. This ISR is withheld before paying the employee.
  
  

• CFDI payroll obligations: Every payroll must generate a CFDI receipt that shows ISR withholding, taxable income, and deductions. Missing or incorrect CFDIs can trigger audits.
  
  

• Annual adjustment: At year-end, employers perform an annual reconciliation to ensure ISR was withheld correctly. Any difference must be paid or refunded in December.
  
  

• Multiple employment relationships: If an employee works for more than one employer, each employer must calculate ISR separately. The employee may need to file their own annual return to reconcile total income.
  
  

A compliant EOR like Human Resources Mexico (HRM) calculates ISR, issues CFDIs, performs annual adjustments, and ensures full SAT compliance. HRM manages this automatically for foreign companies.

Employees who want to verify approximate monthly withholding can refer to this ISR calculator. It provides a simple estimate based on SAT tables and salary inputs.

ISR for Self-Employed, Freelancers, and Independent Contractors

Self-employed individuals, freelancers, and independent contractors in Mexico must calculate and pay ISR directly to SAT. Unlike employees, no one withholds tax for them, so they are fully responsible for monthly payments, CFDI invoicing, and annual filings.

These taxpayers must track income carefully, maintain valid documentation, and understand the rules that apply to local and foreign clients. ISR compliance is essential because SAT monitors electronic invoices and tax declarations closely.

• Monthly provisional payments: Contractors must file monthly ISR declarations based on income received and authorised deductions. SAT calculates the payment owed for each month, and failing to declare can generate fines or interest.
  
  

• Need to issue CFDIs: Income must be supported and reported through CFDI invoices. SAT closely monitors CFDIs to verify income recognition and tax compliance. Contractors must generate CFDIs for every service provided, whether the client is in Mexico or abroad.
  
  

• Deductible expenses: Contractors may deduct business-related expenses such as equipment, software, internet, travel, office rent, and professional services. Deductions must match CFDIs and electronic payments.
  
  

• Rules for foreign clients: Income earned from foreign clients is still taxable for Mexican residents. CFDIs must be issued using SAT’s “public in general” or foreign client options.
  
  

• Differences vs employees: Contractors pay their own taxes, social security is optional, and they do not receive Mandatory (Statutory) Benefits like vacation, Aguinaldo (Christmas bonus), or PTU.
  
  

These rules ensure contractors stay compliant while managing their own business obligations under ISR.

ISR for Non-Residents and Foreign Companies

Non-residents and foreign companies must pay ISR when they earn income from Mexican sources. Even without residency or a local entity, Mexico taxes income generated within its borders. SAT applies special rules for withholding, permanent establishment, and cross-border payments.

Understanding these obligations is essential for global companies, investors, and service providers operating in Mexico.

• ISR on Mexican-source income: Any income earned in Mexico is taxable, including services performed in Mexico, rents, interest, royalties, digital services, and business activities. Residency is not required for ISR liability.
  
  

• Withholding at source for non-residents: When a non-resident receives payments from Mexican clients, the Mexican payer must withhold ISR at the applicable rate. This withholding fulfills the non-resident’s tax obligation in most cases.
  
  

• Permanent establishment rules: If a foreign company has a permanent establishment in Mexico, such as a fixed place of business or dependent agent, it must pay ISR like a Mexican company. SAT determines when activities qualify, and failure to register creates major tax risk.
  
  

• Special rates for dividends, interest, royalties, and services: Non-residents face fixed ISR rates depending on income type. Dividends, interest, royalties, and technical services have specific withholding percentages, often between 10 and 35 percent.
  
  

These rules ensure that all income connected to Mexico is taxed fairly, even when earned by non-resident individuals or foreign companies.

ISR Filing Requirements and Deadlines in Mexico

ISR compliance in Mexico varies depending on the applicable tax regime and requires timely filings, accurate reporting, monthly payments, proper documentation, and an annual return.

SAT monitors electronic records closely, and missing a deadline can lead to penalties or interest. Understanding each requirement helps taxpayers avoid unnecessary risk and stay fully compliant with Mexican tax law.

• Monthly filings: Most taxpayers, including freelancers and companies, must file monthly provisional ISR payments. These filings report income, deductions, and tax owed for the period. Missing a month can generate automatic SAT alerts.
  
  

• Annual declarations for individuals: Individuals must file their annual ISR return by April 30. Employees usually do not file unless they have multiple employers, high deductions, or additional income.
  
  

• Annual declarations for companies: Companies must file their annual ISR return by March 31. This declaration includes income, deductions, depreciation, credits, and final taxable profit.
  
  

• Mandatory records: Taxpayers must keep CFDIs, bank statements, contracts, payroll reports, and deduction evidence. SAT may request these during reviews.
  
  

• When SAT may audit: SAT can audit when filings show inconsistencies, CFDIs do not match income, or deductions appear unusual.
  
  

• Electronic filing through SAT portal: All filings are electronic and require e.firma or password access.
  
  

Following these deadlines ensures taxpayers remain compliant and avoid SAT-related penalties or audits.

Penalties and Consequences for Not Paying ISR in Mexico

Failing to pay ISR correctly can create serious financial and legal problems in Mexico. SAT monitors all CFDIs, payroll reports, and monthly filings electronically, so missing payments or underreporting income is detected quickly.

Both individuals and companies must comply with ISR obligations, and foreign businesses face additional exposure if they operate without proper tax compliance.

• Fines: SAT imposes monetary fines for late filings, missing declarations, incorrect data, or unpaid ISR. These fines increase when errors repeat or involve significant amounts.
  
  

• Interest charges: Unpaid ISR accumulates daily interest until the balance is fully paid. This makes delays increasingly expensive over time.
  
  

• Late surcharges: SAT adds surcharges on top of interest for failing to pay ISR by deadlines. These penalties can significantly raise total tax liability.
  
  

• SAT audits: Inconsistent CFDIs, underreported income, or missing filings can trigger audits. SAT may review bank movements, invoices, payroll, and contracts to verify accuracy.
  
  

• Criminal liability for tax evasion: Serious or intentional evasion can lead to criminal charges. In extreme cases, penalties may include asset seizure or imprisonment.
  
  

• Impact on foreign companies operating without compliance: Foreign companies that do not withhold or pay ISR correctly risk permanent establishment assessments, large back taxes, and blocked operations in Mexico.
  
  

Proper ISR compliance protects individuals and companies from financial loss, legal exposure, and long-term tax problems.

ISR vs IVA (Income Tax vs Value Added Tax)

ISR and IVA are the two main federal taxes in Mexico, but they apply to completely different situations. ISR is charged on income earned, while IVA is charged on the sale of goods and services.

Many taxpayers must handle both, especially freelancers and companies. Understanding the differences helps avoid mistakes in billing, deductions, and compliance with SAT rules.

• Key differences: ISR is an income tax applied to salaries, profits, and business earnings. IVA is a consumption tax added to invoices for most goods and services, usually at a standard rate of 16 percent. ISR depends on net income, while IVA depends on invoiced transactions.
  
  

• When both apply: Businesses, freelancers, and contractors often pay ISR on their profit and also collect IVA from clients. IVA must be transferred to SAT monthly, even if ISR may be lower due to deductions.
  
  

• How ISR + IVA work for freelancers and companies: Freelancers issue CFDIs showing both ISR-related income and IVA charged to clients. Companies calculate ISR on taxable profit and file monthly IVA returns based on IVA collected minus IVA paid on expenses.
  
  

Understanding how ISR and IVA interact ensures correct invoicing, tax withholding, and full compliance with SAT regulations.

How an EOR in Mexico Manages ISR for Foreign Companies

An Employer of Record (EOR) allows foreign companies to hire legally in Mexico without creating a local entity. The EOR becomes the official employer under Mexican law and handles all tax, payroll, and compliance responsibilities.

This protects foreign companies from complex ISR obligations, permanent establishment risks, and penalties from SAT.

• EOR becomes the legal employer in Mexico: The EOR legally hires the employee under its own Mexican entity, taking on all ISR, IMSS, and payroll responsibilities instead of the foreign company.
  
  

• EOR calculates, withholds, and pays ISR to SAT: The EOR uses SAT payroll tables to calculate ISR each pay cycle, withholds the correct amount, and pays it directly to SAT on time.
  
  

• Ensures employees receive compliant CFDI payroll: The EOR issues legally required CFDI payroll receipts showing ISR withholding, taxable income, and benefits.
  
  

• Avoids permanent establishment risk: By acting as the legal employer, the EOR prevents foreign companies from accidentally creating a taxable presence in Mexico.
  
  

• Prevents fines and non-compliance issues: The EOR protects companies from incorrect ISR payments, missed filings, or SAT audits.
  
  

• EOR handles full obligations: ISR, IMSS, Infonavit, payroll tax, PTU, vacation, Aguinaldo, and termination benefits are all managed locally.
  
  

Using an EOR ensures full Mexican tax and labor compliance without opening a legal entity, providing foreign companies with a safe and scalable way to hire in Mexico.

Why HRM Is the Safest EOR for ISR Compliance in Mexico

Foreign companies need a trusted partner to handle ISR correctly, and Human Resources Mexico (HRM) is the safest choice in Mexico.

HRM is the only true, physical, REPSE-registered Employer of Record with more than 16 years of continuous operations in Mexico.

Unlike global platforms that rely on shell entities or undisclosed subcontractors, HRM runs all payroll, ISR calculations, IMSS payments, and SAT compliance directly through its real Mexican team.

• Real Mexican payroll team: HRM’s payroll specialists calculate ISR using SAT’s official tables, issue compliant CFDIs, process IMSS and Infonavit payments, and ensure every payroll cycle is legally correct.
  
  

• No subcontractors or shell entities: HRM does not outsource employment to hidden partners. All employees are hired under HRM’s real Mexican entity, eliminating common risks found in global platforms.
  
  

• Full SAT and IMSS compliance: HRM manages ISR withholding, monthly tax payments, annual adjustments, social security registration, and all mandatory employer contributions.
  
  

• Protection against payroll and tax risks: HRM prevents misclassification, ISR under-withholding, illegal contractor setups, incorrect CFDIs, and permanent establishment exposure.
  
  

• Transparent and accurate taxation: HRM provides clear cost structures with no hidden fees, ensuring every ISR and payroll obligation is handled precisely.
  
  

Working with HRM gives foreign companies complete protection, full compliance, and total confidence when hiring in Mexico.

Ready to hire in Mexico without tax or payroll risks? Let HRM handle full ISR and compliance for you.
Contact us today for a custom proposal tailored to your global hiring needs.

To estimate your monthly or annual ISR, you can use this simple ISR Calculator: https://www.payrollmexico.com/mexico-isr-calculator

FAQs About ISR in Mexico

What income is subject to ISR in Mexico?

ISR applies to most income earned in Mexico, including salaries, business activities, rent, dividends, interest, capital gains, and royalties. Mexican residents are taxed on worldwide income, while non-residents pay ISR on Mexican-source income. SAT oversees all taxable categories under the Income Tax Law.

Do foreigners pay ISR in Mexico?

Yes. Foreigners pay ISR on income earned from Mexican sources, even without residency. Payments for services, rent, interest, dividends, and royalties may be subject to withholding. Non-residents with permanent establishment must also file and pay ISR like a Mexican company under SAT rules.

How does ISR work for remote employees?

Remote employees in Mexico pay ISR the same way as onsite employees. Employers must calculate and withhold ISR each payroll using SAT’s tax tables and issue CFDI payroll receipts. Remote location does not change tax obligations, residency rules, or statutory compliance requirements.

How does an EOR handle ISR for foreign employers?

An EOR calculates, withholds, and pays ISR to SAT every payroll cycle. It issues CFDI receipts, manages annual adjustments, and ensures full compliance. HRM, as a real REPSE-registered employer, prevents permanent establishment risk and protects foreign companies from tax errors or under-withholding.

What deductions can individuals claim?

Individuals can deduct medical expenses, tuition, mortgage interest, retirement contributions, donations, and certain authorized personal expenses. All deductions require CFDI invoices, electronic payments, and proper documentation. These deductions reduce taxable income and must be reported in the annual ISR return.

What happens if ISR is not paid?

Failure to pay ISR leads to fines, interest, late surcharges, and possible SAT audits. Serious non-compliance may trigger criminal consequences for tax evasion. Foreign companies also risk permanent establishment assessments and large back-tax liabilities if ISR is under-withheld or unpaid.