Mexico is right across the U.S. border and is full of skilled workers in a similar time zone, making it an attractive location to expand your workforce. If you want to attract talent, however, you need to understand how to run Mexico payroll in compliance with Mexico payroll laws.

We’ll cover what American businesses need to know about how to pay employees in Mexico, key employer payroll taxes in Mexico, and more. 

We’ll also explain how working with an like Payoneer Workforce Management can help you streamline the payroll process. 

Payroll in Mexico: Wages and other payments

Employees in Mexico are entitled to various types of compensation and benefits. Here’s a breakdown of the main payments employers need to make when running payroll in Mexico.

Payroll cycle

The fiscal year in Mexico runs from January 1st to December 31st. Many employers in Mexico use a 15‑day (bi‑weekly) payroll cycle, although pay frequency can vary by industry and employment agreement.

Minimum wage

There are 2 different minimum wages in Mexico. The Northern Free Zone that borders the United States has a higher cost of living than the rest of the country, so employees there are entitled to a higher minimum wage. 

Region	Daily minimum wage
Northern Free Zone	$ 419.88
Rest of Mexico	$ 278.80

The Mexican government plans to raise the minimum wage by a double-digit percentage each year starting in 2025. Working with an EOR like Payoneer Workforce Management can help you navigate Mexico payroll laws. 

Overtime

The Mexican Federal Labor Law (FLL) outlines very clear rules for overtime compensation. 

The maximum work week is 48 hours long. If employees work beyond these hours, they must be paid at the following overtime rates:

• The first 9 hours of overtime must be paid at 200% of the regular hourly wage. 
• Every hour beyond the first 9 must be paid at 300% of the regular hourly wage.

While this triple-time regulation exists, Mexico payroll regulations also impose a limit of 9 hours of overtime per week and 3 hours per day.

Apart from these,

• Sunday premium (Prima Dominical): Additional 25% pay for Sunday work.
• Holiday overtime: Double pay in addition to the daily wage if working on holidays.

Sick pay

Sick pay in Mexico is managed by the Mexican Social Security Institute (IMSS). That means employers do not give sick pay to their employees. They do, however, need to register their employees with the IMSS and make social security contributions each month.

To receive sick pay, employees must get a medical certificate from a certified medical professional. The first 3 days of an illness are unpaid. From the 5th day onwards, they receive 60% of their wages. 

These sickness benefits can continue for up to 52 weeks, and extensions may also be possible.

Maternity pay

Pregnant employees in Mexico are entitled to 12 weeks of maternity leave. This is commonly split into 6 weeks before the birth and 6 weeks directly after the birth. 

Workers receive 100% of their usual salary during these 12 weeks, paid by the IMSS.

Leave can be extended, but only for medical reasons such as the child’s disability. 

Paternity pay

Partners and fathers receive 5 days of leave (paid by the IMSS) directly after the birth of their child.

Severance packages

In Mexico, employers must have a legally valid reason to terminate an employee. Valid reasons are outlined in Article 47 of the FLL and include situations such as:

• The employee misleads the employer with false certificates or references
• The employee engages in acts of violence against the employer
• The employee intentionally causes material damage to buildings or other property owned by the employer

If an employee is terminated without just cause, they are entitled to claim reinstatement or receive a severance package. 

Severance packages for employees in Mexico are due 20 days’ salary per year of service, a mandatory 3-month (90 days) salary, plus applicable back wages and interest.

Severance may also include any benefits, such as unused vacation or bonuses.

Aguinaldo bonus payments

Workers in Mexico receive a bonus payment in December equal to 15 days’ salary. Workers receive 50% of their salary during an extension.

Employer payroll taxes in Mexico

When you pay employees in Mexico, the main payroll taxes you need to be aware of are income tax, IMSS contributions, and ISN state taxes.

Income tax

Employers in Mexico must withhold income tax on behalf of their employees and pay it to the Mexican tax authorities (SAT). The tax rate is progressive from 1% to 35%.

IMSS payments

Contributions to Mexico’s social security system (the IMSS) take care of sickness benefits, maternity leave, disability benefits, and retirement pensions.

Mexico payroll compliance best practices

When you pay employees in Mexico, there are a few things you should do to make sure you’re complying with various laws and regulations.

• Monitor laws, regulations, and requirements for any changes or updates
• Perform payroll audits to check for accuracy
• Provide ongoing Mexico payroll training to your staff

If the idea of being informed of Mexico payroll laws sounds daunting, working with an EOR may make things easier. EORs offer support to pay employees in Mexico while staying compliant with local labor laws.

Your options for payroll services in Mexico

To hire and pay employees in Mexico, you have three main options. 

• Set up a local entity: Registering your business in Mexico means you can directly employ workers in the country. However, this can be an expensive and time-consuming process and won’t work well for companies looking to hire in multiple countries.

• Hire contractors in Mexico: Hiring contractors can be a good option for short-term or project-based work. However, if you treat your independent contractors like employees, you could run into misclassification penalties. 

• Work with an EOR in Mexico: EORs offer flexible payroll services in Mexico. EORs allow you to hire and pay workers in multiple countries, including Mexico. The EOR acts as the legal employer and supports with the administrative duties, from payroll and taxes to benefits and leave policy.

Payoneer Workforce Management enables businesses to seamlessly build, manage, and pay global teams.

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FAQs

1) How does salary work in Mexico?

The fiscal year in Mexico runs from January 1st to December 31st, and workers are paid bi-weekly. Employers must withhold income tax on behalf of their employees and contribute to social security programs.

2) What are employer payroll taxes in Mexico?

The main employer payroll taxes in Mexico are income tax (withheld from employees’ salaries), social security (IMSS) contributions, and ISN state tax.

3) How to pay employees in Mexico?

You may pay employees by setting up a local entity, via bank transfers, global payments platforms, or by using an Employer of Record (EOR). Working with an EOR helps streamlinethe process to pay employees in Mexico.