What global businesses need to know about payroll in Mexico
It’s easy to overlook Mexico as a destination for global business, because it’s a much bigger country than people often think. With over 130 million citizens, it’s the 11th most populous country in the world, and ranks 12th for GDP, ahead of the likes of Australia, South Korea and Spain.
Mexico’s geographical position works in its favor. Despite political tensions over immigration, Mexico’s position bordering the United States, and much lower cost and wage levels, allows it to manufacture and export goods in vast quantities. Over 85% of Mexican exports go to the USA and Canada, although at the time of writing (February 2025), the threat of tariffs from the Trump administration may have an impact in the months and years ahead.
At the same time, Mexico has strong cultural links to all of its Latin American neighbors to the south, the vast majority of which also speak Spanish. And as you’ll see in this guide to running payroll in Mexico, many of its specific payroll requirements and characteristics are similar to those you’d find in other Latin American countries.
Getting Started
The most common types of business entities used by companies in Mexico are Sociedad Anonimo (S.A.), similar to a public limited company, and Sociedad de Responsabilidad Limitada (S. de R. L.), which is a company with limited liability. Alternatively, some companies dealing with non-tangible services, such as accountancy and consultancy, may form as a Sociedad Civil (S.C.). Foreign ownership of Mexican businesses is allowed, but will require an official representative or operator to be situated within Mexico itself.
For global companies looking to establish long-term operations in Mexico, business setup is a three-step process. The first stage is to draw up and sign a Deed of Incorporation before a notary public, which requires physical presence of the owners along with their ID and proof of address, as well as the National Registry of Foreign Investment. After registering the business, the company must obtain its tax identification card from the appropriate Federal Taxpayers registry.
In addition, the organization must register as an employer with Mexican Social Security and obtain tax registration from the governing bodies in the local jurisdiction. Once these matters have been addressed, the company should establish in-country bank accounts, which are mandatory for making payments to both employees and the government’s social security and taxation agencies. It is also a legal requirement to register for VAT in Mexico, even if the nature and value of your business means that collecting and emitting VAT is unlikely.
To open a bank account in Mexico, a company must supply a Tax Identification Number (Registro Federal de Causantes or RFC) or equivalent, proof of address, banking or commercial references, and formal identification of the organization’s legal representatives or guarantees of a power of attorney. Processes around these vary from bank to bank, although it is likely that the person opening the account will have to physically attend the bank to do so, and potentially provide further information to comply with Mexican anti-money laundering laws.
Employment Considerations
To comply with labor and social security legislation in Mexico, it is advisable to hire employees through a local subsidiary or a service entity. Companies cannot employ more than 10% of foreign workers, and cannot employ anyone in a technical role that could viably be done by a Mexican (not including directors and managers).
New employees can be hired either on a temporary or an indefinite basis, or through a number of contracts that include test periods, training periods, or seasonal work. Any employees that have been hired for more than three months automatically become permanent employees on indefinite contracts.
When hiring a new employee, the worker must provide his or her personal documents, which are necessary for the preparation of employment agreements and to ensure employees can receive payments through the company’s bank account. Employees must be registered for social security and insurance on their day of hire. Mexico also legally recognizes workers’ right to form unions to defend their interests.
The standard working week in Mexico is extremely long at 48 per week, which is officially spread over six days but often condensed into five. This weekly total reduces to 42 for those working night shifts, and 45 for those working a combination of day and night shifts; furthermore, collective bargaining and contract negotiation can vary these levels by mutual agreement.
Overtime is limited to three hours per day, and cannot be done for more than three days in a row. Overtime is normally paid at double time for the first nine extra hours per week, and triple time beyond that (or if the overtime is on a public holiday). As with working hours, collective agreements can alter these figures.
Compensation & Bonus Guidelines
The minimum wage in Mexico is currently low, but is being raised at a fast pace. For 2025, the rate has reached 278.80 pesos per day (approximately £10.90; $13.70; €13.10); expect further substantial increases in the years to come.
Employee wages can be paid weekly, biweekly or monthly, depending on the conditions agreed upon in the employment contract. Payments can be made electronically if a new employee asks for permission to process a payroll bank account. However, Mexico is a country with many low-paid workers who don’t have access to banking facilities, and large numbers of transient workers who move around regularly. It’s therefore common for pay to be given in cash, although the use of payroll cards and mobile-enabled Earned Wage Access represent practical alternatives that reduce the risk of fraud.
In line with most Latin American countries, employees receive a 13th-month ‘Aguinaldo’ bonus at the end of the year, which must be paid by December 20. Additionally, businesses in Mexico are legally obliged to share 10% of their profits among the workforce, with equal payments made to every employee excluding directors and managers. Companies in their first year of operation are exempt.
Mexico has defined guidelines around the ‘justified causes’ for which either the employer or employee can terminate the working relationship without liability. If an employee is dismissed and then argues a justified cause, they are entitled to the following if they are not reinstated:
- Three months’ salary
- 20 days of salary per year of service
- A further 12 days of salary per year for service longer than 15 years
- Prorated holiday pay, 13th-month bonus and profit-sharing dividend
Tax Collection & Withholding
Employers are required to deduct income tax contributions from their employees’ paychecks, and these payments must then be submitted to the government each month.
Mexico has a progressive income tax rate, with the amount required from each employee determined by their salary. However, the rates and number of bands – 11 in total – makes this fairly complex. As of 2025, the lowest rate of 1.92% applies to the first 8952.50 pesos earned per year (approx. £350; $440; €420). The highest rate of 35% applies to all earnings over 4,511,707.38 pesos per year (approx. £175,000; $221,000; €211,000).
Non-residents are taxed at 15% on earnings above 125,900 pesos per year (approx. £4,900; $6,200; €5,900) and 30% on earnings above 1 million pesos per year (approx. £38,700; $49,000; €46,800).
Employers must file an annual statement of wages and salaries paid each year by February 15 of the following year with the SAT (Servicio de Administración Tributaria), Mexico’s federal tax collecting administration.
In addition to income tax, the employer must also deduct social security contributions on behalf of their employees. All social security payments must be made via an authorized bank by the 17th of each month.
The levels of social security contributions vary according to a number of factors, including earnings, industry, employee age, location of work, how often they work and even where they live. Employees contribute between 10% and 30%, plus an extra 1.125% for retirement insurance. Employers contribute between 24% and 38%, plus as much as 3% extra for payroll tax (rates vary across different states).
Holiday, Vacation & Leave Considerations
Paid leave entitlement starts at 12 days after one completed year of service, with two extra days given for each of the following five years. Once an employee reaches 22 days after six years’ service, they receive an extra two days per year every five years, up to a maximum of 32 days after 31 years’ service. Employees are entitled to their usual pay plus a 25% vacation bonus, known as the ‘prima’, on these days. Some companies do offer more than this, either voluntarily or through a collective bargaining agreement with unions.
Mexico only has seven days of national public holidays each year. While the day of a presidential inauguration is also given as a public holiday, the next one isn’t due until December 2030. There are also several regional, religious and unofficial public holidays spread throughout the year, but employees don’t have a legal entitlement to paid leave for these. Some holidays that fall on weekends may be moved to the following Monday to give employees long weekends off.
Maternity leave is 12 weeks, six weeks either side of the birth, paid at full salary by social security. Additionally, during the three months prior to the due date, pregnant employees are banned from ‘excessive’ physical labor in the workplace. Paternity leave entitlement is mandatory for five working days following a birth or adoption, and employers pay this time off at full salary.
Sick pay is covered by social security in medically certified cases, at 60% of normal salary rate for a maximum of 52 weeks. Employees should, however, receive 100% of their salary if they are absent because of a work-related injury.
In Summary
As with many countries across Latin America, the way payroll works in Mexico is evolving all the time. Minimum wage rates are rising, and as more and more Mexicans get access to technology, they will be increasingly open to banking services and tech-led ways of getting paid rather than traditional cash payments.
So for long-term success running payroll in Mexico, a combination of local expertise and flexible, innovative technology will put you in the best position – and that’s exactly where a global payroll provider can help.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay.