How to hire employees in Mexico through an Employer of Record (EOR) [2023 Guide]
Apr 27, 2023
Mexico is home to a skilled workforce, so it's no wonder so many foreign employers are keen on tapping into it by hiring employees in Mexico. But hiring full-time employees in another country can be complicated—in order to hire legally, you need to either establish a local entity in Mexico or work with an EOR service.
Starting your own legal entity can take months—plus, even after it's established, it requires knowledge of complex labor laws in Mexico. Mistakes can be costly, including fines and legal action from Mexico's tax authorities.
Another option is to use an Employer of Record service (EOR), which allows you to hire employees in Mexico without shouldering the burden of payroll, tax, and compliance considerations.
Interested in using an EOR to hire employees in Mexico? Read on for a step-by-step guide.
Step by step: How to hire through an Employer of Record in Mexico
Step #1: Decide between a Mexican EOR and a legal entity
When hiring employees in Mexico (or any other foreign country), you have two options: hire through an EOR or to set up your own entity. The option you choose should depend on your company's size, resources, and plans to scale in the future.
- Legal entity in Mexico. Setting up a legal entity from scratch can be a complex and time-consuming process. You'll need to choose your business structure, register with the Mexican Secretariat of Economy, open a business bank account in Mexico, submit the necessary documents to the Public Registry of Property and Commerce, pay a fee (equal to 16.3% of your estimated business income for the first year), and apply to the local Tax System Administration (SAT) office for a business license and a Mexican tax ID number.
- Mexican EOR. On the other hand, you can hire through an EOR, a third-party service that operates as an employer on your behalf, meaning you don't have to set up your own entity in Mexico. EORs also handle all the legal requirements for complying with a foreign country's labor laws, including payroll, contracts, and benefits. EOR services include calculating and withholding taxes, onboarding and managing employees, and running payroll.
Pros and cons of EORs vs. setting up a legal entity
Cost & Implementation
✔ Less time-consuming to set up.
✔ You can start hiring within days instead of months.
✘ Becomes costlier as your headcount increases.
✘ Takes up to six months to set up—and requires registration fees.
✔ More cost-effective once you’ve hired enough employees in a foreign country.
✔ Quickly set up new hires, often within 1-14 days, depending on the provider.
✔ Supports large-scale expansion in a new market.
✔ Manages all of your compliance work for you, takes on liability, and provides localized employment contracts.
✘ Can’t tailor certain policies, and other HR/legal processes, to the needs of your business.
✘ Requires expert knowledge of Mexican laws and tax regulations and internal legal resources, as your company is liable for all legal and compliance infractions.
✔ Can tailor certain policies, and other HR/legal processes, to the needs of your business.
Payroll & Benefits
✔ Quickly pay and insure employees around the world.
✔ Taxes are filed for you.
✘ Must manually keep track of statutory deductions and employee entitlements for every hire.
Step #2: How to choose the best EOR for your business
Before you choose a platform, you should consider the services you will need, and how much you plan to grow your global hiring presence.
- Is the EOR active in the countries in which you need to hire? The first, and perhaps most obvious consideration when choosing an EOR for global expansion.
- Does the EOR own its own entities in the countries it services? If the EOR does not own the entities, it means they are partnering with a local or third-party provider.
- How does the EOR protect your sensitive and confidential information? It is vital that your EOR has the appropriate data protections in place, as well as secure technology that eliminates potential disclosures of private information.
- Does the EOR offer automated solutions? You may want to look for an EOR that automates the busy work like onboarding and benefits enrollment and other common HR and IT tasks.
- What is the EOR’s support model? It’s essential that your EOR has support staff that are both easy to contact and experts in the regulations of the countries in which you are hiring.
Get the full checklist in our guide: What is an EOR?
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Step #3: How to hire and onboard your Mexican employees
Once you’ve picked an EOR that works in Mexico, you can begin the onboarding process by collecting the following information from your new employees:
- The employee's name, nationality, age, sex, marital status, and address
- The employee’s Federal Taxpayer Registry code issued by the SAT
- Your business address in Mexico
- The type of employment relationship (i.e. employee or independent contractor)
- Whether there's a training period
- The types of services the employee will provide
- The physical address where work will be performed
- The employee's work hours, amount of pay, and pay frequency
- The employee's day of rest and whether they'll be required to work on any national holidays
- A beneficiary to receive any unpaid wages if the employee dies
- Documents to prove the employee's identity and address
You'll also need to create an offer letter (or employment contract) for each hire in Mexico. This should be translated into Spanish and include:
- Contact information, including name, nationality, age, sex, civil status, tax ID number, and address of both the employee and the employer
- Position (job title), job description, and start date
- Nature and duration of employment, including whether the contract is indefinite, fixed-term, or seasonal
- Probationary period
- Place or places the employee will work
- Working hours
- Compensation details, including any equity compensation and/or benefits the employee will receive
- Termination policy and notice periods
- Confidentiality and non-disclosure clauses, if applicable
You can onboard new hires anywhere, end to end, with Rippling. Request a demo today.
Step #4: Run payroll
For the A-to-Z on global payroll, read our comprehensive guide to running international payroll for employees in Mexico.
After collecting each new hire's information, as well as creating and signing labor contracts, an EOR will pay your Mexican employees in Mexican pesos (MXN), while automatically withholding the legally required taxes from each payment. This includes contributions to:
- Mexican Social Security Institute (Instituto Mexicano de Seguro Social or IMSS)
- Profit sharing
- Payroll tax
- City and state payroll taxes depending on the employee's location
Frequently asked questions about hiring through an EOR in Mexico
How much does an EOR cost?
EORs typically use one of two pricing structures:
- Fixed monthly fee per employee
- Percentage of payroll plus applicable taxes
Be aware that both pricing structures can also come with administrative fees, onboarding costs, extra charges for supplemental features, and other added costs. If your goal is to use an EOR while keeping costs low, keep in mind that you don't need to use the EOR for your entire workforce—you can segment it, only paying for the employees you employ through the EOR.
What is the difference between an EOR and PEO?
A Professional Employer Organization (PEO) co-employs a company’s workforce and provides administrative services, like paying employees, handling compliance, and filing payroll taxes, that take some of the hassles of global employment off your plate. The company and PEO service are jointly responsible for the workforce, but an international PEO is not a legal employer, so it does not allow you to hire employees in countries where you haven't set up a legal entity.
An EOR, on the other hand, is the sole employer of the portion of your workforce you use it for, so it assumes all associated liabilities. An EOR allows companies to work with employees in other countries without setting up a legal entity.
Does an EOR protect your sensitive and confidential information?
While outsourcing your payroll management to an EOR can help you save time and mitigate compliance risk, sharing your data with companies who use third-party vendors can leave you exposed to data breaches from manual uploads.
You should seek out EORs that prioritize data protection, including:
- Compliance with industry-standard privacy regulations in different countries.
- Secure infrastructure with around-the-clock maintenance.
- Carefully vetted personnel.
You can also establish a Data Processing Agreement (DPA) with a payroll service that mandates sound privacy practices and provides legal protection.
Does an EOR help with Mexican payroll records?
Payroll records can be audited for up to five years in Mexico, so it's recommended that employers keep detailed records for at least that long. An EOR can help collect and store the necessary payroll information, including:
- A copy of each employee's contract or employment agreement
- Dates of employment
- Rate and frequency of pay
- Total regular and overtime pay
- Net pay
What are the mandatory benefits for Mexican employees?
Mexico’s federal labor law dictates that all employees are entitled to certain statutory benefits from their employer. These entitlements include:
- Minimum wage
- Contributions to the social security system, which covers healthcare, pension plans, employment insurance, work risk insurance, life insurance, disability pay, sick leave, maternity leave, paternity leave, childcare, and social housing
- Profit sharing
- Severance pay (depending on the reason for termination)
- Annual leave, with the number of vacation days depending on years of service
- Public holidays
- Weekly rest days
- Christmas bonus (aguinaldo)
Public holidays in Mexico vary by region, but all employees are entitled to paid leave for these national holidays:
- New Year's Day
- Constitution Day
- Benito Juarez's birthday
- Labor Day
- Independence Day
- Revolution Day
- When there's a change of president
- Christmas Day
Healthcare is nationalized for all Mexican residents who enroll in social security. However, it's common for employers to offer private healthcare as a benefit to help them attract and retain the best talent in Mexico.
For more information on mandatory benefits in Mexico, read our complete guide.
What are the employer costs for full-time employees in Mexico?
Employers are responsible for deducting the following from their full-time employees’ paychecks:
Social security contributions
Mexican companies are required to share 10% of their annual profits with their employees, beginning in their second year of operation.
Varies by state; see table below
Unable to process off-cycle pay runs like bonuses or reimbursements
You can run off-cycle pay runs as needed, because we don’t rely on third-party payroll partners
Rippling helps you hire, pay, and manage people worldwide. Request a demo today.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.