According to the World Bank, Mexico’s labor market has nearly 57 million workers. This means plenty of opportunities for foreign companies to find highly-skilled contractors. But how can you cooperate with them while staying compliant with Mexican employment laws?
Read on to learn how to make Mexican contractors part of your global team. Below, you’ll find a step-by-step breakdown on how to run payroll for your independent workers.
Step #1: Classify your workers
Mexican authorities see contractors and employees as two distinct worker categories. It’s essential to classify your contractors correctly to avoid the risk of worker misclassification.
If a contractor believes they should be covered by an employment contract, they can file a claim against you. A Mexican court will inspect if you haven’t chosen an independent contract arrangement to avoid employment. If they decide that you’re eligible for an employee-employer relationship, they’ll reclassify you automatically. Additionally, you might also become eligible for back taxes, fines, and other penalties.
To help you decide if you should hire employees or hire contractors, consider the following differences:
High level of autonomy. Since contractors are self-employed, they enjoy more autonomy in when and how they complete their work. They don’t have a fixed work schedule.
More supervision from the company. As an employer, you can maintain more control over your employee’s work, including where, how, and when they’re required to fulfill their tasks. They are also subject to fixed working hours.
Work tools and equipment are owned by the independent contractor.
Work tools and equipment are usually provided by the employer.
No benefits from the company. Independent contractors are responsible for covering income tax and social contributions themselves. They’re not eligible for any state-mandated benefits from the contracting party. For healthcare coverage, they must sign up for a health insurance plan themselves.
Entitled to employee benefits. Employers are responsible for settling payroll tax and social security contributions on behalf of their employees. Among others, they are eligible for sick leave, maternity leave, and paternity leave. Additionally, they’re entitled to profit sharing.
Closed-ended contracts are common. Independent contractors commonly work on the basis of fixed-term arrangements. They aren’t eligible for severance pay, Christmas bonuses, or paternity/maternity leave.
Covered with indefinite contracts. Employees are hired on indefinite contracts, which guarantees severance pay upon termination.
Receive a fee after sending an invoice. The invoice specifies the exact services (a consultancy fee) for each month.
Receive a salary, regardless of the work completed each month
Can serve multiple companies. Independent contractors aren’t your employees. They’re free to render their services to other businesses.
Can be exclusive. Your employment contract can prohibit your employee from working with anyone else.
On that note, bear in mind that businesses without a local legal entity in Mexico can only work with independent contractors. To hire a full-time employee in the country, you must either establish a business or work with an Employer of Record (EOR).
Step #2: Determine the best way to pay your contractors
Before you start working with independent contractors, it’s worth agreeing on the payment method, and there are a few you can choose from. It’s important to find an option that works both for your business and your contractors. Here is what you can consider:
Wire transfer: You can either open a local bank account and transfer the funds to your Mexican contractor’s account or go with an international bank transfer. While it’s the most common payment method, it can be quite costly due to currency conversion rates and transfer fees.
Online money transfer provider: Alternatively, you can opt for money transfer providers like PayPal, Xoom, or Wise. While your contractors will receive their money quickly, using these services might come at a cost. For example, PayPal charges both parties 2.99% of the total transaction amount + 49 cents for invoicing. Also, you have to account for exchange rates, and these can fluctuate daily.
Global payroll services: As independent contractors are responsible for paying their own income tax, they usually aren’t included in the company’s payroll. They issue invoices, which often go to accounts payable. However, if you turn to a platform like Rippling you’ll be able to pay both your employees and your contractors in a single pay run, irrespective of their location.
Step #3: Use global payroll software to process payments
As you’ve seen in the previous step, there are a few methods you can turn to while settling invoices from your contractors in Mexico. That being said, the easiest, fastest way is to handle payments through global payroll software.
Rippling lets you send funds to your independent contractors, even if they’re based all across the world. You can handle all of your international payments in as little as 90 seconds:
Step #4: Calculate and file your tax forms
Part of staying legally compliant when you hire Mexican contractors is getting the taxation right. This includes correct tax calculations as well as filing appropriate tax forms. Your contractors must register with the Mexican tax authorities as independent service providers and keep their signed invoices on file.
In terms of payments, freelancers get their pay in full and no deductions are necessary, since they have to settle their own taxes. However, as of April 2021, the Mexican government requires all contractors to report their contracts every four months to Instituto Mexicano del Seguro Social (IMSS) and Instituto del Fondo Nacional de la Vivienda para los Trabajadores (INFONAVIT).
Companies that hire contractors in Mexico should provide them with the following documents:
- A W-8BEN for individuals, or
- A W-8BEN-E for those who operate a business.
Both of these are used to verify the contractor’s country of tax residence, and therefore claim deductions or exemptions from United States’ taxes.
FAQs about paying contractors in Mexico
Do you need to withhold taxes when paying contractors in Mexico?
Independent contractors in Mexico are responsible for settling their own taxes, so you don’t have to make any deductions from their pay.
Does Mexican minimum wage apply to independent contractors in Mexico?
Mexican independent contractors are exempt from minimum wage and overtime payments.
Do Mexican contractors get benefits?
Benefits such as social security contributions, paid time off, or profit-sharing perks should not be offered to contractors. If you wish to provide your independent worker with certain benefits, then the safest way is to ask the contractor to add its financial equivalent as part of their invoice.
Can you pay contractors in Mexico in your home currency?
While you can send payments in your home currency, for example, USD, you should ask your contractor how they’d like to get paid. Some independent workers prefer to be paid in Mexican Pesos (MXN) to avoid costly conversion fees. It also helps them avoid exchange rate fluctuations.
With Rippling, you can pay global contractors in their local currency, in minutes, without waiting on transfers or conversion.
Can you manually pay contractors in Mexico?
Yes, you can, and it’s common, especially for small business owners to handle contractor payments manually in an attempt to save money. While it can work if you only cooperate with a handful of contractors, it can get overly complicated as you onboard more and more freelancers.
Also, bear in mind that processing payments manually is not risk-free. Not only can your international payroll be subject to human errors but also security threats. Especially if you use spreadsheets or paper records.
How do you turn a contractor into an employee in Mexico?
Admittedly, working with international talent on the basis of independent contractor agreements can be beneficial from a financial and operational point of view. However, over time, you might become interested in converting an independent contractor into a full-time employee. This is certainly possible but comes with an entirely different set of payroll and legal obligations. The biggest potential blocker is that you would have to set up a local legal entity in Mexico to offer full-time employment.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are. See Rippling 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.