How to run international payroll for employees in Mexico (Updated 2024)

With its diverse, talented workforce, Mexico is becoming more and more attractive for companies looking to hire the best possible employees. But hiring employees in Mexico comes with some challenges—namely, staying compliant with another country's labor and tax laws.

One of the most challenging parts of managing a global workforce is payroll, and Mexico is no exception. Paying your employees in Mexico means following local laws to the letter—and that's where this guide comes in.

If you're looking for a step-by-step guide to running payroll in Mexico, you've come to the right place. Read on for what you need to know about paying your employees in Mexico the right way.

Table of Contents

• Step #1: Decide whether or not to create your own entity in Mexico or use an Employer of Record (EOR)
• Step #2: Choose a global payroll software solution
• Step #3: Determine your workers’ employment status
• Step #4: Capture your new hires’ Mexican payroll information
• Step #5: Run payroll
• Step #6: Document and store your payroll records
• Frequently asked questions about running payroll in Mexico

Step #1: Decide whether or not to create your own entity in Mexico or use an Employer of Record (EOR)

Before you can hire and pay employees in Mexico, you need to establish a business entity there. There are two ways to go about this: You can establish your own local business entity, or you can use an Employer of Record (EOR).

When, why, and how do companies use an EOR?

EORs are a natural choice for many smaller companies looking to expand their operations into new countries—including Mexico. An EOR exists as the legal entity through which a company hires and pays its foreign employees, shouldering the responsibility for calculating and withholding the right taxes to stay compliant with local labor and employment laws. An EOR handles payroll, benefits administration, IT, and more—all while ensuring compliance.

Setting up your own business entity can take significant time and resources that many small companies simply don't have. That's why they turn to an EOR—it lets them hit the ground running in a new country with less administrative load.

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When, why, and how do companies create their own entity?

As your company grows and scales its operations in Mexico, it may become more cost-effective to establish your own legal entity rather than use an EOR. Your legal entity then takes the place of the EOR, handling hiring, running payroll, and ensuring compliance internally.

Here's how to set up your own legal entity in Mexico:

• Choose your business structure and name and 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, including notarized copies of your articles of incorporation, bylaws, and business registration, your company's business address, and a letter from your bank showing you have a business account.
• Pay the fee, which amounts to 16.3% of your estimated business income in your first year.
• Apply to the local Tax System Administration (SAT) office for a business license and a Mexican tax ID number.

Step #2: Choose a global payroll software solution

Global payroll software can streamline the process of paying employees all over the world. There are two main types:

• Global payroll processors use their own software to process your payroll, transmit funds, and calculate and file taxes in different countries. They allow you to pay local and international employees the same way: quickly, easily, and together in a single pay run.
• Global payroll aggregators aggregate local payroll providers in different countries and manually transmit payroll files to them.

Learn more about the differences between global payroll processors and global payroll aggregators.

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Step #3: Determine your workers’ employment status

Mexico takes employee classification seriously, so it's absolutely crucial to understand who you're paying: Employees or independent contractors?

When an independent contractor raises a misclassification claim, Mexican courts look carefully at the arrangement to determine whether an employer-employee relationship was present. If they believe a worker classified as a contractor was actually acting as an employee, your business could face hefty government fines.

Here are some of the signs that a worker is an independent contractor in Mexico:

• They have the ability to determine when and how they perform their work, with limited instructions from their employer.
• They provide their own equipment and tools.
• They receive payments after submitting an invoice, not as regular "salary."
• They don't receive benefits from their employer.
• They aren't subject to disciplinary action from their employer.
• Their engagement is not exclusive and they can provide their services to any other business entity.

Classify your workers now using Rippling’s Worker Classification Analyzer.

Step #4: Capture your new hires’ Mexican payroll information

Before you can set up your new employees for payroll, you need to collect certain data from them. In Mexico, this information is collected via their employment contract, which must include:

• 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

You'll also need to collect documents to prove the employee's identity and address.

Step #5: Run payroll

You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under Mexican law.

Time to run payroll!

Here’s a preview of how Rippling’s global payroll system works:

Step #6: Document and store your payroll records

Payroll records can be audited for up to five years in Mexico, so it's recommended to keep them for at least that long. At a minimum, payroll records should include:

• A copy of each employee's contract or employment agreement
• The dates of employment
• The rate and frequency of pay
• Any deductions
• Total regular and overtime pay
• The employee's net pay

Frequently asked questions about running payroll in Mexico

Can you pay Mexican employees in your local currency?

No. As of 2017, Mexican law requires all employees in Mexico to receive their salary payments in Mexican pesos.

What are payroll deductions in Mexico?

Employers in Mexico are responsible for deducting social security from their employees' pay, which covers pension, employment insurance, healthcare, and other social benefits. They must also deduct payroll taxes, which vary depending on their location. For full details, see our employer cost table below.

What are the employer costs for full-time employees in Mexico?

Employers are responsible for deducting the following from their full-time employees’ paychecks: