Payroll in Mexico: A Complete Guide for US Businesses

Mexico has emerged as a major business hub, thanks to its competitive workforce, proximity to the United States and membership in major trade agreements like USMCA. For businesses entering the market, payroll in Mexico comes with strict legal requirements. This guide provides clear, actionable information on how to pay employees in Mexico while staying compliant with local regulations.

We'll also talk about how BatchTransfer can help your team do international payroll.

Step-By-Step Guide: Setting Up Payroll in Mexico

Before you can pay employees legally, you must complete several key steps to comply with Mexican tax and labor laws. Here are the essential steps for setting up payroll in Mexico.

Step 1: Incorporate Your Business in Mexico

To hire employees in Mexico, you must first set up a legal company. This means registering with a notary public, getting a public deed of incorporation, and recording it with the Public Registry of Commerce.¹ You can’t pay employees or handle payroll taxes until this step is done.

Step 2: Get a Federal Taxpayer Registration Number (RFC)

Once incorporated, the next step is to obtain a Federal Taxpayer Registration Number (RFC) from the Tax Administration Service (SAT).² This number identifies your company for tax purposes and is mandatory for all businesses operating in Mexico.

With the RFC, your company can file and pay corporate taxes, withhold and remit employee income tax, and issue compliant electronic invoices and pay slips.

Step 3: Register With The Mexican Social Security Institute (IMSS)

After receiving your RFC, you must register as an employer with the Mexican Social Security Institute (IMSS).³ This allows you to make social security contributions on behalf of your employees, covering healthcare, retirement and disability benefits.

IMSS registration is essential because it gives your employees access to healthcare services, ensures you meet social security contribution requirements and helps you avoid legal penalties for unregistered employment.

Step 4: Register With INFONAVIT For Housing Contributions

In addition to IMSS, you must register with the National Workers' Housing Fund Institute (INFONAVIT).⁴ Employers in Mexico are required to contribute 5% of each employee’s salary to INFONAVIT, which funds housing loans and programs for workers.

INFONAVIT registration ensures your business meets mandatory housing contribution requirements and allows your employees to access housing benefits.

Step 5: Register With State Payroll Tax Authorities

Mexico has a state-level payroll tax that varies by region, usually between 1% and 3% of gross salaries. To remain compliant, you must register with the relevant state payroll tax authority where your business operates.

State payroll tax registration is required to properly file and pay monthly payroll taxes and to avoid fines or penalties from local tax authorities.

Step 6: Consider Employer Of Record (EOR) Options

If your company does not want to set up a legal entity in Mexico, you can use an Employer of Record (EOR)⁵ or Professional Employer Organization (PEO). These services handle all legal registrations, manage payroll taxes, social security contributions and employee benefits, and allow you to hire employees quickly without the administrative burden. EOR services are a practical option for companies testing the Mexican market or hiring remote teams without setting up a local office.

Payroll Cycles in Mexico: Choosing the Right Pay Frequency

Mexican labor law dictates certain rules for pay frequency. Manual laborers must receive wages weekly. For other employees, payroll can be processed bi-weekly, semi-monthly or monthly.

Most companies opt for semi-monthly payments, with salaries paid on the 15th and last day of each month. The chosen pay cycle must be outlined in employment contracts. This reduces the risk of disputes and ensures payroll taxes and social contributions are calculated on the correct schedule.

Minimum Wage in Mexico and Legal Working Hours

The minimum wage in Mexico is reviewed annually by the National Minimum Wage Commission (CONASAMI). As of 2025, the national minimum wage is approximately $278.80 MXN per day. In the northern border zone, which includes areas adjacent to the U.S. border, the minimum wage is $419.88 MXN per day to reflect the higher cost of living.⁶

Working hours are also regulated. A standard workweek in Mexico is capped at 48 hours, spread across six days, with at least one full day of rest. Overtime, night shifts and work on public holidays attract higher pay rates as mandated by law.

Employee Benefits and Social Security Contributions in Mexico

Payroll in Mexico comes with significant employer obligations related to employee benefits and social security contributions. These statutory benefits are non-negotiable, strictly regulated under the Federal Labor Law, and apply to all formal employment relationships.

Key requirements include:

• Aguinaldo: This is a mandatory Christmas bonus equal to at least 15 days’ wages, payable by December 20 each year. Many companies offer more than the minimum to remain competitive in the local labor market.
• Paid Vacation: Employees are entitled to a minimum of 12 days of paid leave after their first year of service. This entitlement increases progressively based on years of service. In addition, employers must pay a 25% vacation premium on top of the regular salary during vacation days.
• Profit Sharing (PTU): Companies are required to distribute 10% of their annual taxable profits among employees. There is a cap in place, limiting the amount to a maximum of three months’ salary per employee or the average of the last three years’ PTU, whichever is lower.
• INFONAVIT Contributions: Employers must contribute 5% of an employee’s gross salary to the National Workers’ Housing Fund Institute (INFONAVIT). This contribution funds low-interest housing loans and home improvement programs for employees.
• IMSS Contributions: Contributions to the Mexican Social Security Institute are paid by both the employer and the employee. The employer’s share can range from 34% to 50% of salary, depending on various risk factors and wage components. Employees contribute around 2.78% of their salary.

These contributions secure employees' access to essential services like healthcare, pensions, housing loans, disability benefits and life insurance.

Mexico Payroll Taxes and State Contributions

Payroll taxes in Mexico operate on two levels: federal and state. Every employer is responsible for withholding income tax (ISR) from employee salaries, which is filed monthly with the SAT. The tax follows a progressive system, where higher earnings attract higher tax rates.

Additionally, each state in Mexico imposes a payroll tax on gross salaries, typically ranging between 1% and 3%.⁵ These taxes are entirely funded by the employer.

Employers must also account for social security contributions to IMSS and housing fund contributions to INFONAVIT. Combined, these payroll taxes in Mexico can add around 50% to the base salary cost, making budgeting accuracy essential.

Payroll Compliance Obligations in Mexico

Employers must comply with strict reporting and documentation rules when managing payroll in Mexico. Every salary payment must be accompanied by a digital pay slip called Comprobante Fiscal Digital por Internet (CFDI),⁷ which includes gross salary, all deductions and net pay.

Payroll records must be retained for at least five years in case of government audits. Special attention is required when engaging independent contractors. While contractors pay a flat 10% income tax withholding, misclassifying employees as contractors can result in fines and legal liabilities.

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Pay Employees With BatchTransfer

BatchTransfer has an easy-to-use instant payments system that allows you to make multiple payments, for both domestic and international, in one go. Small businesses and enterprises can get access to BatchTransfer with no additional cost after getting a Wise Business account.

BatchTransfer’s core strengths for payroll:

What sets BatchTransfer apart is its commitment to providing the mid-market rate for currency conversions. This means that businesses get a fair and transparent deal when making international payments.

Another perk of using BatchTransfer for international payroll is its extensive coverage of over countries and currencies! With features like automatic payment scheduling and API integration, small businesses can streamline their payroll process, freeing up valuable time and resources for other important tasks.

• How can businesses use BatchTransfer for payroll?: Businesses can send up to 1000 payments with a single click with BatchTransfer. US-based business can access BatchTransfer at no extra charge.

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In-House vs. Outsourced Payroll Processing in Mexico

Businesses can choose to manage payroll in-house or outsource to a third-party provider. Here’s the breakdown.

Payroll Processing Method	In-House Payroll	Outsourced Payroll (EOR/PEO)
Who Manages Payroll	Internal HR or payroll team within the company.	External Employer of Record (EOR) or Professional Employer Organization (PEO).
Expertise Required	Requires in-depth knowledge of Mexican tax laws, payroll taxes, social security contributions and labor regulations.	The provider ensures compliance with Mexican payroll laws and manages regulatory updates.
Administrative Burden	High: Employers handle salary calculations, tax filings, social security contributions and reporting.	Low: The provider handles all payroll processing, benefit contributions and tax compliance.
Compliance Risk	Higher risk if internal errors occur or if laws change unexpectedly.	Lower risk due to professional handling and built-in compliance monitoring.
Scalability	Suitable for larger companies with established infrastructure.	Ideal for companies expanding quickly, entering Mexico for the first time or running remote teams without a local entity.
Best For	Businesses with local operations and experienced payroll teams.	Foreign companies or businesses looking to simplify operations and reduce compliance risk.

How Payroll Taxes in Mexico Are Calculated

Payroll taxes in Mexico follow a straightforward process. It begins with calculating the gross salary based on the employee’s contract and hours worked, including any overtime or bonuses.

From there, employers withhold income tax according to official tax brackets set by the SAT. Employees who earn more pay a higher tax rate. Both the employer and employee also make social security contributions. These go to IMSS for health care and pensions, and INFONAVIT for housing benefits.

On top of this, employers pay a state payroll tax, which usually ranges from 1% to 3% of gross salary depending on where the business operates. After taxes and contributions are deducted, employees receive their net pay. Employers must also file reports and make payments to SAT, IMSS and local tax offices every month.

Avoiding Payroll Mistakes in Mexico: What to Watch Out For

Payroll in Mexico can get complicated fast, especially if you’re unfamiliar with the local system. Small mistakes can turn into costly penalties and create trust issues with employees. Here are some of the most common payroll mistakes businesses make in Mexico and how to avoid them.

Getting State Payroll Taxes Wrong

One of the easiest ways to make a mistake is by applying the wrong state payroll tax rate. Every state in Mexico sets its own rate, usually between 1% and 3%, and it’s up to employers to know what applies where they operate. Miss a payment or miscalculate, and you risk fines or extra scrutiny from local tax authorities. Always check the latest rates for your location and keep your payroll system updated.

Underestimating How Much Employees Really Cost

It’s common for businesses to focus on salary and forget about all the extras. Between social security contributions, housing fund payments, and other payroll taxes, the real cost of hiring can jump by 40% to 50%. Forgetting this can cause budget headaches later on. Always factor in the full cost, not just the take-home pay, when you plan payroll expenses.

Missing Mandatory Bonuses

In Mexico, certain payments aren’t optional. The Christmas bonus (aguinaldo) and profit-sharing (PTU) are legally required, with strict deadlines. Forgetting or delaying these payments can result in legal penalties. The solution is simple: track these dates in your payroll calendar and set aside funds throughout the year so there are no surprises in December.

Messing Up CFDI Pay Slips

Every payment to employees must come with a proper electronic pay slip, called CFDI. These slips need to include very specific details about wages, deductions, and contributions. Errors in these payslips can create compliance issues during audits. Using reliable payroll software or services that automatically generate compliant CFDIs helps avoid this headache.

Misclassifying Workers

Trying to save on costs by labeling employees as independent contractors is a risky move. If workers are performing core functions under your direction, they likely count as employees under the law. Misclassification can lead to fines and force you to pay back wages and benefits. If you’re unsure, it’s safer to classify them properly from the start.

How to Keep Payroll Running Smoothly

The easiest way to avoid payroll mistakes is to get help from people who know the system inside out. Whether you hire local payroll experts, work with a trusted accountant or use an Employer of Record (EOR), professional support can take the stress out of managing payroll in Mexico. It helps you stay compliant, avoid fines and keep employees happy.

Final Thoughts

Payroll in Mexico is complex but manageable with the right approach. Employers must register with the proper authorities, calculate taxes correctly, pay mandatory benefits and issue compliant electronic pay slips. Getting any of these steps wrong can lead to penalties, back payments or legal issues.

Other than salary, the cost of hiring in Mexico includes income tax withholding, social security contributions, state payroll taxes, and annual bonuses like Aguinaldo and profit-sharing. Some companies choose to handle payroll in-house, but it takes time, resources and in-depth knowledge of Mexican labor law. Many others choose to outsource payroll to an Employer of Record (EOR) or PEO, which takes care of the entire process and keeps the company compliant from day one.

Frequently Asked Questions About Payroll In Mexico

What is the Minimum Wage in Mexico?

The minimum wage in Mexico is approximately MXN 248.93 per day for most regions. In the northern border zone, the rate is higher at around MXN 374.89 per day due to the increased cost of living.

How Much are Social Security Contributions in Mexico?

Employers contribute between 34% and 50% of an employee’s salary to IMSS, while employees contribute roughly 2.78%. Employers also pay 5% to INFONAVIT for housing benefits.

What are the Mandatory Employee Benefits in Mexico?

Mandatory benefits include a 15-day Christmas bonus (Aguinaldo), paid vacation with a vacation premium, 10% profit sharing (PTU) and contributions to IMSS and INFONAVIT.

How Often are Employees Paid in Mexico?

Employees can be paid weekly, bi-weekly, semi-monthly or monthly. The most common pay frequency is semi-monthly, with payments on the 15th and last day of each month.

What is the State Payroll Tax in Mexico?

The state payroll tax varies by region, generally ranging between 1% and 3% of gross salaries. This tax is paid solely by the employer.

Do Companies Need to Issue Pay Slips in Mexico?

Yes, employers must issue electronic pay slips (CFDI) for each payment, detailing gross salary, deductions and net pay. These are mandatory for compliance.

Can Foreign Companies Pay Employees in Mexico Without a Local Entity?

Yes, foreign companies can use EOR or PEO services to handle payroll in Mexico without establishing a legal entity, simplifying tax, social security and labor law compliance.

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Sources:

1. Public Registry of Commerce – Banco de México
2. RFC Registration and Notices – SAT Mexico
3. Other Procedures for Company Registration – Gob.mx
4. INFONAVIT – Mexico’s Housing Fund
5. How to Use an Employer of Record in Mexico – Remote.com
6. Minimum Wage in Mexico – StartOps
7. Electronic Invoicing in Mexico – EDICOM