Mexico
This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.
Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations.
The national currency is the peso (MXN). In 2020, MXN 21.56 were equal to USD 1. That year, the estimated earnings of the average worker are MXN 131 163 (Secretariat estimate).
1.1. Central government income tax
1.1.2. Tax allowances and tax credits
1.1.2.1. Standard tax reliefs
There are two basic allowances, a yearly holiday bonus and an end-of-year bonus.
Holiday Bonus: Mexico's Labour Law stipulates a minimum holiday bonus of 25% of six days of the worker’s wage. The maximum exemption according to the Tax Law is equivalent to 15 UMAs.1
End-of-year bonus: The minimum end-of-year bonus established in the Labour Law is 15 days of the worker’s wage. The Tax Law exempts end-of-year-bonuses up to 30 UMAs.
1.1.2.2. Main non-standard tax reliefs
Medical expenses (doctor, dental, psychology and nutrition fees and hospital expenses): For expenses made by the taxpayer on behalf of his or her spouse and straight line relatives, the deduction is allowed only if the taxpayer´s relative earns less than the minimum annual wage.
Complementary contributions of certain retirement accounts are considered eligible as long as they do not exceed 10% of taxable income and MXN 158 469 (5 annual UMAs).
Funeral expenses: for the spouse and straight-line relatives up to 1 annual UMA.
Deposits on special savings accounts, payments of insurance premium of pension plans, and for the acquisition of shares of investment societies as long as they do not exceed MXN 152 000.
Health insurance premiums for individuals, if the beneficiary is the taxpayer, and/or his family.
Real interest expenditure of mortgage loans if the value of the property does not exceed MXN 4 843 991. Real interest expenditure is defined as the excess of interest expense over the inflation rate.
Deduction of taxpayer's educational expenditures for himself, on behalf of his/her spouse, parents or children, among others, for the following educational levels.
Since 2016, the limit amount for personal deductions was increased. The new limit is the minimum between 15% of taxpayer's gross income and an amount equivalent to 5 annual UMAs (MXN 158 469 in 2020). The limit does not apply to private school´s tuition, charity donations, complementary contributions to retirement´s personal accounts, professional fees, and medical expenses in the event of incapacity or disability.
1.1.2.3. Employment subsidy credit
The employment subsidy credit is decreasing on workers´ income and is assigned based on a table of income brackets. For monthly income higher than MXN 7 382 no employment subsidy credit is given. Employees with an income tax lower than the credit receive in cash the difference along with their salary. The rest of the workers that receive the credit are entitled to a reduction in their tax burden. The employment subsidy credit is paid by the employers who may credit it against their tax liabilities; the credit therefore represents a fiscal cost for the government.
1.3. Payroll taxes
Mexico does not have a Federal pay-roll tax. However, most States apply a state pay-roll tax with an average rate of 2.53 %. These taxes are not considered in this Report since there are a wide range of practices with respect to the definition of the tax base that does not allow obtaining a reliable estimation.
2.1. Employees’ contributions
Social security contributions are divided as follows:
For sickness and maternity insurance, 0.625% of the workers monthly wage, plus 0.40% of the amount in excess of 3 UMAs. For disability and life insurance, 0.625% of the monthly wage.
In 2020, a ceiling of 25 UMAs applies to the salary that is used to calculate the social security contributions.
2.2. Employers’ contributions
For sickness and maternity 20.40% of the UMA, plus 1.10% of the amount in excess of 3 UMAs, plus 1.75% of the monthly wage.
For disability and life insurance, 1.75% of worker’s monthly wage.
For social services and nursery, 1% of worker’s monthly wage.
For insurance for work injuries of employees, 2.033% of worker’s monthly wage.2
In 2020, a ceiling of 25 UMAs applies to the salary that is used to calculate the social security contributions.
The Social Security Law enacted in July 1997 changed fundamentally the financing of non-government employees’ social security, which shifted from a pay-as-you-go scheme to funded individual accounts. The government does not manage these accounts; new private financial institutions were created specifically for this purpose. However, the contractual obligation is between the workers and the government, not with the private administrator of the funds, because legally they are still considered as contributions to social security, independently of who manages the funds. It should be noted that the federal government also contributes to each pension account, and guarantees a minimum pension to every beneficiary of the social security system, independently of the administration of the funds as well.
4.1. Changes to labour taxation due to the covid-19 pandemic
The Tax Administration Service extended the deadline for filing the individual 2019 annual tax return until June 30, 2020 (originally April 30).
Examples of tax measures at Subnational Governments.
The Mexico City Government extended the deadline to obtain a discount on the payment of the Tax on Vehicle Ownership from the end of March to the end of July. The City Government also announced the deferral of tax returns and payments obligations included in the Mexico City Tax Code, extending the deadline to the end of the month. Tax inspection acts were suspended from March 23rd to May 29th.
Individuals and companies were exempted of surcharges, fines and other expenses generated during the first three bimesters of 2020 for non-compliance with the payment of the property tax. Additionally, a 5% discount was granted on the payment of this tax for the fourth bimester, as well as for advance payments of the tax corresponding to the fifth and sixth bimesters.
The State of Mexico also extended the deadline for the payment of the Tax on Vehicle Ownership to the end of July. The Government also granted a 100% discount in the tax on lodging for the months of April, May, June and July and a 50% discount for the payment of payroll tax for companies with up to 50 employees for April and May.
The Government of the State of Sonora announced for March and April a 50% discount for the payment of payroll tax for companies with up to 50 employees and a 100% discount for the Tax on Lodging. The State Government also announced the deferral for the payment of permits for the sale of alcoholic beverages and for the revalidation of vehicles permits, and also the suspension of tax inspection acts. The measures were extended until June.
5.1. Method used to identify an average worker and to calculate his gross earnings
The income data refer to average workers. It should be noted that in the sample used for this survey, medium and large size firms are over-represented. In Mexico, there are no state or local government income taxes. Information on non-standard tax reliefs is not available.
Figures for 1999 and subsequent years cannot be compared with preliminary figures from previous editions of this publication for two reasons: first, the wage level of the average worker is now based on observed data instead of being estimated; second, social security contributions taken into account no longer include contributions made by employers and employees to privately managed individual accounts. Contributions no longer included in the calculation of social security contributions are specified in the table below.
5.2. Main employees’ and employers' contributions to private pension, health, etc. schemes
The equations for the Mexican system in 2020 are on an individual basis.
The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.
Notes
← 1. For 2020, the value of the UMA is 86.88, mean while the general minimum wage is 123.22 and 185.56 in the northern border region. The municipalities constituting the northern border region are as follows: Ensenada, Playas de Rosarito, Tijuana, Tecate and Mexicali in the state of Baja California; San Luis Río Colorado, Puerto Peñasco, General Plutarco Elías Calles, Caborca, Altar, Sáric, Nogales, Santa Cruz, Cananea, Naco and Agua Prieta in the state of Sonora; Janos, Ascensión, Juárez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides in the state of Chihuahua; Ocampo, Acuña, Zaragoza, Jiménez, Piedras Negras, Nava, Guerrero and Hidalgo in the state of Coahuila de Zaragoza; Anáhuac in the state of Nuevo León, and Nuevo Laredo; Guerrero, Mier, Miguel Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Río Bravo, Valle Hermoso and Matamoros in the state of Tamaulipas.
← 2. The amount of the work injury fee depends on the risk level in which the company is classified. The Mexican Institute of Social Security provided a weighted average rate that considers the economic activities from C to K of the International Standard Classification.