A startup founder thought hiring three engineers in Guadalajara would be straightforward. Six months later, the company faced a $180,000 IMSS audit for underreported contributions, plus penalties for missing aguinaldo payments and incorrect worker classification. The team was strong, but the compliance approach nearly sank the business.
Mexico offers significant nearshoring advantages, but employment compliance is not optional. This guide explains what US startups need to know before hiring their first employee in Mexico.
Quick answer: What does it cost to hire employees in Mexico?
Hiring employees in Mexico under direct employment typically costs 42–45% above base salary once mandatory employer contributions and statutory benefits are included.
Gross salary benchmarks explain what engineers earn, while compliance costs explain what employers pay. Both are required to model true nearshore hiring costs.
Important context: Companies hiring through an Employer of Record (EOR) may see lower effective overhead due to pooled compliance, benefits administration, and pricing efficiencies, compared to direct employment.
US startups hire in Mexico for time zone alignment and 40–60% gross salary savings versus US roles, but non-compliance can trigger fines, back pay liabilities, and enforcement actions under post-2021 labor reforms.
Table of contents
- Understanding Mexico’s employment law framework
- IMSS (Mexican Social Security) compliance
- ISR (income tax) withholding requirements
- Mandatory annual benefits
- Mandatory leave and time off
- Severance pay and termination rules
- Payroll compliance and CFDI requirements
- Total employment cost breakdown
- Common compliance pitfalls for US startups
- Employer of Record (EOR) solutions
- Why US startups hire Mexican engineers
- Recent legal reforms (2025–2026)
- Frequently asked questions
Understanding Mexico’s employment law framework
Does Mexico recognize at-will employment?
No. Mexico does not recognize at-will employment. All employment relationships require written contracts and justified cause for termination.
Contracts must specify duties, salary, work location, and benefits before work begins. Missing or vague terms are interpreted in the employee’s favor during disputes, often increasing severance and liability exposure.
As of 2026, the minimum wage is MXN $315.04 per day in the general zone and MXN $440.87 per day in the northern border region. Discrimination based on race, sex, age, disability, or religion is prohibited and actively enforced.
How does Mexico classify employees vs. contractors?
Worker classification in Mexico is determined by subordination, not contract labels.
If a company controls schedules, supervises work methods, or integrates the worker into internal operations, authorities will classify the individual as an employee regardless of contractor agreements. Mexico's 2021 outsourcing reform significantly increased enforcement and penalties.
Misclassification can result in back payment of IMSS, PTU, aguinaldo, vacation, and severance for the entire relationship period. In cases of intentional fraud, criminal liability may apply. Companies may also lose intellectual property rights to work created by misclassified workers.
IMSS (Mexican Social Security) compliance
What is IMSS and who must register?
IMSS (Instituto Mexicano del Seguro Social) is Mexico’s mandatory social security system. All private-sector employees must be registered from their first day of employment.
Employer contributions generally range from 24–38% of gross base salary, while employee contributions vary based on wage level and risk classification. Delayed or missing registration triggers compounding penalties and automated audits.
What does IMSS cover?
IMSS provides healthcare, pensions, disability benefits, maternity leave, and workplace risk insurance. Sick leave pays 60% of registered salary after a three-day waiting period, with coverage extending up to 52 weeks for serious illness.
Maternity leave provides 12 weeks paid by IMSS. Employers must maintain the employment relationship and coordinate benefits, including salary differences above IMSS caps.
INFONAVIT housing contributions
SBC (contribution base salary) calculations
ISR (income tax) withholding requirements
What are Mexico’s income tax rates?
ISR (Impuesto Sobre la Renta) is Mexico’s federal income tax. Rates range from 1.92% to 35%, with most software engineers falling between 15–30% based on income level.
Low-income workers may qualify for employment subsidies that reduce withholding obligations.
What are employer withholding obligations?
Employers must withhold ISR monthly and remit payments to SAT (Mexico’s tax authority) by the 17th of the following month. Errors or late payments create liabilities for employers, not employees.
State payroll taxes
Mexican states impose payroll taxes ranging from 1–3%. Tax liability is determined by the employee’s physical work location, not the employer’s registered address.
Mandatory annual benefits
What is aguinaldo?
Aguinaldo is a mandatory annual bonus equal to at least 15 days of gross base salary. It must be paid by December 20 each year and applies to all employees on a prorated basis.
Failure to pay can result in fines exceeding $55,000 USD per violation. The first 30 days of aguinaldo are exempt from ISR taxation.
What is PTU (profit sharing)?
PTU requires companies to distribute 10% of taxable profits to employees annually. Payments are capped at three months’ salary or the three-year average, whichever is higher, under a 2024 Supreme Court ruling.
Companies without taxable profits are not required to pay PTU, which is why many early-stage startups have no PTU obligation despite full compliance.
Mandatory leave and time off
How many vacation days are required?
Parental leave requirements
Maternity leave provides 12 weeks paid by IMSS. Paternity leave provides five paid days after birth or adoption. These rights apply equally to remote employees.
National holidays
Severance pay and termination rules
How much does it cost to terminate an employee?
Unjustified termination requires constitutional severance, including:
- 90 days of integrated salary
- 20 days per year of service
- Seniority premium
- Accrued benefits
Termination costs often exceed several months of salary, making performance documentation and process discipline critical.
Termination with cause
Even with justified cause, employers must pay accrued benefits and meet strict procedural requirements. Errors convert justified termination into unjustified termination.
Payroll compliance and CFDI requirements
What is CFDI?
CFDI (Comprobante Fiscal Digital por Internet) is Mexico’s mandatory electronic payroll receipt system. CFDI 4.0 has been required since 2023.
Every payroll payment requires a CFDI itemizing wages, deductions, and contributions. SAT and IMSS cross-reference CFDIs electronically during audits.
Payroll records must be retained for at least five years in electronic format.
Total employment cost breakdown
Under direct Mexican employment, total employer cost typically ranges from 42–45% above gross base salary.
Example for an employee earning MXN 50,000 per month (gross base salary):
- Base salary: MXN 50,000
- IMSS: ~30%
- INFONAVIT: 5%
- State payroll tax: ~3%
- Prorated annual benefits: ~4–5%
Estimated total monthly cost: MXN 71,250
Companies using an Employer of Record may experience lower effective overhead due to operational efficiencies, while still maintaining full statutory compliance.
Mexico payroll compliance checklist for US companies
- Written employment contract before start date
- IMSS registration on day one
- Correct SBC calculation
- Monthly ISR withholding and SAT remittance
- State payroll tax registration
- CFDI 4.0 issued for every payroll run
- Aguinaldo paid by December 20
- PTU calculated and paid by May 30 (if profitable)
Employer of Record (EOR) solutions
What is an Employer of Record?
An Employer of Record (EOR) acts as the legal employer while you manage day-to-day work. The EOR handles payroll, taxes, benefits, and compliance.
EORs allow companies to hire in Mexico within days, avoiding entity setup costs of $15,000–$50,000 and timelines of 3–6 months.
Should you use an EOR or open a Mexican entity?
EORs are best for teams under 50 employees or early-stage expansion. Larger, long-term teams may benefit from entity setup if internal compliance expertise exists.
Why US startups hire Mexican engineers
Mexico has more than 700,000 software developers, strong English proficiency in major tech hubs, and real-time collaboration across US time zones. Gross base salaries typically fall between $53,000 and $63,000 USD, based on verified 2026 payroll data.
Recent legal reforms (2025–2026)
- Ley Silla (Chair Law): Requires seated rest options (effective June 2025)
- Expanded recognition of digital platform workers under IMSS
- Proposed reduction of the workweek from 48 to 40 hours beginning in 2027
Frequently asked questions
Do I need a Mexican entity to hire employees?
No. You can hire through an Employer of Record without establishing a local entity.
Can I fire employees at will?
No. Mexico requires justified cause and formal termination procedures.
Do remote employees receive the same benefits?
Yes. Location does not reduce statutory employment rights.
Hire compliantly in Mexico with Howdy
Howdy helps US startups hire and manage Mexican engineers through compliant Employer of Record and payroll solutions, without entity setup or compliance risk.