When establishing a business presence in Mexico, it’s important to implement accurate, legal payroll procedures for your employees. In some ways, this compensation process mirrors U.S. regulations, like how an employer must contribute to social security (the Mexican Institute of Social Security or IMSS) and withhold appropriate taxes.

However, there are also some noticeable differences.

For example, in Mexico, most employers are required to redistribute 10% of the company’s profits to their employees.

How can you comply with Mexico’s profit-sharing rules? In this short guide, we’ll go over the relevant laws and the best strategies for ensuring compliance while reducing your costs.

How Profit Sharing Works

The right to employee profit-sharing is laid out in Mexico’s constitution.

• The constitution establishes a National Commission composed of Mexican government officials, labor representatives, and companies to set a percentage of profits that must be shared with workers.
• Mexican employers are currently required to share 10% of their taxable income (PTU). However, the National Commission can choose to review and update that compensation percentage based on prevailing economic conditions.
• Mexican employers must give an annual report of their PTU to employees and explain how their profit-sharing calculations were made.
• Companies must pay Mexican employees within 60 days of May 31st, while single-member businesses (like sole proprietors) have an additional month and must pay within 60 days of June 30th.

The amount that an individual employee will receive is based on the number of days they’ve worked and their base income salary.

Profit-Sharing vs 401Ks and Retirement Plans

U.S. companies who regularly make contributions to employees’ retirement accounts might think that profit-sharing in Mexico is a similar structure. However, there are important differences.

• 401K contributions are deferred employee wages (they are not drawn from the company’s profits).
• Some employers voluntarily allow U.S. workers to participate in employee profit-sharing to incentivize high performance. Shared profits could take the form of stock options, cash, or retirement account contributions.

However, profit-sharing in Mexico is legally mandated. It’s not a retirement account contribution.

Exceptions to Profit-Sharing

While profit-sharing is broadly required, the Federal Labor Act provides some exceptions.

Companies do not necessarily have to share their profits with everyone who has received a paycheck. According to Article 127 of the FLA, individuals who may not receive a share include:

• Board members
• Partners and stakeholders
• Directors and general managers
• Mexican employees and contractors who worked for fewer than 60 days

Besides these limitations on eligibility, some companies may be completely exempt from meeting Mexican profit-sharing standards. Article 126 excludes the following kinds of companies from obligation:

• Newly formed companies who have been in business for less than one year
• Companies that have been in business for less than two years and are creating a new product 
• Nonprofit organizations with humanitarian missions
• Companies whose taxable profit (PTU) falls below a certain threshold amount set for their industry by the Department of Labor and Social Services (often less than 300,000 pesos)
• Mining and extraction companies in the exploration and development phase

Do you think your company might be exempt based on its Mexico PTU or another factor? Make sure to work with a partner who understands all local regulations. Otherwise, you could face fines.

Fines for Failure to Share Profit

When you’re managing an employee payroll in Mexico, it’s important to comply with all relevant laws and regulations. Otherwise, you could face penalties and legal action.

If you fail to enroll an employee in your profit-sharing program on the first day of the job, you could be fined between $900 and $18,000 USD.

Can Outsourcing Help You Avoid Profit-Sharing?

Many companies find it expedient to outsource some tasks to third-party providers. This can help to lower overhead costs while freeing up time and resources for other purposes. A potential bonus is shrinking the pool of employees who are eligible to receive a share of the company’s profits.

While outsourcing is completely legal, it’s also been abused to avoid profit sharing.

In 2020, President Andrés Manuel López Obrador announced a bill to limit outsourcing and promote equitable profit sharing. Now, it’s only legal to outsource certain predefined specialty services.

Other changes include:

• Companies providing outsourcing services and those using outsourced services will both need to participate in a new national registry. 
• Payments to outsourcing providers cannot be counted as tax deductions or credits for VAT.
• There are increased fines for the illegal use of outsourcing to circumvent profit-sharing requirements.

Establishing Your Payroll in Mexico with NAPS

Nearshoring and reshoring in Mexico have numerous potential benefits, from the wide availability of affordable Mexican labor to reduced transportation costs. However, as in any new business endeavor, there’s a learning curve.

At NAPS, we use our years of experience in Mexico manufacturing to help other businesses pay their employees in a timely and legal manner while fully complying with profit-sharing laws.

Whether you’re interested in building your own operation from the ground up, outsourcing your payroll, or operating under shelter services, we can help you avoid legal exposure while streamlining your manufacturing and distribution.

 

Sources: 

Mexican laws. Mandatory profit sharing. https://mexicanlaws.com/STPS/profitsharing.htm

National Law Review. It’s time for profit-sharing payments in Mexico! https://www.natlawreview.com/article/it-s-time-profit-sharing-payment-mexico

Buztel Long. Critical changes to Mexico’s outsourcing practices loom. https://www.butzel.com/resources-alerts-Critical-Changes-to-Mexicos-Outsourcing-Practices-Loom.html