How to Manage and Pay Contractors in Mexico

Mexico’s diverse workforce makes it an ideal location for hiring independent contractors. From small startups to large corporations, hiring contractors in Mexico can prove to be a lucrative decision. 

What is the difference between an independent contractor and full-time employee in Mexico? 

When you hire contractors in Mexico, you’ll need to be extra careful about distinguishing full-time employees from independent contractors in the eyes of the Mexican government. 

In Mexico, employee-employer relationships are regulated by the Mexican Federal Labour Law (Ley Federal del Trabajo). This law regulates what commercial codes and taxes contractors are required to abide by. 

Some general distinctions between employees and contractors are: 

• Employees are on payroll while contractors are paid per project 

• Contractors file and deduct their own taxes 

• Employees are entitled to benefits while contractors are not 

• Contractors are not entitled to notice or severance

• Contractors set their own hours and completion of projects, while employees have more set working hours  

In general, employees are directly working for a company in Mexico, while independent contractors are hired by a business to complete a specific service or project. 

Misclassifying contractors

Mexico has robust laws in place that favor employees and contractors. 

Make sure you are properly distinguishing between an employee and contractor. According to the Federal Income Statue in Mexico, if you misclassify a contractor in Mexico, your company could be subject to lawsuits. You might also be required to build a permanent establishment in Mexico, which means paying additional taxes and adhering to specific laws.

Employees who are misclassified as contractors in Mexico may be entitled to accrued benefits, social security, and other compensations for the amount of time they’ve been working as an employee but labeled as a contractor. 

How to determine if you need a contractor in Mexico

After deciding whether or not to hire a contractor in Mexico, you’ll need to determine the scope or your project and the amount of time you’ll need the contractor for. 

Although you should always be asking yourself these questions regardless of location, it is especially crucial you’re considering these questions when you’re hiring a contractor in Mexico:

• Do I want to put this person on my payroll, or should they be responsible for their own taxes? 

• Is this person going to be working enough to where they are entitled to benefits and other forms of compensation from my company? 

• What qualifications does this person have that make them specialized to complete a specific project? 

• Do they need to put in bids to compete for these projects, or can I assign them everyday tasks like an employee? 

• Can I give this person independence to complete this project without inserting managerial opinion along the way? 

• How long will it take to complete this project? 

Where to find contractors in Mexico

One of the best ways to find contractors in Mexico is through word-of-mouth referrals. But, without an established business base in the country, you may have to turn to other resources. 

Job boards for hiring contractors in Mexico include:

• Upwork

• Fiverr

• Freelancer

• LinkedIn 

These sites allow you to research what services you need a contractor for and provide reviews on the candidate you plan to hire. 

How to onboard contractors in Mexico

In Mexico, employment agreements are always mandatory, for both employees and contractors. 

Take this requirement as an opportunity to always create a strong independent contractor agreement that details the scope of the working relationship. Putting a clear and detailed independent contractor agreement in place protects both you and the contractor, as well as helps both parties avoid any future misclassification or liability problems. 

Independent contractor agreements outline important details between the contractor and client, including: 

• Description of the services being provided

• Length of the project or service 

• Payment and other billing details 

• Dispute resolutions

How to pay contractors in Mexico

Before the first invoice hits from your Mexican contractor, you’ll need to know exactly how to pay them. 

You have a few options to legally pay independent contractors in Mexico: 

1. Justworks International Contractor Payments. If you are a Justworks customer, you can easily pay contractors using our platform. Using a third-party payroll processing service in Mexico can be tricky because they need to be properly registered with local bureaucracies. 

2. Set up a bank account. You can set up a bank account in Mexico to pay your contractors. However, you’ll normally need to set up an entity within the country and register with the proper bureaucratic organizations (which can take months). 

3. International money order. One of the common ways to pay a Mexican contractor without an entity is to set up an international money order. They can take awhile to process, and the contractor will have to physically deposit the order. This is a good option when you’re only fulfilling one invoice. 

4. Digital wallets. You can set up a digital wallet through multinational peer-to-peer lending companies like PayPal or Zelle. These services help you deposit and transfer money into your contractors accounts. This is perhaps the quickest way to pay contractors without partnering with Justworks or another contractor payment service. Most of these services do charge fees, so be aware of that before choosing this option. 

5. Money transfer services. Another popular option for employers  looking to send large amounts of money across borders is using a money transfer service like Payoneer. These transfers can occur relatively fast and usually ensure a prompt payment. But be aware, if you transfer money in a different currency like USD to pesos, there usually is a conversion fee. 

How can Justworks convert contractors in Mexico to full-time employees 

After establishing a secure employment relationship with your Mexican independent contractor, you may want to bring them on as a full-time employee. 

Justworks makes the process of converting contractors to full-time employees simple. In Mexico, converting a contractor to a full-time employee must be completed in steps and both parties must come to an agreement. 

To convert a contractor to a full time employee you need to: 

• Determine their new hourly rate/annual salary

• Calculate employment taxes and deductions

• Factor in employee profit sharing (PTU)

• Determine benefits and bonuses

At Justworks, we have expert support that can  guide you through the conversion process. 

Determine new hourly rate/annual salary

As contractors normally charge more for their services because they pay their own taxes and don’t receive benefits, the rate that they charge may not easily align with how much someone performing those same tasks would be paid at your company as a full-time employee. 

Using an EOR service like Justworks can easily help you configure a contractor's hourly rate when you convert them to a full-time employee. Setting a new payment rate might be the most difficult step when deciding how to transition contractors to full-time employees, since you will need to consider other forms of compensation, like PTO, equity, payroll taxes, and health care. 

Employers take on more expenses for their full-time employees, and we can help you figure out what expenses are required when hiring employees in Mexico. 

Employment taxes

Using Justworks can help you determine exactly what taxes need to be deducted from your employee’s paychecks. Remember, in Mexico, tax practices and withholdings are different for full-time employees and contractors. Contractors have to deduct their own self-employment taxes. 

Required employment taxes in Mexico: 

• 7.85% for social security (IMSS)

• Income taxes ranging from 1.92%-30%

• State income taxes are levied at the individual state level and range from 1%-3%

Profit sharing

Employers are also required by law in Mexico to profit share with their employees. This means that 10% of the total taxable income made by a business has to be shared with all employees (some exceptions apple).

Determine benefits and bonuses 

Another crucial component when converting contractors to employees is determining their benefits and bonuses. As a global EOR service, we know exactly what additional compensation and benefits full-time employees are entitled to in Mexico.

Examples of mandatory benefits in Mexico include:

• Social security 

• Aguinaldo (Christmas bonus) 

• Sick leave

• Paid maternity and paternity leave

• Health care

How Justworks Can Help 

Justworks’ global EOR is the solution for small businesses looking to easily hire talent in countries where they don’t already have a legal presence. 

Justworks has direct entities in 11 countries, with the ability to hire in 100+ additional countries upon request through our trusted local partners. You can fearlessly handle HR essentials like payroll, benefits, local compliance, and more. 

Learn more about our EOR services, and get started today!