How to Find and Pay Remote Contractors in Mexico
Right next door to the US, Mexico is a popular place for US employers to hire remote contractors. What should you consider when hiring in Mexico, and what are the best ways to find and pay contractors there?
Published on October 22, 2021
Latin America has many opportunities for those seeking to hire from an international talent pool. One of the most common places that American companies look to hire in Latin America is Mexico. The exchange rate from US dollars to Mexican pesos is favorable for US companies, and because of Mexico's geographic proximity, it's easy to collaborate and communicate with its remote workers.If you're looking to hire independent contractors or employees in Mexico, you will need to pay attention to the qualifications that delineate independent contractors and employees.
EmployeesIn an employer-employee relationship, the employer manages the worker's schedule and instructs the worker on their duties. Full-time employees are given a written contract that sometimes offers employee benefits, such as health care, parental leave, and vacation pay. Employees are also entitled to severance pay if their employment is terminated.Under Mexican Federal labor law, known as Ley Federal del Trabajo or colloquially as FLL, an employment relationship is contingent on whether a worker is subordinate to their employer, performing professional activities in exchange for compensation. Companies must share 10% of their profits with employees. If employers fail to do this, a fine of $900 to $18,000 USD may be levied.
Tax obligations for employeesA company that hires a team of employees should know that as the employer, they are responsible for payroll taxes, which includes the employees' tax withholding, and social security. To be recognized as employers, companies with employees in Mexico must not only report taxes to Mexico's internal revenue service, known as Servicio de Administración Tributaria (SAT), but they must register their employees with the Mexican Social Security Institute (IMSS) and pay social security contributions and profit sharing.
Independent contractorsAn independent contractor works independently and receives compensation for their professional services, but generally they do not receive benefits such those stated above for employees. They are also not entitled to things like paid leave, or severance pay if an employer ends their employment relationship with them. Contractors do not receive minimum wage, or overtime compensation for extra work.One benefit to being a contractor is that one can manage their own work schedule and can work for more than one employer. Independent contractors work as their own entity, and usually use their own equipment to provide a service.The economic landscape in Mexico generally relies on contract work. In fact, more than half of Mexico's workforce relies on informal contract work, but amendments to the Ley Federal del Trabajo has required that companies must keep their contractors' conditions for working in writing.
Tax obligations for independent contractorsIn many countries, including Mexico, tax laws dictate that independent contractors have withholding obligations for filing and paying taxes. An independent contractor is responsible for their own social security withholding. Contractors pay income taxes, or Impuesto Sobre la Renta (ISR), on any compensation they received in exchange for professional services they provided to a company in Mexico.Recruiting independent contractors in lieu of hiring employees is an excellent option for a company that has an immediate, short-term project to hire for. It's also typically a cost-effective option for businesses, as they are not responsible to tax agencies for taxes that their independent contractor may owe.If you’re looking to hire an independent contractor, make sure you distinguish that relationship from an employee relationship when you make a job offer.
Misclassification of a worker 🚫One of the riskiest mistakes foreign companies can make is overlooking legal requirements for employees versus contractors. Misclassifying a worker may result in significant fines or even a lawsuit.It's common for some global businesses to hire contractors because the company can avoid becoming a taxable presence in Mexico. Moreover, some companies do not want to be liable for employee benefits or payroll taxes. One of the pitfalls of hiring foreign contractors can occur when a company chooses to hire additional personnel to perform most of the duties of an employee, which can result in grave penalties for an employer.Just this year, the Mexican government changed Mexican federal labor law with an amendment that penalizes employers for subcontracting; in other words, companies who misclassify employees as subcontractors may be subject to fines of up to $222,000. Company representatives may also face criminal charges from the Mexican government.Here is an example of the repercussions of misclassification: someone who has been hired as a contractor in Mexico may argue that they are an employee when their relationship with their employer is terminated. They may argue that they are entitled to severance pay because of the nature of their work. They could also argue that they are owed back pay for their services, or backpay for benefits that they would otherwise have been paid as an employee to the company.If you are a business owner hiring independent contractors in Mexico, make sure your independent contractors are registered with the Mexican tax authorities as independent service providers. It's also wise to save and record payment receipts.
Expats and the US-Mexico Tax Treaty 🌐As of 2020, over 1 million expats are reportedly living in Mexico, with American expats representing about 65 percent of that group that has either a temporary or permanent visa. An independent contractor becomes a tax resident of Mexico if 50% of their income received in a calendar year is from an employer in Mexico.Under the US-Mexico Tax Treaty, the US can tax the income of their citizens, as well as any tax resident from the States who lives and works in a foreign country. Fortunately, the treaty includes provisions that prevent Americans from having to pay tax in Mexico in addition to the United States.
How to find the right independent contractor or employeeSo how do you find exceptional global talent in Mexico? To hire the best talent, here are some tips for advertising a job opening.
Role descriptionUse detailed role descriptions as well as important information about your company in the listing. The potential foreign contractor or employee will show more interest if they have information about their pay and the type of service you need.
TranslationTo make your job listing more accessible to bilingual or Spanish speakers, make sure you use a Spanish translator to translate the ad into Spanish. Expect to receive some applications in Spanish regardless, even if you request that applications be submitted in English.
Sorting through applicationsYou can sort through job applications manually, or you can use hiring software to sort through them, such as CodeSignal and Codility. A hiring software such as Greenhouse also offers translation services as well for interviewers hiring non-native speakers. For translating a company's hiring information or contracts, there are also translation services such as AMTRAD and PRECISA Global that can help.
InterviewsThese days, virtual interviews are commonplace, and if you’re hiring from overseas, that’s obviously your most convenient option for hiring independent contractors. Again, unless you’re strictly hiring English speakers, try to learn a few Spanish phrases before the interview. It will go a long way to make the candidate feel welcomed.
Making international payments 💸One challenge that Mexico is facing is its citizens' accessibility to financial inclusion, meaning that a majority of the country's citizens do not have bank accounts or digital accounts. The World Bank reports that only 37 percent of adults have accounts, and just 32 percent have made or received digital payments, which is especially low, given that other countries with similar levels of development have more financial inclusion.What does this mean for hiring in Mexico? Your new hires may need to set up bank accounts first, if they do not already have one. Once they have set up their accounts, though, you have many options to choose from, when it comes to paying them. Here are a few to consider.
Bank transfers using SWIFT 🏛The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a network used by financial institutions around the world, and many companies find it useful to facilitate international payments.The service ensures that the income for an independent contractor makes it into the contractors' bank accounts. It's considered a very safe and secure option, but one of the cons of SWIFT is that there are bank fees that can add up and deduct money from your worker's pay as the payments get transferred to them. SWIFT payments are typically routed through multiple banks before they reach the contractor’s bank, and each bank can deduct a fee from the funds being transferred. The fees aren’t consistent, either, and no one likes surprises.Bank transfers such as these make it hard for employers to plan ahead: even if the same banks are used as previously, the cost may be different each time.
Online money transfer companies 💳Money transfer companies typically have better markups on exchange rates than banks do. Their services are online, too, which makes the process convenient. Popular online transfer companies include Remitly, Xoom (owned by PayPal), and Wise (formerly Transferwise).One downside to money transfer companies is that sometimes these services require that customers (i.e. payees) use company-issued debit cards, which charge a fee every time it is used. And even though a transfer company's markups may be better than those of banks, these companies often still charge percent-based fees or add markups to exchange rates.
Traditional money transfer services 🏦Companies like MoneyGram and Western Union have both online services and physical locations in the US and in Mexico, making them easy to find. They typically have better markups on currency rates than banks do, but they still charge percent-based fees or add markups for currency exchange.
Cryptocurrencies 🤑While there are countries that recognize cryptocurrency as legal tender, Mexico is not one of them. In June of 2021, Mexican Finance Minister Arturro Herrara announced that crypto would not be recognized as legal tender, mere hours after billionaire Ricardo Salinas Pliego, a chairman of Grupo Salinas, announced that he was working to make Banco Azteca the country's first bank to accept crypocurrency. Grupo Salinas is a parent company of Banco Azteca.Ironically, Mexico is the headquarters of Bitso, which is the largest cryptocurrency exchange in Latin America, with a $2.2 billion valuation. The ban is unlikely to be lifted any time soon, so any US company hoping to minimize transfer fees with crypto in Mexico are out of luck.
Payment servicesCompliance should be a priority for a business hiring internationally, and it’s important that a company offset the risk of accidentally overlooking labor laws, local legislation, and/or tax obligations. A service that specializes in compliance, among other skills, is critical to staying organized.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
How Pilot can helpPilot can help you manage everything from figuring out whether to classify international team members as employees or contractors to sending payments to your global team. It can be hard and time-consuming for a foreign employer to navigate local laws, employment contracts, compensation, paid leave, and other benefits in another country. Pilot's team of experts can help answer these questions and more. Pilot’s own team is fully distributed around the world, and we understand the complexities of hiring and running payroll and benefits in multiple countries.
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