Taxes in Mexico are run by a single federal agency, the Servicio de Administración Tributaria (SAT), and built around two big levies: the Impuesto Sobre la Renta (ISR), an income tax that reaches 35% for individuals and sits at a flat 30% for corporations, and the Impuesto al Valor Agregado (IVA), a 16% consumption tax charged on most goods and services.1datos.gob.mx. Servicio de Administración Tributaria (SAT) – Instituciones Everything else — payroll obligations, invoicing rules, filing calendars — hangs off those two taxes and off one threshold question: are you a Mexican tax resident?
Who Mexico Taxes
Residency decides the scope of your tax bill. If you’ve established a permanent home in Mexico, you’re generally treated as a tax resident. When you keep homes in both Mexico and another country, the tiebreaker is your “center of vital interests,” which turns on two tests: whether more than 50% of your annual income comes from Mexican sources, or whether Mexico is where you conduct your main professional activities. Either one makes you resident.
Residents owe ISR on worldwide income, including foreign investments, pensions, and rental properties abroad. Non-residents pay Mexican tax only on income sourced in Mexico, and that tax usually gets withheld at the source rather than reported on a return the taxpayer files themselves. A foreigner renting out a vacation home in Puerto Vallarta, for instance, pays Mexican tax only on the rental income.
Personal Income Tax (ISR)
Individual ISR is progressive. The lowest bracket starts at 1.92%, and the top marginal rate of 35% applies to annual taxable income above roughly MXN 5.1 million. For 2026 there are 11 brackets in total. Salaried employees have ISR withheld from each paycheck, and if your total compensation stays under MXN 400,000 and you have no other income, you generally don’t need to file an annual return.
Residents can reduce gross income with authorized personal deductions: medical and dental expenses, mortgage interest, private school tuition, and voluntary retirement contributions. The overall cap is the lesser of 15% of gross income or five times the annual UMA, which works out to about MXN 213,973 for 2026. Retirement contributions and education expenses have separate limits outside that cap, and medical expenses escape the cap entirely if you hold a certificate from a government health institution.
Dividends from Mexican corporations get included in a resident’s taxable income, and dividends paid from post-2013 corporate profits also face a separate 10% withholding at distribution.2PwC. Mexico – Corporate – Withholding Taxes The annual individual return is due April 30 for the prior calendar year. A narrow exception applies to people whose only income is bank interest under MXN 100,000.
Non-Resident Withholding on Wages
Non-residents earning Mexican-source employment income face a tiered flat-rate withholding instead of the progressive brackets. The first MXN 125,900 in any 12-month period is exempt. Income from MXN 125,901 to MXN 1,000,000 is withheld at 15%, and anything above MXN 1,000,000 at 30%. Wages are fully exempt if the employer is a non-resident with no Mexican permanent establishment and the employee spends fewer than 183 days in Mexico within any 12-month window.
Value Added Tax (IVA)
IVA works like a European-style VAT. Businesses charge it on sales, reclaim it on purchases, and remit the net difference to the SAT each month. The standard rate is 16% nationwide, with a reduced 8% rate in designated border municipalities under a presidential decree meant to stimulate those regions.
Some transactions carry a 0% rate, including exports, basic food staples, and prescription medicines. Zero-rated sellers still get to reclaim the IVA they paid on inputs, so the zero rate produces refunds in practice. That’s very different from IVA-exempt transactions, which include residential property sales, education, and healthcare: you don’t charge IVA to the buyer, but you also can’t recover the IVA you paid on related purchases. Classifying each sale correctly is one of the most common compliance headaches for Mexican businesses.
IVA on Digital Services
Since June 2020, foreign companies selling digital services to consumers in Mexico must register with the SAT, collect 16% IVA, and file returns. The rule covers streaming platforms, software subscriptions, cloud services, app stores, and similar products. Providers that fail to register or miss three consecutive monthly returns risk having the SAT block internet access to their platforms inside Mexico. For 2026, the rules expand with new withholding obligations and electronic invoicing requirements for digital platform operators.
Corporate Income Tax
Mexican corporations pay a flat 30% ISR on worldwide taxable income (gross revenue minus authorized deductions). Foreign companies operating through a permanent establishment pay the same 30% on the income attributable to that establishment. When profits flow out to non-resident shareholders, dividends paid from post-2013 earnings carry an additional 10% withholding tax.2PwC. Mexico – Corporate – Withholding Taxes Distributions from pre-2014 profits don’t get that extra layer.
Deducting a business expense in Mexico is stricter than in many countries. The expense generally must be backed by a valid CFDI (electronic invoice), be strictly necessary for the business activity, and be paid through traceable means such as bank transfer or credit card rather than cash. Transactions with related parties, whether domestic or cross-border, must be priced at arm’s length and supported by contemporaneous transfer pricing documentation. Miss any of these and the SAT can disallow the deduction outright.
RESICO for Small Taxpayers
The Régimen Simplificado de Confianza is Mexico’s streamlined regime for small taxpayers. Sole proprietors and freelancers with annual gross income up to MXN 3,500,000 can opt in and pay ISR at rates between 1.0% and 2.5% of gross income, depending on how much they earn. That compares with standard progressive rates that can hit 35%. RESICO taxes gross revenue rather than net profit, so there are no deductions to track. Small corporations have their own version with a higher income ceiling and different rules.
The tradeoff is inflexibility. RESICO participants can’t claim the personal deductions available under the general regime, and they must issue CFDIs for every peso of income. Missing three consecutive monthly returns can get you ejected from RESICO and pushed back into the standard regime retroactively, which is an expensive surprise.
What Employers Actually Pay
Hiring in Mexico costs well more than the salary line. Employer contributions to the Instituto Mexicano del Seguro Social (IMSS) cover healthcare, disability, maternity, retirement, and workplace risk insurance, generally running 24% to 38% of the employee’s gross base salary depending on industry risk classification and wage level. On top of IMSS, employers pay 5% of each employee’s integrated daily salary to INFONAVIT, the national housing fund, on a bimonthly basis. That INFONAVIT contribution is capped at a salary of 25 times the daily UMA.
Each state also levies its own payroll tax, the Impuesto Sobre Nómina (ISN), typically between 2% and 5% of total taxable payroll, paid directly to the state. And most employers must distribute 10% of annual taxable income to employees under the Participación de los Trabajadores en las Utilidades (PTU) program. A 2021 reform capped each employee’s individual PTU payment at the greater of three months’ salary or the average of their PTU over the prior three years, whichever benefits the employee more. The PTU distribution is due by May 30 for corporations and by June 29 for individuals with employees. Stack IMSS, INFONAVIT, ISN, and PTU together, and total employer-side labor costs can easily add 35% to 50% on top of gross wages.
How the US-Mexico Tax Treaty Fits In
The bilateral income tax treaty prevents most income from being fully taxed in both countries. For US citizens and residents paying Mexican ISR, the main relief is the foreign tax credit, claimed against US federal liability on IRS Form 1116.3Internal Revenue Service. Instructions for Form 1116 (2025) The credit is limited to the US tax that would otherwise apply to the same foreign income, so it offsets your US bill but doesn’t generate a refund beyond it.
The treaty also lowers withholding on cross-border payments. Dividends from a Mexican company to a US beneficial owner are capped at 5% if the recipient owns at least 10% of the voting stock, or 10% otherwise. Interest gets reduced rates too, as low as 4.9% for bank loans and publicly traded bonds.4Internal Revenue Service. United States – Mexico Income Tax Convention
Retirement income splits along an important line. A private pension from past US employment paid to a Mexican tax resident is taxable only in Mexico. US Social Security benefits, though, remain taxable only in the United States even if the recipient lives in Mexico.4Internal Revenue Service. United States – Mexico Income Tax Convention Annuities follow the pension rule and are taxable only in the country of residence. Getting this wrong leads to double-reporting and overpayment on both sides of the border.
Registering, Invoicing, and Filing
Anyone with economic activity in Mexico, whether employed, self-employed, or running a business, needs a Registro Federal de Contribuyentes (RFC), the country’s tax ID number.5Gobierno de México. Inscription at the Federal Taxpayer Registry The RFC is required to file returns, issue invoices, open bank accounts, and interact with the SAT at all. Foreign nationals need valid immigration documents and proof of a Mexican address, and generally have to book an in-person appointment at a SAT office.
Every business and self-employed taxpayer must issue electronic invoices, called CFDIs (Comprobantes Fiscales Digitales por Internet), for every transaction. The current mandatory version is CFDI 4.0, which pre-validates the buyer’s tax data — RFC, name, tax regime, and postal code — before the invoice can be stamped. An invoice that fails validation won’t process, so keeping your SAT registration current is non-negotiable.
Most taxpayers file monthly provisional returns for both ISR and IVA, covering the preceding month’s income, expenses, and consumption tax activity. The annual individual ISR return is due by April 30; the annual corporate return by March 31. Every taxpayer also needs an active e.firma (electronic signature) and must enable their Buzón Tributario, the SAT’s official digital mailbox for notifications and legal communications. Starting January 1, 2027, failing to enable the Buzón Tributario will itself be an infraction subject to fines.6Servicio de Administración Tributaria. Buzón Tributario – SAT
Penalties for Getting It Wrong
SAT enforcement runs from fines to criminal prosecution. Late or missed returns carry fines of roughly MXN 1,400 to MXN 17,370 each under the Código Fiscal de la Federación. Incorrect or improperly formatted CFDIs draw MXN 400 to MXN 600 per invoice, which adds up quickly at volume. Failing to maintain proper electronic accounting brings MXN 5,000 to MXN 15,000 per omission.
The heavier tool is suspension or cancellation of your digital seal certificates, which shuts down your ability to issue invoices and effectively halts business activity. Repeated filing failures can trigger this. Deliberate tax fraud can lead to imprisonment. The SAT generally has five years from the filing date to audit and assess additional tax, and that window stretches to ten years if the taxpayer never registered, failed to keep required records, or didn’t file at all.