Understanding Mexico's ISR Tax System

If you earn MXN $40,000 per month in Mexico, about MXN $5,850 goes to ISR income tax and MXN $1,600 to IMSS social security contributions — leaving you with roughly MXN $32,550 net. Here's exactly how Mexico's tax system works, from brackets to deductions to the mandatory Christmas bonus.

What Is ISR?

ISR stands for Impuesto Sobre la Renta — Mexico's federal income tax on all types of income including salaries, freelance work, business profits, and investment returns. It is administered by the SAT (Servicio de Administración Tributaria), Mexico's tax authority equivalent to the IRS.

For employees, ISR is withheld monthly by the employer and remitted directly to the SAT. You don't file a monthly return — your employer handles it. However, if you earn income from multiple sources, have significant deductions, or earn above a certain threshold, you must file an annual declaration (Declaración Anual) in April.

Freelancers and independent contractors under the Régimen Simplificado de Confianza (RESICO) file monthly and apply different simplified rates.

2026 ISR Tax Brackets

Mexico's ISR uses 11 progressive tax brackets. Each bracket has a lower limit, upper limit, fixed fee, and marginal rate. The calculation applies the fixed fee for your bracket plus the marginal rate on income above that bracket's lower limit.

These are the monthly brackets. Annual brackets multiply each limit by 12.

Worked Example: MXN $40,000 Monthly Salary

Let's calculate ISR for an employee earning MXN $40,000 per month gross.

Step 1: Identify the bracket. MXN $40,000 falls in the second bracket ($8,952.50 – $75,984.55).

Step 2: Apply the formula.

• Excess over lower limit: $40,000 − $8,952.50 = $31,047.50
• Tax on excess: $31,047.50 × 6.40% = $1,987.04
• Plus fixed fee: $171.88
• ISR before subsidy: $2,158.92

Step 3: Apply the employment subsidy (Subsidio al Empleo). Mexico provides a subsidy for lower and middle earners that reduces ISR. At MXN $40,000, the subsidy is partially phased out. For a $40,000 salary, the effective subsidy is approximately zero (it fully phases out around $18,674/month).

Step 4: ISR withheld = $2,158.92 per month (approximately $5.4% effective rate).

At MXN $100,000 per month, the calculation puts you in the fourth bracket with an ISR of approximately $20,400/month (20.4% effective rate). At MXN $20,000/month, ISR would be around $700/month (3.5% effective rate) — the subsidy has more impact at lower income levels.

IMSS Contributions

IMSS (Instituto Mexicano del Seguro Social) is Mexico's social security system. Employee and employer contributions are calculated based on your Salario Diario Integrado (SDI) — your daily wage including proportional shares of benefits.

Employee contributions for a MXN $40,000/month salary (approximately MXN $1,333/day SDI):

Your employer pays approximately 25–30% on top of your salary in employer IMSS contributions, covering the same programs at much higher rates.

What IMSS provides: Full access to IMSS hospitals and clinics for you and registered dependents, short-term disability payments (60% of salary for up to 52 weeks), maternity leave, life insurance, and retirement fund accumulation. IMSS healthcare is free at the point of use for covered workers.

The Aguinaldo (13th Month Bonus)

Mexico's Aguinaldo is a legally mandated annual bonus. Under the Ley Federal del Trabajo (Federal Labor Law), every employee must receive at least 15 days of salary paid before December 20 each year. Many employers pay more — 20 to 30 days is common in larger companies.

For a MXN $40,000/month salary, the minimum aguinaldo is:

• Daily rate: $40,000 ÷ 30 = $1,333/day
• Minimum aguinaldo: 15 × $1,333 = $20,000

The first MXN $82.22 per day of aguinaldo is ISR-exempt. So for 15 days, MXN $1,233 is tax-exempt. Everything above that amount is taxed at your marginal rate.

CLT Employee vs Independent Contractor (Honorarios)

Mexico's workforce broadly divides into two tax regimes:

Employees receive formal contracts, IMSS registration, aguinaldo, vacation, profit sharing (PTU), and severance rights. Their employer withholds ISR monthly and pays employer IMSS. This is the majority of formal sector workers.

Independent contractors (régimen honorarios or asimilados) invoice their clients, pay their own ISR quarterly, and are responsible for their own social security. They don't receive aguinaldo, vacation pay, or PTU. The RESICO (Régimen Simplificado de Confianza) introduced in 2022 simplifies this for small earners — monthly rates of 1-2.5% on gross income up to MXN $3.5 million/year.

Misclassifying employees as contractors is illegal and carries significant penalties under Mexican labor law.

Filing Your Annual SAT Declaration

Most employees are not required to file an annual declaration if their only income is from a single employer. However, you must file if you:

• Earn from multiple employers simultaneously
• Have income above MXN $400,000 from a single employer
• Earn income from renting property, investments, or freelance work
• Want to claim deductions that weren't applied by your employer

Annual declarations are due in April for the prior calendar year. The SAT's online portal (sat.gob.mx) pre-fills most data using information employers already submitted.

Common deductions for annual declarations:

• Medical expenses and dental fees: deductible up to 15% of your income or MXN $174,953 (whichever is lower), but only expenses paid by bank transfer or card
• Mortgage interest on your primary residence
• Voluntary AFORE contributions
• Education expenses for dependents (limited to SAT-approved amounts per education level)
• Charitable donations to authorized organizations (donatarias autorizadas)

Keep all receipts (Comprobante Fiscal Digital, or CFDI) — without a valid CFDI, a deduction cannot be claimed.