In Mexico there are two taxes very important and that practically nobody is saved from paying. One is the VAT (Value Added Tax), which is currently 16% on any purchase made. The other is the ISR or Income Tax, which applies to the income of natural and legal persons (companies). Although the first is a fixed percentage, the second is more difficult to calculate, since it depends on various variables.
The ISR is a tax burden that is applied to the income obtained that increases the wealth of a taxpayer. It is a direct tax, since it directly taxes the sources of wealth. In contrast, indirect taxes are those that are levied on consumption, such as VAT and IEPS (Special Tax on Production and Services).
It is a fundamental tax for the country, since it represents a good part of the collection of government revenues. In 2021, the ISR contributed almost 44% of the income obtained from taxes, as reported by the Tax Administration Service (SAT).
In case of non-compliance with the ISR payment, both natural and legal persons are entitled to an administrative, economic or even criminal sanction, depending on the conditions of the omission.
Who pays ISR?
According to Article 1 of the Income Tax Law (LISR)all natural and legal persons are required to comply with the payment of this tax in the following cases:
1. Those who reside in Mexico regardless of “the location of the source of wealth from which their income comes”.
two. Mexican citizens, either by birth or by naturalization, who reside abroad and “have a permanent establishment” in Mexico that reports “income attributable to said establishment.”
3. Residents abroad who obtain “income from sources of wealth located in national territory” (in Mexico), even if they do not have a permanent establishment in the country. Or, if even having it, the perception of your income is not attributable to your establishment as such.
It should be clarified that foreigners residing in Mexico must comply with this tax obligation if the source of their income is in the national territory.
On what type of income is Income Tax paid?
Some of the most common concepts on which ISR must be paid are:
- Salaries received for subordinate service
- Fees for professional activities
- Remuneration to board members, administrators, commissioners and managers
- Leasing and sale of real estate and personal property, as well as their construction
- interest earned
- Awards obtained
- Dividends, profits, remittances and profits distributed by legal entities
- Disposal of assets (delivering ownership of a property from one individual to another, even if there was no economic transaction involved)
- Artistic activities, sports or public shows
- Income from marketing and/or manufacturing
- Timeshare tourist service contracts
- Disposal of shares
- Financial leasing
- Royalties, technical assistance and advertising
However, there are also income exempt from ISR payment. These are, among others:
- Benefits other than salary, such as the vacation bonus, Sunday bonuses, remuneration for overtime or for the provision of services on rest days without replacement, as long as the workers are receiving the minimum wage
- Social security benefits offered by public institutions
- Compensation for work risk or illness
- Retirements, pensions or retirement assets unemployment in advanced age and old age
- Reimbursements for medical, dental, hospital and funeral expenses
- Perceptions due to disability benefits, educational scholarships for workers or their children, and day care centers
- Contributions and income from the housing subaccount
- Income from savings accounts or funds
- Contributions established by the Social Security Law for workers paid by employers
- Premiums for seniority, retirement, compensation or settlement
- Income from inheritance or legacy of movable or immovable property
- Donations between spouses or descendants in a straight line
- Prizes obtained on the occasion of a scientific, artistic or literary contest, open to the general public
- Travel expenses
How to calculate ISR for individuals, step by step
You should know that the ISR is a progressive taxthat is those who earn more, pay more. The rate can vary from 1.9% to a maximum of 35% depending on your income.
This tax is annual, but provisional monthly payments must be made. Employers are required to ‘withhold’ each month the proportional part of ISR from their employees’ payroll, based on gross salary, and report it to the SAT.
Since not everyone pays the same and there are online ISR calculators, it is important to know the procedure and learn how to calculate it yourself, to know how much your contribution is.
This is how it’s done:
1. Identify the base amount
The first step is to know the total income on which we want to calculate the ISR. That is, the gross amount you received in a certain period of time. These can be per day, for 10 days, fortnightly, monthly, bimonthly, quarterly, semester, or annually.
2. Locate your income in the ISR tables
Check the ISR tables corresponding to the year in which the income was made, where the percentage to be applied according to the salary level is defined. The current rates for 2022 were published in the Official Gazette of the Federation (DOF) and you can also find them in Annex 8 of the Resolution of the Miscellaneous Fiscal Current.
There are several tables according to the periodicity mentioned in the previous point. In all of them you will find two concepts: ‘Lower limit’ Y ‘Upper limit’. You must identify in which range the amount you received falls in, to know the amount of the fixed fee and the corresponding percentage or rate.
3. Do the calculations
Once you found between what limits your income is, the fixed fee and the percentage, it’s time to do the calculation with the following steps:
- Subtract the ‘Lower Limit’ from your total income, the result is known as ‘base’ or ‘surplus’.
- Apply the percentage (rate) indicated in the table to the base or surplus.
- The fixed fee is added to the result and that is the amount you must pay for ISR.
To make it clearer, we will put a example of someone who earns 10,000 pesos a month. Based on the 2022 monthly table, the amount is in the range of 9,614.67 (lower limit) to 11,176.62 (upper limit). Therefore, it corresponds to a rate of 16% and a fixed fee of 772.10 pesos.
– Monthly income: 10,000 pesos
– Lower limit: 9,614.67 pesos
– Base: 385.33 pesos
– The rate applies: 16% of 385.33 is 61.65 pesos
– We add the fixed fee: 61.65 + 772.10 pesos
– Total: 833.75 pesos
Thus, the total ISR tax payable for a person who earns 10,000 pesos per month is 833.75 pesos, and he has 9,166.25 pesos left.
How to pay less Income Tax and obtain a ‘credit balance’‘
If you are a salaried worker, it is the obligation of your employer to make your ISR payment and therefore you do not need to present Annual statement or make payments.
However, there are cases in which you must do so: when you work for more than one employer and both withhold ISR, if your annual income is greater than 400,000 pesos or if you receive any extra income from another activity apart from your salary.
It can even be very convenient to recover a part of what you have already paid, thanks to the deductions approved by law. In your tax return you can deduct some expenses you have had, such as:
- School fees and transportation (up to high school)
- Medical, dental, nutritional and psychological expenses
- Hospital expenses and clinical tests
- Magnifiers
- Funeral expenses
- Mortgage loan interest
- Medical and dental insurance premiums
- Medicine, purchase or rental of orthopedic devices
- Contributions to the Afore
These deductions must be subtracted from the total expenses before calculating the ISR. In this way you can have a balance in favor if you have more expenses than income.
In this case, you can request a refund within the five years following the date on which the credit balance was determined. The procedure is done on the official website of the SAT, in the ‘Refunds and compensations’ section within the ‘Procedures’ section. You can check all the details to apply here.
Mairem Del Rio Addicted to watching series and movies, doing (a little) exercise and changing my hair color. I am also a journalist, with more than 16 years of experience and dedicated 100% to digital media since 2011. I have been from reporter and community manager, to editor in various media and agencies. My areas of expertise are as diverse as they are contrasting: entertainment, travel, lifestyle, health, business and finance. Now I am focused on the entrepreneurial ecosystem, cryptocurrencies, NFTs, metaverses and the promising cannabis industry in Mexico.