How to Set Up as an Independent Contractor (Autoempleo) in Mexico
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In Mexico, the lack of quality job opportunities and access to new technologies has pushed many people into self-employment.
According to the Amway Global Entrepreneurship Report in 2020, 35% of Mexicans consider that their country has the technology available that makes entrepreneurship easier. This is especially true for millennials, who only need an internet connection for their professional activities. In the past few years, there has been an essential growth in the number of self-employment through freelancing, such as content writing, web designing, translations, etc. This is a way for them to work without having to be in an office.
The following article will guide you through the process of setting up as a self-employed professional in Mexico.
Disclaimer: Please bear in mind that this article doesn't substitute legal advice. Information in this article was collected from the Mexican government's official website and other online resources. Please always check official websites or seek legal advice before you take action.
Employee VS Independent Contractor
According to the Mexican Federal Labour Law (Ley Federal del Trabajo), an employment relationship is characterized by the fact that the employee is subordinated to personal service to the employer, in exchange for the payment of a wage. An employer can control and direct the employee's work. Labor relationships are regulated by the FLL, whereas independent contractors services' are regulated under the civil or commercial codes.
The main difference between the employee and independent contractor status is the subordination; an independent contractor can't be subordinate to an employer, as the employee is.
An independent contractor is not subject to the employer's command regarding the way they need to accomplish the work they were hired for. Unlike the employee, the independent contractor is free to define their work schedule as well as the place to perform the work, for instance. Under Mexican legislation, independent contractors are individuals who render their professional services as contractors, without being subject to subordination.
However, the courts determine whether a person is considered to be an employee or an independent contractor based on how the services are rendered. The title given to the employee or independent contractor, or the type of agreement executed between the employer and the employee or independent contractor is not important.
The business owner needs a tax identification number that is required to pay taxes. It's called RFC number (RFC stands for Registro Federal de Contribuyentes); the number is given by the SAT (Servicio de Administración Tribuataria), which is the Service tax administration in Mexico.
To get the RFC number, you need a CURP (Clave Única de Registro de Población — Unique Population Registry Code), which is a general identification number, an 18-digit social security number for people living in Mexico. This one is given if you are a permanent or temporary resident of the country. The CURP is considered as the key to access the procedures and services offered by the Public Administration agencies. Therefore, if you don't already have it, you must obtain it.
What are the steps to obtain a CURP number in Mexico?
You will need first a copy of your passport or a copy of your immigration (permanent or temporary) visa (but not tourist visa), your resident card and a CURP request letter in Spanish. Then, you must find out where your local CURP government office is and check when they are open for CURP registrants.
Looking to hire independent contractors in Mexico? Here's how to ensure total compliance.
Mexican government promotes independent work
The Mexican government encourages independent work (self-employment) through El Fomento al Autoempleo (FA), which is a sub-program that aims to support jobseekers who wish to develop an activity on their own with the delivery of furniture, machines, equipment and/or tools. In other words, it's an initiative brought by the Mexican government to help set up as independents.
This FA provides in-kind support (furniture, machinery, equipment and/or tools) whose cost can be up to $25,000 per person and up to $125,000 when the number of the Self-Employment Initiative is five or more.
Here are the requirements :
- Complete the "National Employment Service (NES) Application" process.
- Fill out and sign under protest the form "Applicant Registration"
- Be a job seeker
- To be 18 years old or older
- Have at least six months experience in the activities related to the business to be undertaken, which will be confirmed in the interview with the job applicant.
- In the case of not having experience or knowledge, these people will have the option to participate, previously, in a training course of the Bécate subprogram whose specialty must correspond to the business project.
- Have an income of less than six monthly minimum wages in your family nucleus.
- Contribute their resources for the operation of the business corresponding to fixed and working capital.
- Prepare and deliver the business project proposal.
- The members of the business must sign the "Letter of Commitment", "Carta Compromiso".
The required documentation should be submitted in one original and one legible copy.
Social security for self-employed
As self-employed, contributions for health services and private pensions are not mandatory but desirable. Independent contractors are not entitled to benefit from the employment rights provided to employees.
The Mexican Institute of Social Security (Instituto Mexicano del Seguro Social) is an institute you can enroll for your healthcare.
Misclassification of an employee as an independent contractor in Mexico
Misclassification of employees as independent contractors allows companies to avoid or reduce, its labor obligation or employees' benefits. Since employees are falsely considered as independent contractors, the employees don't receive work protection such as the minimum wage, the overtime compensation, the unemployment insurance, or the workers' compensation. It also has financial consequences for the government, such as lower tax revenues.
Mexican Federal labor law (Ley Federal del Trabajo) is an employee protective law. Significant fines are planned on companies that use arrangements as contractors to avoid their legal duties. In Mexico, employees can share in 10 percent of their employer's profits, since there is an obligation of profit-sharing between employers and employees (it's called the Participación de Los Trabajadores en las Utilidades, cf. art. 117 and following of the Ley Federal del Trabajo). It means that, in addition to the fines, employees should have back what they would have received from the beginning, as employees. Also, if the employer doesn't fulfill this obligation, a fine in the amount of 250 to 5,000 times the general Mexican minimum wage could be imposed on the employer.
Contractor tax practice VS employee tax practice
Income tax must be paid by the employee ("ISR", is the acronym in Spanish).
The employer, for its part, must withhold and pay this tax on the employee's behalf. Furthermore, the employer has to pay 5% of the worker's salary to the National Housing Fund for Workers (INFONAVIT), which is the largest mortgage lender in Latin America. Those contributions are also considered as taxes.
Employers are responsible for withholding and paying the employee's social security dues, as well as for the payment of its own.
Concerning independent contractors, as long as their income is considered as revenue, there is an obligation for paying ISR.
Also, provisional withholdings from the independent contractor's revenue can be made by the beneficiary of the services.
The services the independent contractor provides are subject to Value Added Tax (VAT) payment. VAT in Mexico is levied for the provision of independent services, just like in other countries.
The value-added tax (or "IVA" for its initials in Spanish) is equal to 16% of the sum of the professional fees he charged to the company.