A common practice for many US companies with activities in Mexico is to pay Mexican residents as independent contractors. US companies do this so they are not liable for Mexican labor obligations, such as payroll taxes and employee benefits. Additionally, they do not want to create a permanent establishment, or taxable presence, in Mexico.
Identifying this practice, the Mexican government recently enacted amendments to the federal labor law that would impose significant fines on companies using alternative legal arrangements to avoid or reduce its statutory labor obligations or employees’ fringe benefits. These amendments could create significant risk to US companies utilizing Mexican resident independent contractors. To limit their exposure, companies should make sure they thoroughly understand the requirements for Mexican independent contractors.
Independent Contractor Requirements
If you answer “yes” to all five questions, you likely have an independent contractor relationship and will be able to avoid Mexican labor obligations and the creation of a permanent establishment in Mexico.
- Is the “independent contractor” involved in all the activities developing in the workplace?
- Are you able to justify the specialized service of your “independent contractors”?
- Does your “independent contractor” have the capability to hire additional personnel?
- Does your “independent contractor” have sufficient autonomy?
- Does your “independent contractor” have more than one source of income?
If you answered “no” to any of the questions above, you may need to re-categorize your independent contractor as an employee.
Now what should I do?
The Mexican Government recently created a new opportunity where independent contractors and the companies they work for can come forward to receive a tax credit of 100 percent for all labor obligations; therefore, this is a great time to get company operations fully integrated and avoid any potential tax penalties.