The Payroll Tax (ISN) is a fee that employers must cover when carrying out transactions in an employment relationship.
What is Payroll Tax?
Also known as the tax on expenditures for remuneration, the ISN is the tax applied to payments in cash, in service, or kind for remuneration of work performed in a subordinate relationship (from a worker to an employer).
It is mandatory for companies for each transaction made regarding their employees, including concepts such as wages and labor benefits.
What is included in the ISN?
Expanding the reference to the concepts covered by the ISN, we find:
- Salary
- vacation bonus
- Bonus
- Bonuses and prizes
- commissions
- Extra hours
- seniority bonus
- compensation
- Payments to administrators, directors, or members of surveillance or administration of companies and associations
The concepts that are not included in this tax are:
- Funeral expenses
- Contributions for the Retirement Savings System
- Equipment installation expenses
- Infrastructure or materials needed for work
- Retirement and pensions
- IMSS or ISSSTE premiums
- Travel expenses
- Representation expenses
- Compulsory insurance fees
- Social security benefits
- Utilities
Who must pay the Payroll Tax
The ISN is an obligatory requirement for business owners and all types of employers, employers being understood as natural or legal persons. Its application starts from the first payment made to a worker.
It must be applied when having personnel in a certain state of the Mexican Republic, regardless of whether the company has its fiscal domicile outside of it.
How is the Payroll Tax declared?
Your declaration is monthly and must be made before the 17th of each month before the Secretary of Finance of the corresponding federal entity.
- The procedure that is carried out online and for which it is necessary to have the signature (before FIEL).
- The employer must declare the suspension of activities if this is the case.
- Although its mandatory nature does not extend to the entire country, in addition to the fact that its amount and its laws are variable, breach of duty can lead to fines and penalties depending on each local case.
Being an employer comes with important responsibilities. Making sure all workers are properly classified as employees or independent contractors and making sure taxes are withheld and paid promptly are critical.
This fact sheet, the nineteenth in the Tax Gap series, helps business owners better understand their payroll tax responsibilities and how to classify workers.
It is a common mistake any time a person is classified as an independent contractor when they work part time or earn less than $600 per year. Part-time work status and the number of hours worked are generally not factors that determine whether a worker is an employee or an independent contractor.
Worker Classification
Employers must withhold income tax and social security tax from employees’ paychecks. Instead, independent contractors are responsible for reporting and paying their income taxes and social security taxes.
Businesses use a few factors to determine how to classify their workers, including the degree of control the business has over its workers. In general, the more control the business has over a worker, the more likely the worker is an employee rather than an independent contractor.
The facts that provide evidence on the degree of control and independence are classified into three categories:
- Control over operation
- Financial control
- relationship class
Control over performance establishes whether the business has the right to direct and control how the worker performs the task for which he or she was hired. Generally, anyone who performs services for you is your employee if you can control what is done and how it is done. This is so even if you offer the employee freedom of action. What is important is that the employer has the right to control the details of how services are performed. Such details include:
- When and where to do the work
- What tools or equipment to use
- Which workers to hire or to help with the work
- Where to buy supplies and services
- What job has to be performed by a particular person
- What order or sequence will be followed
Financial control establishes whether the worker can affect financial decisions. Does the worker have a significant investment in goods or tools? Are there unreimbursed expenses, which the worker has to cover from his account? Are the worker’s services available to the public? What is the method of payment: Do they get paid if the job is completed or not, or do they get paid only if they finish the job? Independent contractors can make a profit or a loss on a job. Can the worker make business decisions that affect their bottom line?
The relationship between the parties establishes whether or not there is a contract between the worker and the business and how it was drafted; if the worker receives any kind of benefits (vacation and sick pay, retirement plans and life or medical-hospital insurance). Also, it establishes the permanence of the relationship, such as continuing indefinitely or only for the duration of a project or a specific period. Does the worker have his own business, which he markets to others?
If you want the IRS to determine whether a particular person is an independent contractor or an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding . federal employment tax and income tax withholding purposes.
Payroll Tax Obligations
If you have employees, you are responsible for various federal, state, and possibly local taxes. As an employer, you have to withhold some taxes from your employees’ paychecks.
Payroll taxes include the following:
- Federal income tax withholding
- Social security and Medicare taxes
- Federal Unemployment Taxes ( FUTA )
Generally, you must withhold federal income tax from your employees’ wages.
Social security and Medicare taxes pay for the benefits that workers and families receive under the Social Security Contributions Act ( FICA ). Social security tax pays for FICA benefits on the old-age, disability, and survivors’ portion of insurance. Medicare tax pays for FICA benefits from the hospital insurance portion. You withhold a portion of these taxes from your employees’ wages and pay a similar amount yourself as the employer.
