The Income Tax or ISR is a tax applied directly on the profits that a natural or legal person obtains during a certain period. Its objective is to increase tax collection to finance public spending.
When you invoice, when you collect a payroll receipt, when you declare your taxes, there are those three letters. Surely you have seen them pass in your documents, but you are not so clear about what they mean or why you should pay them. Therefore, in this article I will show you what is ISRwhat it is for and how to calculate it.
Prepare your calculator and take out those receipts that left you with doubts. Knowing the importance of this tax and how to calculate it will help you have more clarity when addressing tax issues related to your business income.
Shall we start?
What is the ISR? What does IRS mean?
You know you have to pay, but you don’t know what does ISR mean, certain? The Income Tax (ISR) is the fiscal burden that taxpayers carry out according to the amount of earnings or income received during an exercise or period.
In other words, it is the proportional contribution that we make according to the profits that increase our wealth over a given time. And yes, I speak in the plural because ISR is a tax obligation for all people who receive incomealthough of course there are some exceptions which I will tell you about later.
In tax terms, unlike for example, ISR is a direct tax that is applied to the income a person receives and not to what they consume. So, as a general rule, the greater the profits and income you obtain from your economic and commercial activities, the greater the ISR that you must pay to the SAT.
The legal foundations and fiscal procedures around ISR are included within the , a document that indicates who, how and under what circumstances we must pay the tax. So, when I mention an article, I will surely refer to the data of this law.
In addition, every time the criteria for the collection and collection of this tax change or are adjusted, these adjustments appear in the Miscellaneous Tax Resolution (RMF). For example, the changes for this year and the rates for the collection of ISR are in the .
Who pays the ISR?
The payment of Income Tax, in accordance with the current ISR Law, applies so that:
- They reside in national territory.
- They reside abroad, but have a permanent establishment in our country.
- They reside abroad, but their income comes from sources of wealth in Mexico.
And in case you were wondering what “permanent establishment” is, the answer is found in Article 2 of the LISRwhere it clarifies that it is:
any place of business where business activities are conducted, in whole or in part, or independent personal services are rendered. Permanent establishment shall mean, among others, branches, agencies, offices, factories, workshops, installations, mines, quarries or any place of exploration, extraction or exploitation of natural resources”.
So if you are a professional or merchant residing in Mexico, a businessman with a company that operates in Mexican territory or a foreigner who obtains income from commercial or professional activities in our country, you have the fiscal obligation to pay ISR through provisional and annual tax returns.
Income that pays ISR
In Article 175 of the Law on Income Tax, it is established in a general way what are the income that cause the collection of this tax burden. These are:
- Wages
- Fee
- Leasing of real estate
- Alienation (sale or transfer) of assets
- Prizes derived from lotteries, raffles, raffles or games with bets and contests
- Business activities
- Interest or credit yields of any nature
Within ‘business activities’, commercial, industrial, agricultural, livestock, fishing or forestry functions (related to forestry and wood work) are considered.
📢 Type: if you want to know more exactly if any activity you carry out must pay ISR, in addition to the LISR that we already shared with you, you can check where each category is detailed.
How much ISR is paid? Percentage to be paid by natural and legal persons
The amount of ISR in percentage to pay in Mexico for natural persons it depends on rates ranging from 1.92 and up to 35% on gross income, depending on the current rates, which are available in the tables found in the .
ISR percentage for legal entities
In the case of legal entities, the percentage of ISR to be paid is 30%applied to the tax result obtained in the year, as indicated in .
In both cases, authorized deductions can be applied to the total annual amount that causes ISR according to the type of person in order to reduce the total payable on gross income.
So stop at the question How much is the ISR?the answer will depend on the gross income in the case of individuals and a fixed amount for legal entities.
What are the authorized deductions for ISR in Mexico?
Inside of Income Tax Lawthe contemplated deductions are divided into two categories:
- Allowable Deductions
- Personal deductions for individuals
Let us now see what each of these groups includes.
Authorized deductions
- Returns received or discounts or bonuses made during the fiscal period.
- The cost of what was sold.
- Net expenses of discounts, bonuses or refunds.
- Investments.
- Uncollectible credits and losses due to acts of God, force majeure or the sale of assets.
- Fees paid by employers to the Mexican Institute of Social Security.
- The accrued interest charged in the year, without any adjustment.
- The annual adjustment for inflation that is deductible.
- Advances and yields paid by cooperative production companies.
- Contributions made to create or increase reserves for staff pension or retirement funds.
Authorized personal deductions for natural persons
- Payments for medical, dental and professional services in psychology and nutrition.
- Funeral expenses.
- Non onerous or remunerative donations.
- Interest on mortgage loans for the acquisition of a home.
- Complementary retirement contributions made directly in the complementary retirement contributions subaccount.
- Premiums for medical expenses insurance, complementary or independent of health services provided by public institutions.
- Expenses for school transportation of descendants in direct line.
- Payments made for the local tax on income from salaries and in general for the provision of a subordinate personal service.
📢 Type: personal deductions for natural persons have exceptions that you can consult in the .
What income does not pay ISR?
The one from the Income Tax Law establishes that the tax will not be paid on these incomes:
- Non-salary benefits received by workers of the general minimum wage.
- Compensation for work risk or illness.
- Retirements, pensions, retirement assets and other forms of retirement.
- Reimbursement of medical, dental, hospital and funeral expenses.
- Social security benefits granted by public institutions.
- Disability subsidies, educational scholarships, child care centers, cultural and sports activities.
- The contributions and returns from the housing subaccount provided for in the Social Security Law.
- Workers’ savings banks and savings funds established by companies.
- Workers’ social security contributions paid by employers.
- Seniority premiums, retirement and compensation or other payments.
- Bonuses received by workers from their employers.
- Remuneration for subordinate personal services received by foreigners.
- Per diems declared in service of the employer.
- Lease contracts extended by provision of law.
- Disposal of the taxpayer’s home and movable property.
- Credit and financial interests.
- The amounts paid by insurance institutions to the insured.
- Inheritance or legacies.
- Donations (in certain cases).
- Prizes obtained on the occasion of a scientific, artistic or literary contest.
- Compensation for damages that do not exceed the market value of the property in question.
- Income received as food by food creditors.
- Withdrawals made from the retirement subaccount, severance pay at advanced age and old age under the terms of the Social Security Law.
- Disposal of parcel rights.
- Income from allowing third parties to publish written works of your creation or to reproduce recordings of musical works.
How is ISR calculated? Get it in 5 steps!
To calculate ISR on an amount, you need to know the current income tax rate for admission, as well as the lower and upper limits of the level to calculate, in addition to the fixed fee. All this data can be found in the applicable rate tables available at the Miscellaneous Tax Resolution 2022, right on the .
Let’s take as an example the rate applicable to the calculation of ISR for provisional payments, that is, those you make each month to the SAT before reaching the . The table is this:
Don’t be intimidated by numbers; Once you understand how ISR works and how it is calculated, these tables will become your best allies for applying Income Tax. Trust us. 😉
Suppose you want to know the ISR on a provisional payment to be made for an income of $20,000 MXN. The five steps to calculate the ISR are the following:
- The first thing is locate your gross taxable income (before taxes) in the table that we show you. This amount corresponds to the 6th level, because 20 thousand is between 13,381.48 and 26,988.50.
- Now, you take the lower limit of that level and subtract it from your income: 20,000 – 13,381.48 = 6,618.52 (difference)
- To this difference, You apply the rate that corresponds to the level, which in this case is 21.36. So, 21.36% of 6,618.52 = 1,413.72 (marginal tax).
- From the same 6th level, you take the corresponding fixed fee and add it to the marginal tax. Thus you obtain: 1,413.72 + 1,417.12 = 2,830.84 (ISR determined).
- Now, All you have to do is subtract the ISR determined from your gross income.: 20,000 – 2,830.84 = 17,169.16 (net income, after ISR).
Clever! The ISR that you must pay for that $20,000 of monthly income is $2,830.84.
The full calculation would look like this:
In Annex 8 of the RMF are from rates for the ISR for sale and lease of real estate, to the rates and levels for payments at 7 and 15 days. Once you locate the type of income to which you will apply the ISR, it is just a matter of finding the table…
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