Calculating your gross to net salary can significantly impact your actual disposable income for expenses, savings, and investments. Additionally, forecasting and managing your own taxes and contributions is essential if you're self-employed.

In fact, it's a task that concerns all workers in general, as it allows for better financial control.

So, if you want to have a clear view of your earnings, it's vital to understand what each of these terms means and how to calculate them.

Net and Gross Salary: How to Understand and Calculate Your Income

Gross Salary and Net Salary: Definitions

One of the aspects you must master when you're a freelancer is the concept of gross salary and net salary. This is fundamental for accurately managing personal finances.

Below, we explain the definitions of both:

• Gross Salary: This is the total income you receive before any type of deduction is made. For example, the deduction of freelance taxes, your social security contributions, among others.

• Net Salary: This is the amount you actually receive for your services after all corresponding deductions have been made.

In other words, the net salary is obtained from the gross salary, and just like the break-even point, you must learn how to calculate it.

Differences Between Gross Salary and Net Salary

There are several key aspects that differentiate gross salary from net salary. Let's see what they are.

How to Calculate Your Net Income from Gross Salary

To calculate the gross to net salary, you need to understand the various applicable deductions and break down how it's structured.

We'll analyze each aspect step by step to make the process clearer and simpler:

Elements

This salary can be set in different ways: by time worked, by project completed, through commissions, or other methods.

But in Mexico, the most common model is the salary per unit of time, where a determined amount is defined according to the duration and type of the worker's workday.

According to the Federal Labor Law (LFT) in its Article 84, salary is composed of:

• Bonuses

• Premiums

• Housing

• Daily wage

• Commissions

• Accommodation

• Additional earnings

• Any other benefit granted to the worker

Thus, the gross salary includes all the income a worker receives, whether self-employed or not:

• Base salary

• Benefits

• Bonuses

• Overtime

• Any other additional earnings

Withholdings and Deductions

The gross salary is subject to various deductions and withholdings that reduce the final income of any worker.

The most common include:

• Income Tax (ISR)

• Local taxes

• Payments to third parties

• Collective agreements

• Voluntary deductions

• Social security

Considering this, you can use a gross to net salary calculator in Mexico to get a faster result. Some sites include Runahr or Buk.

Now, there are two contributions that stand out: the IMSS and the ISR.

Gross to Net Salary: How to Calculate Deductions and IMSS Contributions

Social security is deducted from the gross salary and is allocated to the Mexican Social Security Institute (IMSS). According to the law, it is a mandatory right for all workers in Mexico.

This contribution is made by the employee, the employer, and a portion comes from the Mexican government.

The IMSS coverages include:

Illnesses and Maternity

Covers medical and hospital care, and is paid by both the employee and the employer.

The calculation is as follows:

• In-kind benefits: The employer multiplies 20.40% of the monthly UMA (Unit of Measure and Update) to calculate their contribution.

• Employee's contribution: Only if the salary exceeds three times the monthly UMA; the excess is calculated and multiplied by 0.40%.

• Medical expenses: The employer applies 0.375% to the gross salary.

• Cash benefits: The gross salary is multiplied by 0.25% to obtain this contribution.

Total: All applicable benefits and contributions are summed.

Occupational Risks

This cost is fully covered by the employer and is determined according to the worker's risk classification, which can be:

• I – 0.54355%

• II – 1.13065%

• III – 2.59840%

• IV – 4.65325%

• V – 7.58875%

Calculation: The Base Contribution Salary (SBC) is multiplied by the applicable risk percentage.

Disability and Life

This is a contribution in case of incapacity or death, where both parties contribute:

• Employer's contribution: Calculated by multiplying the SBC by 1.75%.

• Employee's contribution: Obtained by multiplying the SBC by 0.625%.

Total: The sum of both amounts.

Retirement, Unemployment in Advanced Age, and Old Age (CEAV)

The cost of the worker's retirement insurance is paid by the employer. However, unemployment and old age are divided between both parties.

• Retirement: The employer multiplies the SBC by 2% to obtain the retirement contribution.

• Unemployment and Old Age: The employer applies 3.150%, and the worker applies 1.125% on the SBC.

The sum of both contributions is divided by two to obtain the monthly amount to be withheld, as it is paid bimonthly.

Childcare and Social Benefits

The contribution covers childcare services and other worker benefits. In this case, the employer pays, multiplying the worker's SBC by 1% to cover this benefit.

In your case, as a freelancer, you pay the IMSS on your own if you're affiliated under the scheme of "Independent Workers".

Calculating Gross and Net Salary: How to Deduct ISR

To calculate gross to net salary in Mexico, you also need to subtract the amount payable for the Income Tax (ISR). This is usually automatically applied to the total income of the dependent worker.

To do this, consult the current ISR tables published by the SAT (Tax Administration Service). There you'll see the lower and upper income limits, fixed fees, and applicable rates.

Here's what you need to do:

• Identify the Income Range: Locate the table range that includes your gross monthly income.

• Calculate the Base: Subtract the lower limit of the range from the worker's gross monthly income.

Example: If it's 20,000 MXN and the lower limit is 17,000 MXN, the base is 3,000 MXN.

• Apply the Rate: Multiply the base by the rate corresponding to the range.

Continuing the example, if the rate is 21%, the calculation is 3,000 MXN × 0.21 = 630 MXN.

• Add the Fixed Fee: Add the fixed fee indicated in the income range.

If the fixed fee is 1,000 MXN, then 630 MXN + 1,000 MXN = 1,630 MXN.

• Subtract the ISR: Subtract the calculated ISR (1,630 MXN in the example) and other deductions from your gross income to obtain the net salary.

The ISR rate applies to the earnings you generate as a self-employed worker. It can vary between 1.92% and 35%.

Conclusion

Understanding the difference between gross salary and net salary is fundamental for any freelancer practicing in Mexico. It will allow you to better plan expenses, set appropriate rates for your services, and anticipate what you need to set aside to cover your tax obligations.

As a freelancer, deductions on gross income usually focus on the ISR, as well as VAT. Calculating and paying them are your responsibility, just as if you decide to make contributions to social security.

Of course, depending on the region and type of services you offer, other specific taxes may apply.

Remember that if you have clients from abroad, you can receive payments in dollars from Mexico through DolarApp. And if you need pesos, you can simply transfer them from one account to another, taking advantage of the best exchange rate.