Understanding how ISR (Impuesto Sobre la Renta) is calculated is essential for any freelancer, independent professional, or small business owner in Mexico. Unlike a flat tax, ISR uses a progressive rate structure—meaning the more you earn, the higher the percentage you pay, but only on the portion of income within each bracket.
In this article, I explain how ISR works, how to calculate it, and provide real examples for freelancers and small businesses.
📌 What Is ISR?
ISR (Income Tax) is a direct tax applied to the income earned by individuals and legal entities. It is calculated on net income—income after allowed deductions—using a progressive rate table updated annually by the SAT.
💡 ISR is not a flat percentage of your total income. Different portions of your income are taxed at different rates.
🧾 How Progressive Taxation Works
Progressive taxation means that as your income increases, the tax rate applied to the additional income increases. Your entire income is not taxed at your highest rate—only the portion that falls into each bracket.
Example: Understanding Progressive Rates
| Income Bracket (MXN) | Rate |
|---|---|
| $0 – $8,000 | 1.92% |
| $8,001 – $10,000 | 6.40% |
| $10,001 – $20,000 | 10.88% |
| (and so on…) |
If your annual income is $15,000:
- The first $8,000 is taxed at 1.92%
- The next $2,000 is taxed at 6.40%
- The remaining $5,000 is taxed at 10.88%
💡 Your effective tax rate (total tax ÷ total income) will always be lower than your top marginal rate.
📋 ISR Rate Table for Individuals (Approximate)
The SAT updates these brackets annually. The following are approximate rates for illustration:
| Lower Limit (MXN) | Upper Limit (MXN) | Marginal Rate | Tax on Lower Limit |
|---|---|---|---|
| $0 | $8,000 | 1.92% | $0 |
| $8,000 | $10,000 | 6.40% | $154 |
| $10,000 | $20,000 | 10.88% | $282 |
| $20,000 | $35,000 | 16.00% | $1,370 |
| $35,000 | $60,000 | 21.36% | $3,770 |
| $60,000 | $120,000 | 23.52% | $9,110 |
| $120,000 | $250,000 | 30.00% | $23,222 |
| $250,000 | $500,000 | 32.00% | $62,222 |
| $500,000 | $1,000,000 | 34.00% | $142,222 |
| $1,000,000 | $3,000,000 | 35.00% | $312,222 |
💡 “Tax on Lower Limit” is the accumulated tax from all previous brackets. This simplifies calculation.
📊 How to Calculate ISR: Step by Step
Step 1: Determine Your Annual Income
Calculate your total income from all sources for the year.
Step 2: Apply Deductions
Subtract allowed deductions to determine your net taxable income.
Common deductions for individuals:
- Medical expenses
- Dental expenses
- School tuition (private schools)
- Mortgage interest
- Voluntary retirement contributions
- Professional fees (for freelancers: expenses directly related to your activity)
Step 3: Find Your Bracket
Locate which bracket your net taxable income falls into.
Step 4: Calculate the Tax
Use the formula:
ISR = (Income - Lower Limit) × Marginal Rate + Tax on Lower Limit
📝 Example 1: Freelancer with $200,000 Annual Income
Scenario: A freelance graphic designer earns $200,000 MXN annually with $20,000 in deductions.
| Step | Calculation | Result |
|---|---|---|
| Gross income | $200,000 | |
| Deductions | ($20,000) | |
| Net taxable income | $180,000 |
Finding the bracket: $180,000 falls between $120,000 and $250,000
| Factor | Value |
|---|---|
| Lower limit | $120,000 |
| Marginal rate | 30.00% |
| Tax on lower limit | $23,222 |
Apply the formula:
ISR = ($180,000 - $120,000) × 30.00% + $23,222 ISR = $60,000 × 0.30 + $23,222 ISR = $18,000 + $23,222 ISR = $41,222
Results:
| Concept | Amount (MXN) |
|---|---|
| Net taxable income | $180,000 |
| Annual ISR | $41,222 |
| Effective tax rate | 22.9% |
💡 The freelancer pays 22.9% of their net income in ISR, even though their top marginal rate is 30%.
📝 Example 2: Freelancer with $1,500,000 Annual Income
Scenario: A freelance consultant earns $1,500,000 MXN annually with $100,000 in deductions.
| Step | Calculation | Result |
|---|---|---|
| Gross income | $1,500,000 | |
| Deductions | ($100,000) | |
| Net taxable income | $1,400,000 |
Finding the bracket: $1,400,000 falls between $1,000,000 and $3,000,000
| Factor | Value |
|---|---|
| Lower limit | $1,000,000 |
| Marginal rate | 35.00% |
| Tax on lower limit | $312,222 |
Apply the formula:
ISR = ($1,400,000 - $1,000,000) × 35.00% + $312,222 ISR = $400,000 × 0.35 + $312,222 ISR = $140,000 + $312,222 ISR = $452,222
Results:
| Concept | Amount (MXN) |
|---|---|
| Net taxable income | $1,400,000 |
| Annual ISR | $452,222 |
| Effective tax rate | 32.3% |
💡 The effective rate (32.3%) is lower than the top marginal rate (35%) because lower brackets were taxed at lower rates.
📝 Example 3: Small Business Owner (Incorporated)
Scenario: A small business with $2,000,000 MXN annual profit.
For legal entities (personas morales), ISR is calculated differently. The corporate rate is a flat 30% on net profits.
| Step | Calculation | Result |
|---|---|---|
| Annual profit | $2,000,000 | |
| ISR rate | 30% | 0.30 |
| Annual ISR | $2,000,000 × 0.30 | $600,000 |
| Net after tax | $1,400,000 |
💡 Corporations pay a flat rate, not progressive. This is simpler but often results in a higher effective rate than individuals at similar income levels.
📅 Monthly Provisional Payments
ISR is not paid only once a year. Individuals and businesses make monthly provisional payments based on income earned that month.
How Monthly Payments Work
| Step | Description |
|---|---|
| 1 | Calculate income for the month |
| 2 | Subtract monthly deductions |
| 3 | Apply the same progressive rate table |
| 4 | Pay the calculated amount by the 17th of the following month |
At the end of the year, you file an annual declaration where you:
- Calculate total annual ISR
- Subtract all monthly payments made
- Pay the difference (or request a refund if you overpaid)
💡 Monthly payments are provisional. The annual declaration reconciles what you actually owe.
📋 Summary Table: Examples Compared
| Scenario | Net Taxable Income | Annual ISR | Effective Rate |
|---|---|---|---|
| Freelancer A | $180,000 | $41,222 | 22.9% |
| Freelancer B | $1,400,000 | $452,222 | 32.3% |
| Small Corporation | $2,000,000 | $600,000 | 30.0% |
📋 Common Deductions for Individuals
| Deduction | Description |
|---|---|
| Medical expenses | Doctors, dentists, hospitals, prescriptions |
| School tuition | Private schools (preschool through high school) |
| Mortgage interest | On your primary residence |
| Retirement contributions | Voluntary AFORE contributions |
| Professional expenses | Costs directly related to your business activity (for freelancers) |
💡 Keep receipts and documentation for all deductions. The SAT can request proof during audits.
⚠️ Common Mistakes in ISR Calculation
| Mistake | Consequence | Solution |
|---|---|---|
| Ignoring monthly payments | Large lump sum at year end | Pay monthly provisions |
| Not claiming deductions | Higher tax than necessary | Track and document all eligible expenses |
| Mixing personal and business | Audit risk, lost deductions | Separate accounts, clear records |
| Using last year’s rates | Incorrect calculation | Check current SAT rates annually |
| Not filing annual declaration | Penalties, fines | File even if no tax is due |
💡 Best Practices for ISR Compliance
Know Your Bracket
Understand which bracket your income falls into so you can plan accordingly.
Track Deductions Throughout the Year
Don’t wait until December. Keep organized records of all eligible expenses.
Set Aside Money Monthly
Estimate your ISR liability and set aside funds with every payment you receive.
File Monthly Provisions on Time
Monthly declarations are due by the 17th of the following month. Late filings incur penalties.
File Your Annual Declaration
Even if you paid monthly, you must file the annual declaration. Missing this carries penalties.
Consult Your Accountant
Tax laws change. Professional advice ensures accuracy and identifies opportunities.
💡 ISR is not optional. Plan for it, or it will surprise you.
📚 Useful Internal Links
- IVA and ISR: The Two Pillars of Taxation in Mexico
- Tax Regime and Invoicing in Mexico
- Income and Expenses: The Foundation of Financial Health
- Taxes: Your Contribution to Society
✅ Conclusion
Calculating ISR doesn’t have to be intimidating. Once you understand progressive rates, monthly provisions, and the annual declaration, it becomes a manageable process.
Remember:
- ISR is progressive—different portions of income are taxed at different rates
- Monthly provisional payments prevent a large year-end surprise
- Deductions reduce your taxable income—track them carefully
- The annual declaration reconciles what you paid with what you owe
- Professional advice is worth the investment
Whether you’re a freelancer, independent professional, or small business owner, understanding your ISR obligation is essential to running a compliant, successful business.
Know your income. Track your deductions. Pay your ISR. Grow with confidence.
