Payroll Compliance in Malaysia

Malaysia has grown its economy at an annual rate of about more than % over the past half-century, transitioning from traditional mining and agriculture to a more industrialized and business-friendly environment. This development makes Malaysia an attractive gateway for regional business interests.

In fact, Malaysia offers diverse business opportunities across sectors such as banking, technology, and pharmaceuticals. The Malaysian government has implemented various initiatives to attract foreign direct investment. Agencies like the Malaysian Investment Development Authority (MIDA) and the Malaysia External Trade Development Corporation (MATRADE) assist companies in setting up and finding markets.

Each year, 20,000 graduates join the Malaysian labor force, offering a pool of highly-skilled potential employees. The Malaysian workforce is young, productive, and proficient in English, making it ideal for roles in various industries.

Employer Responsibilities and Payroll Compliance

Companies in Malaysia must register for tax, Employees’ Provident Fund (EPF), Social Security Organization (SOCSO), and the Human Resources Development Fund (HRDF) if applicable. Employers must register with SOCSO within 30 days of hiring their first employee and contribute monthly.

Currently, there are no specific legal data protection requirements for payroll data in Malaysia. Companies must rely on internal or external policies to ensure data protection principles are upheld.

Payroll Processing Essentials in Malaysia

• Mandatory Benefits: These include paid annual leave, statutory holidays, maternity or medical leave, and termination or unemployment benefits.
• Optional Benefits: These may include housing and transport allowances, medical insurance schemes, commissions and bonuses, and retirement or pension schemes.
• Statutory Contributions: Both employers and employees make contributions to the EPF and SOCSO. Monthly Tax Deduction (MTD) / Potongan Cukai Bulanan (PCB): It is a payment made by employers to the Lembaga Hasil Dalam Negeri (LHDN) / Inland Revenue Board of Malaysia (IRBM) on behalf of their employees. This payment is due on or before the 15th of the following month.
• Payroll Payslip Issuance: All employees must receive a payslip with details of wages and deductions.
• Employee Records: Employers must maintain a register with relevant payroll information for each employee.

Employers must withhold employees’ monthly tax contributions, with rates ranging from 0% to 28% depending on salary. Due to the complexity of Malaysia’s tax regulations, foreign businesses may find it beneficial to outsource payroll administration to ensure compliance and efficient pay delivery.

Standard Payroll Process in Malaysia

• Pay-Day: Payments must be made by the 7th of each month.
• Payment Method: Payments can be made via cash, cheque, or bank transfer.
• Salary Calculation: This includes overtime and sick pay adjustments.
• Payslip Distribution: Payslips can be issued manually or through automated systems.
• Statutory Contributions/Deductions: Contributions to EPF, SOCSO, EIS etc., must be accurately calculated and remitted.
• Payment to Authorities: It’s essential to know the deadlines and methods for remitting payments.

Employment Insurance System (EIS)

In 2018, Malaysia introduced the Employment Insurance System (EIS) to provide financial support to employees who lose their jobs. Managed by SOCSO, EIS helps retrenched workers with up to six months of financial assistance. Both employers and employees contribute 0.2% each of the employee’s salary, capped at MYR4,000 monthly.

Why is it crucial for business owners to understand payroll administration?

If you have employees, your payroll process is a critical component of your business, whether you outsource it to a payroll service provider or handle it in-house. It's a significant expense, it ties your team to their jobs, and it's a continuous business function.

Most business owners don’t aim to become payroll experts, but understanding payroll can be incredibly beneficial for running a successful business.

Accurately managing payroll—paying employees the correct amount on time, tracking overtime pay, and making proper contributions to the Employee Provident Fund (EPF/KWSP)—is crucial for compliance. No matter the size of your workforce, compliance is non-negotiable, and failing to adhere to payroll regulations can result in severe penalties.

When discussing employee engagement, we often focus on company culture and perks. However, one of the most effective ways to engage employees is by ensuring payroll is processed accurately and on time each pay period. By understanding payroll processing, including aspects like paid annual leave, you can ensure smooth operations and efficiently address any employee concerns.

Employee salaries are a significant business expense and, for some businesses, the largest one. Given their importance, understanding payroll operations, monthly contributions, and gross remuneration is essential. This knowledge allows you to maintain accurate bookkeeping and better manage your accounts.

Which legislation relates to payroll?

In Malaysia, the payroll of most employees is governed by the Employment Act of 1995 (EA). This act outlines the rights and obligations of both employees and employers under the law.

The Employment Act applies to all employees in Malaysia, regardless of their wages or occupation. However, employees earning above RM4,000 per month are exempt from certain provisions of the Act, including:

• Overtime rates for work on rest days
• Overtime rates outside of regular working hours
• Shift-based work allowances
• Overtime on public holidays
• Overtime for half days on holidays
• Termination, lay-off, and retirement benefits

The Employment Act also covers gig workers. An individual is considered an employee under the law if any of the following conditions are met, regardless of a written contract:

Their work manner is subject to another person's supervision or control

Their working hours are under another person's supervision or control

They receive tools, supplies, or equipment from another individual to complete a task

Their work is a crucial component of another person’s enterprise

Their effort is made purely for another person’s profit

They receive regular compensation for tasks performed, and this compensation constitutes most of their income

Note that the Employment Act does not apply to Sabah and Sarawak, which have their own Labour Ordinances.

Who is responsible for income tax in Malaysia?

Employers are responsible for paying income tax on behalf of their employees each month in the form of the PCB/MTD. Income tax can be complex, with potential relief available to eligible employees.

In addition to income tax, there are statutory contributions and levies that employers must be aware of. The three compulsory contributions are to the Employees Provident Fund (EPF/KWSP), the Social Security Organisation (SOCSO), and the Employment Insurance System (EIS). The Human Resources Development Fund (HDRF) also applies to businesses with more than ten employees. Other contributions and levies may also be applicable.

Conclusion

The complexity of Malaysia’s payroll management and tax regulations means it may be advisable for foreign businesses to outsource their payroll administration to a local payroll service provider who possesses extensive payroll outsourcing experience. As one of the leading payroll service providers in Malaysia, Corford Solutions offers comprehensive HR and payroll outsourcing services for your Malaysia businesses. Feel free to check us out at www.malaysiapayroll.com.