NairenonTeam understands that payroll calculations can be a bit tricky, especially with the constant updates during these volatile times. Hence, we are starting a Payroll Guide Series! This is the first article in the series and it provides an overlook of Malaysian Payroll. Stay tuned for more payroll-related articles.
If you are starting a business in Malaysia, or are not completely sure if you are balancing employee entitlement and the market standard well, read on. We are going to talk about the basics of Malaysian Payroll and what you need to know.
Now, payroll practices in Malaysia are generally governed by a few government bodies namely the Ministry of Human Resources and the Ministry of Finance. Before we get into the nitty-gritty of payroll, do note that different types of employment mean different types of statutory requirements and other entitlements. Don't worry, we have got you covered! Check out a summary of the different types of employment along with their statutory requirements listed in the Employment Act 1955 (EA 1955).
Salary Structure
Basic Salary
If you have employees under permanent and contract of service, they are entitled to have a basic salary. This is usually the amount that is negotiated and mutually agreed upon contract signing. The basic salary would be the basis of Statutory Deductions (discussed below).
Check out the minimum wages across industries and regions based on the regulations by the Ministry of Human Resources (MoHR) or Kementrian Sumber Manusia (KSM). And if you are curious about the market standard, there are Consulting Firms that provide Salary Guide Book FOC.
Statutory Requirements
In Malaysia, there are four (4) compulsory deductions and contributions that are to be included in payroll processing, these are Monthly Tax Deduction, Employee Provident Fund, Social Security Organization, and Employee Insurance System. Effective 1 March 2021, employers with ten (10) Malaysian employees or more are also required to contribute to Human Resources Development Fund (we will talk more about it in the next article).
Monthly Tax Deduction
Monthly Tax Deduction (MTD) or Potongan Cukai Bulanan (PCB) or also known as CP 39 is a series of monthly deductions that go towards payment of an individual's taxes based on the said individual's income from employment. MTD is calculated and retained by employers from an employee's salary and paid over to the Inland Revenue Board (IRB) or Lembaga Hasil Dalam Negeri (LHDN).
Psst! Have you filed your Tax Return this year?
Employee Provident Fund
Established in 1951, the Employee Provident Fund (EPF) is a compulsory contribution made by the employees as well as employers. The collection of the fund is submitted to Lembaga Kumpulan Wang Simpanan Pekerja (KWSP) and is meant to assist the Malaysian workforce to save for their retirement by the Employees Provident Fund Act 1991. The fund can be liquidated in two (2) stages and is contingent on the individual's age and upon retirement.
Social Security Organization
Social Security Organization (SOCSO) is a collection of funds deducted based on an employee's monthly salary including allowances such as overtime payment, commission, and incentive. The fund is meant for employee coverage in case of health disturbance due to the work process or an accident that takes place at work. Both employee and employer are required to make contributions to Pertumbuhan Keselamatan Sosial (PERKESO) - Government Agency that manages SOCSO.
The contributions are detailed in the Employees' Social Security Act (1969).
Employee Insurance System
Similar to SOCSO, the Employee Insurance System (EIS) or Sistem Insurans Perkerjaan (SIP) is also managed by PERKESO. Starting January 2018, EIS Contribution is compulsory for employers and employees. It is a collection of funds deducted based on an employee's monthly salary. The fund will provide financial assistance to contributing employees for a maximum span of six (6) months in case of retrenchment.
Check out the details of EIS Contributions here.
Now, these are some of the things that employers are obliged to complete by law. Our next article of the series will talk about the Malaysian Market Standard when it comes to payroll processing and contributions.