Many countries choose Malaysia to expand their operations because of its strategic location, market competitiveness, skilled workforce and superb technology capabilities. Before considering expanding your company’s operations in Malaysia, it is vital to understand that the key to success is understanding the process of payroll in Malaysia and all the compliance regulations that need to be followed as not abiding by the regulations could result in wrong attention from the government resulting in a negative impact from the company.
This article will act as a guide providing complete information on the payroll process and compliance procedures that your company should be familiar with when thinking of expanding in Malaysia.
Compliance essentials and process for Payroll in Malaysia
It is very essential to understand the mandatory process for payroll and primary compliance considerations before we analyze the common challenges in Payroll compliance in Malaysia.
We shall understand the basics of the Payroll in Malaysia as below:
Minimum Wages and Working Conditions in Malaysia
Working hours: An employee in Malaysia shall not be required to work –
· More than 8 hours per day;
· More than a spread over a period of 10 hours in one day; and
· More than 48 hours per week.
Pay cycles: Salaries in Malaysia are generally paid on a monthly basis.
Minimum wages: From 1 May 2022, all employees’ minimum wage will be set at RM1,500. However, from 1 May to 31 December 2022, it will vary for employees working in Municipal Council areas versus City Council areas.
Overtime, rest day and holiday pay rates: Employees covered by the Employment Act 1955 (“EA 1955”) should be paid overtime at a rate not less than 1.5 times the hourly pay rate for any overtime work carried beyond than the normal hours of work. Rest days are paid at a rate of two times, and public holidays at three times the hourly pay rate.
Social security and statutory contributions
There are three mandatory statutory contributions in Malaysia
Ø Employees’ Provident Fund (EPF): The (EPF) Employees Provident Fund manages the compulsory savings plan and retirement planning for all the employees in Malaysia. Both employers and Employees (Malaysian citizens or permanent residents only) must contribute to the EPF retirement benefits scheme.
The rates for EPF contribution for employees varies depending on the monthly salary. For employers the EPF contribution is 12%.
Ø Social Security Organization (SOCSO): The organization provides social security protection through social insurance which includes medical and cash benefits, provision of artificial aids and rehabilitation to employees for reducing suffering and assisting with financial guarantees and protection to the family.
Employers must contribute on a monthly basis to SOCSO on behalf of each eligible employee.
There are two types of social protection:
- The Employment Injury Insurance Scheme (EIIS): Cover for employees experiencing work-related injuries or diseases. The EIIS applies to all Malaysian citizens, permanent residents, and foreign workers (excluding domestic servants).
- The Invalidity Pension Schemes (IPS): Cover for employees experiencing invalidity or who die from causes not related to their work.
Ø Employment Insurance Scheme (EIS): The EIS is an act which provides financial assistance to employees who have lost their job while looking for new employment. This is administered by the Social Security Organization to provide certain benefits and a re-employment placement programme for insured persons who have lost their employment, hence promoting active labor market policies, and for matters connected therewith.
Employers are required to make monthly contributions for each employee. Employing one or more employees should register and contribute monthly to EIS for all employees between age 18 to 60 years old under the Employee Insurance System (Act 800)
· Contribution of EIS
Both employers and employees contribute 0.2% each of an employee’s salary, implying that the total contribution is 0.4% of an employee’s monthly salary.
Income tax
Ø Withholding tax: A monthly tax deduction (MTD) system is followed in Malaysia which requires employers to deduct withholding tax at source. Employers is responsible to deduct and send the tax to the Inland Revenue Board (IRB) of Malaysia on behalf of their employees.
Ø Income tax rates: The maximum income tax rate in Malaysia is 30% applied to incomes earned greater than MYR 2,000,000 or ‘non-residents’. Employees working between 60–182 days per year in Malaysia are considered ‘non-residents’, irrespective of their actual citizenship status.
Income tax rates are as follows:
| Taxable Income | Percentage of Income Tax |
| Upto 5000 | Nil |
| Between 5,000-20,000 | 1% |
| Between 20,001-35,000 | 3% |
| Between 35,001-50,000 | 8% |
| Between 50,001-70,000 | 14% |
| Between 70,001-100,000 | 21% |
| Between 100,001-250,000 | 24% |
| Between 250,001-400,000 | 24.5% |
| Between 400,001-600,000 | 25% |
| Between 600,001-2,000,000 | 28% |
| Above 2,000,000 | 30% |
Ø Tax clearing and tax filing: The financial year in Malaysia is from 1 January to 31 December and every employee is required to complete their tax clearing and filing at year-end before April.
Public Holidays in Malaysia
Paid public holidays: Employees are entitled to be paid for 11 gazetted public holidays per year. Five out of the 11 holidays are as below:
1. Hari Kebangsaan or National Day;
2. Birthday of Yang di-Pertuan Agong;
3. Birthday of the Ruler or Yang di-Pertua Negeri or Federal Territory day (varies per state);
4. Labor Day; and
5. Malaysia Day (16 September).
The rest of the six paid public holidays are chosen at the discretion of the employer from the below list:
· Birthday of the Prophet Muhammad (s.a.w);
· Chinese New Year (2 days, except 1 day in the states of Terengganu and Kelantan);
· Vesak Day;
· Hari Raya Puasa (2 days)
· Hari Raya Haji (1 day, except 2 days in the states of Terengganu and Kelantan);
· Deepavali;
· Christmas Day; and
· Awal Muharam.
Leaves in Malaysia
· Annual leave: Employees are entitled 8-16 days of paid annual leave, depending on the employee’s length of service.
· Sick leave: Employees are entitled 14-22 days of paid sick leave which depends on the length of service of the employee with the company.
· Maternity leave: Mothers are allowed 60 consecutive days of paid leave for each of their first five children.
· Paternity leave: This is not a statutory requirement but some employers offer 1-3 days of paid paternity leave for fathers.
Common compliance issues with payroll in Malaysia
Inaccurately calculating the payroll for employees can lead to your company paying heavy fines which could not only result in damaging the reputation of the company but will also lead to dissatisfied employees.
Below mentioned are some of the common payroll compliance issues that any company should be aware of in order to avoid mistakes:
· Delay in payments: Inland Revenue Board (IRB) imposes heavy penalties on delay by employers to pay monthly employee income tax withholdings which is due 15th of each month.
· Missing including perquisites, equity incentives in reporting the compensation: It happens in many cases that these benefits are not made through payroll, therefore, it is very easy for such benefits to be overlooked in the compensation reporting.
· Classifying employees incorrectly: There are different classification of workers such as Foreign workers, non-residents and second which can often be wrongly classified during payroll data system entry. This could lead to wrong salary calculations. As a result, your company might underpay these employees and deduct the wrong income tax amounts.
· Unaware of changing regulation impacting payroll: Mainly there are 4 regulatory bodies that control all the payroll regulations in Malaysia. It is challenging to keep an eye on all of the bodies and staying updated with the latest payroll announcements that are released by governing bodies timely.
Conclusion
It is a challenging task to set up your operations in Malaysia without the necessary professional support. Also, any company who is looking to establish in-house payroll in Malaysia would require a real dedicated team who can understand and handle the monthly calculations related to the contributions and making the submissions to the related government authorities for each of the company employees.
Outsourcing payroll management to a trusted partner like NNRoad, is the best and the most flexible and cost-effective solution for any business. It ensures that your company stays compliant with all the local compliance regulations related to the Payroll in Malaysia so that you can focus on other operations which can generate more revenue for your business.
