Indonesia is the fourth most populous country in the world with massive population of 267 million people. It is a country full of opportunities for business activity. The country has been in a constant state of economic, making it a suitable location for anyone to set up a business. On average, the country’s economy grows by approximately 5% every year. Companies starting a business in Indonesia can take advantage of its increasing economic prosperity and benefit from access to its enormous market size.
As businesses set up operations in Indonesia, there are no doubt numerous key considerations to bear in mind. Legal entities, corporate assets, recruitment, and supply chain processes are just some of the core functions that businesses need to get right. Above all, businesses need to hire the right people to execute these tasks while ensuring that they are well remunerated. This then boils down to understanding and navigating the complexities of managing payroll in Indonesia.
General overview
As with any business and country, payroll processing in Indonesia typically occurs on a monthly basis. Pay day is usually paid on the last working day. Payroll compliance involves tax payments and social security contributions which must be withheld by employers each pay cycle. The statutory submission deadline is the 10th of the following month. In terms of records keeping, reports must be kept for at least 5 years.
In Indonesia, there is a mandatory religious holiday bonus called Tunjangan Hari Raya (THR) payment, an annual payment made before the religious holiday. The amount paid is based on the employees’ service period. For employees working for more than 12 continuous months, they are entitled to THR equivalent to one month’s salary. For employees who have served one month or more but less than 12 months, the THR is calculated on a pro-rata basis. All employees, whether permanent or contract-based are eligible for THR and it must be paid using Indonesian rupiah.
Wages
The five wage components are salary, fixed allowances, variable benefits, deductions and overtime pay. All employees must be paid a minimum wage, which varies according to the district, province, and industry. The rates in cities or districts are normally higher than the provincial minimum wage. The average monthly minimum wage in Indonesia ranges from IDR 1,765,000 (USD 127) to IDR 4,416,186 (USD 317). Wages for all employees (local and foreign) must be paid in Indonesian Rupiah. Formula to calculate minimum wage = current minimum wage + [current minimum wage x (Inflation + % GDP annual increase during the year)]
In Indonesia, severance pay is mandatory if applicable and is determined by the employee’s length of service.
Less than 1 year of employment – 1-month wage
1 year or more, but less than two years – 2 months wage
2 Years or more but less than 3 years – 3 months wage
3 years of more, but less than four years – 4 months wage
4 years or more, but less than 5 – 5 months wage
5 years or more, but less than 6 – 6 months wage
6 years or more, but less than 7 – 7 months wage
7 years or more, but less than 8 – 8 months wage
8 years or more – 9 months wage
Overtime pay
In Indonesia, the typical working hours are 40 hours per week. On average, employees work approximately 8 hours a day. Employees are paid overtime pay when they perform extra working hours. The maximum number of overtime hours is 4 per day and 18 per week. There are two methods to calculate the overtime pay:
For overtime on weekdays, the rate is 1.5x the hourly wage for the first hour and 2x hourly wage for the next hours.
For overtime on weekly holidays and national holidays, it will follow the below.
For companies with 5 working days, the rate is 2x the hourly wage for the first 8 hours, 3x hourly wage for the 9th hour, and 4x hourly wage for the 10th and 11th hours.
For companies with 6 working days, the rate is 2x the hourly wage for the first 7 hours, 3x hourly wage for the 8th hour, and 4x hourly wage for the 9th and 10th hours.
For holidays that fall on the shortest working day (e.g., Friday), the rate is 2x the hourly wage for the first 5 hours, 3x hourly wage at the 6th hour, and 4x hourly wage at the 7th and 8th hours.
Wage per one hour is equal to 1/173 employee’s monthly wage. If the wage/salary consists of basic salary and fixed allowance, then the overtime calculation is based on 100% from wage/salary. If the wage/salary consists of basic salary, fixed allowance, and variable allowance, and basic salary plus fixed allowance is still lower than 75% from total wage/salary, then the calculation of overtime pay is based on 75% of the total wage/salary.
Tax reporting in Indonesia
All tax residents in Indonesia are subject to a Withholding Progressive Tax. It is a form of income tax that is contributed to the Government by the employee. The two types of individual taxpayers are:
Individual Taxpayers
If you have stayed in Indonesia for more than 183 days, the individual tax resident within a period of 12 months.
Or within a fiscal year, it has been present in Indonesia for less than 183 days and has the intention to continue staying here.
If the individual gets a working visa, work and stay permit, or an employment contract that extends beyond 183 days.
Non-Resident Taxpayers
For a non-resident, a single rate of 20% is imposed on gross income, except for income from the sale of shares and certain assets from incorporated companies, which is subject to final 5% tax on the sales proceeds.
Employers are required to prepare and file withholding Tax Return ((TT-11, 11(1)) to the Tax Authority on a quarterly and annual basis. The 20th of April, July and October are the submission dates of the quarterly report, 10th of February of next year for Annual Report. There are two types of withholding tax forms for employees: form 1721 A1 and 1721 A2. Personal taxpayers have three types of Annual SPT forms: SPT Form 1770, SPT Form 1770 S, and SPT Form 1770 SS.
All reports and returns can be submitted by either the client or the payroll provider. Documents must be signed by the employer, or a representative of the payroll provider that is authorized by the client.
Social Security in Indonesia
All companies must register their employees in health and employment and employment social security programs. BPJS stands for Badan Penyelenggara Jaminan Sosial (Social Insurance Administration Organization). Indonesia’s Social Security Programs (BPJS) is run by two organizations:
Social Security Agency for Health Insurance (BPJS Kesehatan), covering health insurance.
Social Security Agency for Workers’ Social Security (BPJS Ketenagakerjaan) that provides work accidents protection, death insurance, old age savings, healthcare, and pension.
Employers are responsible in ensuring their employees are covered by workers’ social security programs under two government social security agencies. Employees’ contributions are collected by the employer through payroll deductions. These must be paid to BPJS together with the contributions borne by the employers.
Leave regulation
Annual leave
Employees are entitled to at least 12 days of paid annual leave per year after completing one full year of employment. Employees who have been working for six consecutive years for the same employer are entitled to one month of leave in the seventh year of service and one month of leave in the eighth year of service.
Maternity Leave
The maternity leave is given for the period of 3 months and is usually taken 1.5 months prior to the delivery and 1.5 months after the delivery. During maternity leave, the company must give the full wages to the employees. The length of the maternity leave can be extended if there is a recommendation from the doctor.
Sick Leave
An employee who is not able to perform work due to illness is entitled to paid leave in the below manner:
For the first 4 months, an employee shall be entitled to 100% of their wages;
For the second 4 months (5th to 8th month), an employee shall be entitled to 75% of their wages;
For the third 4 months (9th to 12th month), an employee shall be entitled to receive 50% of their wages;
For subsequent months, an employee shall be entitled to receive 25% of their wages prior to the termination of employment.
Personal Leaves
The terms of personal leaves are also regulated. There are some conditions in which employees’ personal leaves should be paid, including:
Worker’s marriage (3 days)
Worker’s child’s marriage (2 days)
Worker’s son’s circumcision (2 days)
Worker’s child’s baptism (2 days)
Worker’s wife giving birth or having a miscarriage (2 days)
The death of the worker’s close family members (spouse, child, in-laws, parents, or parents-in-law) (2 days)
The death of the worker’s extended family (1 day)
The above are just a broad overview of the payroll legislations that both employers and employees in Indonesia need to be aware of. More details on the employment laws and statutory benefits can be found at the respective Indonesia authority’s website.
Managing payroll for a large country with various states can potentially be daunting. Hence, it is advisable to invest in a robust payroll software to take care of the administrative payroll matters. Most payroll software today comes with features that enable salary calculations and tax computation while taking into account the statutory contributions and deductions. Other features include monthly alerts to remind payroll staff of important tax filing deadlines or payroll cut-off dates. i-Admin helps organisations to manage complex payroll processes across multiple countries, such as Singapore, Hong Kong, Malaysia, Indonesia and more. Speak to one of our consultants today to understand how we can support you on your payroll journey.
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