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Your Guide To Managing Payroll In Malaysia

Malaysia is one of the most populous countries in Southeast Asia, with a population of over 32 million in 2021. It is also one of the most open economies in the world, with the country experiencing an upward economic growth of 5.4% on average since 2010.

Since Malaysia’s independence in 1957, the country has successfully diversified its economy – from one that was initially agriculture and commodity-based to a booming economy that includes manufacturing and service sectors. The diverse economy that Malaysia boosts today makes it an attractive place for businesses and investors.

As businesses set up operations in Malaysia, 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 Malaysia.

General overview

As with any business and country, payroll processing in Malaysia typically occurs on a monthly basis. However, the time taken to implement a new payroll system will vary depending on the complexity of requirements and headcount size. A general rule of thumb for new businesses is around two months, which include one month of payroll parallel run.

In terms of data protection management, there is currently no formal data protection legislation in place regarding payroll information. Most organisations typically rely on internal or external corporate policies to manage data protection principles.

Key payroll processing steps

Payroll processing in Malaysia can be broadly listed as follows:

  1. Payday: salary payments need to be deposited into employees’ individual bank accounts by the 7th of each month. This can be done via cash, cheques or bank credit.

  2. Salary calculations: key salary components on top of base salary includes overtime, sick pay and transportation allowance.

  3. Issuance of payslips: all employees in Malaysia need to be issued payslips, either in hardcopy or electronic softcopy. The payslip needs to include information such as the wages earned and deductions made.

  4. Statutory contributions and deductions: Malaysia has its own set of taxes and levies that both employees and employers need to contribute. This includes income tax under the monthly tax deduction (MTD) scheme, Social Security and Employee Provident Fund (EPF), and Employee Insurance Scheme (EIS)

  5. Payment remittance to relevant authorities: Given the multiple contribution schemes, payroll staff need to be familiar with the contribution deadlines as well as the available payment methods to avoid late payment charges.

Mandatory Benefits

Under the Malaysian Employment Law, employees are entitled to receive statutory benefits which include annual leaves, public holidays, medical leave as well as benefits for termination or unemployment.

Supplementary Benefits

These are usually optional benefits that are offered to employees in addition to the mandatory benefits. Such benefits typically include housing allowance, transport allowance, long service, commission or bonus schemes and any other pension scheme.

Social Security and Employee Provident Fund (EPF)

There are three key funds that employers and employees need to contribute towards: Social Security Organisation (SOCSO), Employees Provident Fund (EPF) and Employee Insurance Scheme (EIS)

Social Security Organisation (SOCSO)

The SOCSO was set up to provide social security protection in the form of social insurance. This includes medical and cash benefits, provision of artificial aids and rehabilitation to employees, as well as financial guarantees and protection to the employee’s family. There are two types of social protection schemes administered: Employment Injury Insurance Scheme and Invalidity Pension Scheme.

Employers need to register and contribute monthly SOCSO contributions to their employees. This includes foreign employees. Employees are eligible for an income tax relief of MYR250 per annum for SOCSO contribution. Employees will need to pay monthly contributions by the 15th of the following month. For instance, January contributions need to be paid no later than the 15th of February.

Monetary payments that are subject to SOCSO contribution are:

  1. Salaries

  2. Overtime payments

  3. Commissions

  4. Wages for maternity leave, study leave, half-day leave

  5. Any other contractual payments

Employees Provident Fund (EPF)

The EPF was established to help employees, mainly within the private sector, to save for their retirement. It also provides supplementary benefits to members to utilise part of their savings for home ownership and other eligible withdrawal schemes. The amount of contribution depends on the employee’s and employer’s monthly contributions and yearly dividends earned. Monthly EPF contributions should be paid out by the 15th of the following month.

Monetary payments that are subject to EPF contribution include:

  1. Salaries

  2. Payment for unutilised annual or medical leave

  3. Bonuses

  4. Allowances

  5. Commissions

  6. Incentives

  7. Wages for maternity leave, study leave, half-day leave

  8. Any other contractual payments

The employee and employer contribution rates are tiered based on the income bracket, residency status and age group. The breakdown of the contribution rates can be found here.

Employee Insurance Scheme (EIS)

Administered by the SOCSO as well, the EIS protects employees aged 18 to 60 who have lost their employment. However, EIS is not applicable to employees in the case of voluntary resignation, expiry of the contract, unconditional termination of the contract, completion of a project specified in a contract, retirement, and dismissal due to misconduct.

The employee’s and employer’s contribution rate is 0.2% each of the employee’s assumed monthly salary. The contribution rate is capped at a monthly salary of MYR4,000. The EIS contribution is usually paid together with the SOCSO contribution.

Payroll Records

Under Malaysia’s new Personal Data Protection Act (PDPA) which came into effect on 15 November 2013, employers must keep records of employees’ payroll information. These payroll records need to be retained for at least 6 years before they can be made unavailable.

The above are just a broad overview of the payroll processes and payroll legislations that both employers and employees in Malaysia need to be aware of. More details on the employment laws and statutory benefits can be found at the respective Malaysian 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 and Malaysia. Speak to one of our consultants today to understand how we can support you on your payroll journey.

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