All employees of a company in Hong Kong receive their salaries through the HR department. The process of maintaining accurate records for employee compensation is known as payroll accounting. Payroll accountants play a critical role in ensuring that records are properly filed, so employees receive correct salary payments for their work and financial operations comply with Hong Kong’s regulatory requirements.
In this article, we will outline what payroll accounting is, what’s included in payroll accounting, provide examples relevant to Hong Kong businesses, and explain how to set up payroll accounting in Hong Kong.
Content Outline
What is Payroll Accounting?
Payroll accounting in Hong Kong involves recording and tracking employee compensation details, including tax withholdings, Mandatory Provident Fund (MPF) contributions, and any employee benefits provided. Payroll accountants use financial journal entries to summarize a company’s transactions and overall cash flow.
These payroll entries are part of the general ledger, which organizes all financial data. Once payroll information is properly recorded for each employee, the human resources department can access this data and share it with managers for performance evaluations and compensation reviews.
What Is Included in Payroll Accounting?
Here are the key details to include when recording employee compensation:
1. Basic Salaries, Commissions & Bonuses
It’s important to record all income an employee earns within the financial year, including their annual salary, bonuses, and any approved overtime payments. In Hong Kong, if overtime pay applies, be sure to verify approval through both the employee’s supervisor and the HR department. You should also confirm any commissions earned from successfully closed business deals, as these are common in sales-related roles across various industries.
2. Salary Taxes (BIR60, IR56B)
In Hong Kong, payroll accounting must comply with the Inland Revenue Department (IRD) regulations, which require accurate reporting of employee income and related taxes. Two key forms involved are:
- BIR60 (Employer’s Tax Return): While primarily used by the employer to declare their business profits and financial information, it also includes sections related to employee remuneration. Payroll accountants must ensure all salary payments, bonuses, and benefits provided to employees are correctly recorded, as this data contributes to accurate tax reporting on the BIR60.
- IR56B (Employer’s Return of Remuneration and Pensions): This form is essential for reporting each employee’s annual income, allowances, bonuses, and benefits to the IRD. Payroll accountants are responsible for preparing and submitting the IR56B for every employee before the annual deadline, ensuring compliance with Hong Kong tax laws. This form is critical for employees to file their personal tax returns accurately.
Accurate completion of these forms ensures the company remains tax compliant and employees receive the correct tax documents needed for their individual filings. Errors or delays in payroll accounting can result in penalties from the IRD and complications for employees during the tax season.
3. Employee Insurances
When handling payroll accounting related to an employee’s insurance, you need to calculate and document the following:
3.1 Employer’s Insurance Contributions
- Determine the portion of insurance premiums paid by the employer (e.g., medical, life, accident, or critical illness insurance).
- Record these amounts as part of employee benefits and operating expenses.
3.2 Employee’s Insurance Deductions
- Calculate the portion of premiums deducted from the employee’s salary, if the insurance plan requires employee contributions.
- Ensure these deductions are accurately reflected in payslips and payroll records.
3.3 Taxable vs. Non-Taxable Benefits
- Assess whether the insurance benefits provided are taxable under Hong Kong’s Inland Revenue Ordinance.
- Some employer-paid insurance premiums may be considered a taxable benefit and must be reported in the IR56B form.
3.4 Insurance Reimbursements or Claims
- Track any insurance reimbursements paid to employees through the payroll system.
- Ensure proper classification of these amounts in payroll records (whether as taxable income or non-taxable reimbursements).
3.5 Impact on Final Pay Calculations
- For resignations or terminations, calculate any remaining insurance contributions or final deductions to be settled in the last payment cycle.
Payroll Accounting Examples in Hong Kong
Here are practical payroll accounting examples specific to Hong Kong business operations:
1. Retail
Here’s a detailed payroll accounting example in table format for a retail company in Hong Kong:
| Item | Amount (HKD) | Debit Account | Credit Account | Description |
|---|---|---|---|---|
| Basic Salary | 300,000 | Salary Expense | Bank | Monthly salaries for staff |
| Overtime Pay | 20,000 | Overtime Expense | Bank | Approved overtime payments |
| Year-End Bonus | 50,000 | Bonus Expense | Bank | Year-end bonus distribution |
| Employer MPF Contribution | 17,500 | MPF Expense | MPF Payable | 5% of relevant income (employer share) |
| Employee MPF Deduction | 17,500 | — | MPF Payable | 5% deducted from employee salaries |
| Salaries Tax Withheld | 15,000 | — | Salaries Tax Payable | Tax withheld for IRD reporting |
| Housing Allowance | 10,000 | Allowance Expense | Bank | Monthly housing allowance |
| Final Payment for Resigned Employee (Including Unused Leave) | 25,000 | Final Payment Expense | Bank | Final payout for terminated staff |
Total Monthly Payroll Payment:
HKD 300,000 + 20,000 + 50,000 + 10,000 + 25,000 = HKD 405,000 (excluding MPF and tax deductions)
2. Healthcare
Here’s a payroll accounting example for the healthcare industry in Hong Kong:
| Item | Amount (HKD) | Debit Account | Credit Account | Description |
|---|---|---|---|---|
| Basic Salary (Doctors & Nurses) | 500,000 | Salary Expense | Bank | Monthly salaries for medical staff |
| On-Call/Shift Allowance | 30,000 | Allowance Expense | Bank | Special shift and night duty allowances |
| Performance Bonus | 80,000 | Bonus Expense | Bank | Quarterly performance bonuses |
| Employer MPF Contribution | 27,500 | MPF Expense | MPF Payable | 5% of relevant income (employer share) |
| Employee MPF Deduction | 27,500 | — | MPF Payable | 5% deducted from employee salaries |
| Salaries Tax Withheld | 25,000 | — | Salaries Tax Payable | Tax withheld for IRD reporting |
| Housing Allowance (for Expat Doctors) | 20,000 | Allowance Expense | Bank | Housing benefit for expatriate staff |
| Medical Insurance Premium (Employer Contribution) | 15,000 | Insurance Expense | Bank | Employer-paid group medical insurance |
| Final Payment for Departing Employee (Including Unused Leave) | 35,000 | Final Payment Expense | Bank | Final payout for departing staff |
Total Monthly Payroll Payment:
HKD 500,000 + 30,000 + 80,000 + 20,000 + 15,000 + 35,000 = HKD 680,000 (excluding MPF and tax deductions)
3. Construction
Here’s a payroll accounting example for the construction industry in Hong Kong:
| Item | Amount (HKD) | Debit Account | Credit Account | Description |
|---|---|---|---|---|
| Basic Salary (Site Workers) | 400,000 | Salary Expense | Bank | Monthly wages for site workers |
| Overtime Pay (Approved Projects) | 50,000 | Overtime Expense | Bank | Overtime payments for extended shifts |
| Site Allowance | 25,000 | Allowance Expense | Bank | Special site hardship allowance |
| Employer MPF Contribution | 21,250 | MPF Expense | MPF Payable | 5% of relevant income (employer share) |
| Employee MPF Deduction | 21,250 | — | MPF Payable | 5% deducted from employee salaries |
| Salaries Tax Withheld | 18,000 | — | Salaries Tax Payable | Tax withheld for IRD reporting |
| Safety Bonus | 10,000 | Bonus Expense | Bank | Bonus for zero-incident performance |
| Medical Insurance Contribution | 12,000 | Insurance Expense | Bank | Employer-paid medical insurance |
| Final Payment for Resigned Worker (Including Unused Leave) | 28,000 | Final Payment Expense | Bank | Final payout for terminated worker |
Total Monthly Payroll Payment:
HKD 400,000 + 50,000 + 25,000 + 10,000 + 12,000 + 28,000 = HKD 525,000 (excluding MPF and tax deductions)
How To Get Started With Payroll Accounting?
✅ Step 1: Understand Your Legal Obligations as an Employer
- Familiarize yourself with Hong Kong’s Employment Ordinance and Inland Revenue Ordinance to comply with statutory requirements.
- Know key employer responsibilities such as calculating final payments, handling severance, and honoring statutory holidays.
- Stay informed about the latest Minimum Wage Ordinance and MPF contribution rules.
✅ Step 2: Register Your Business with the IRD as an Employer
- You must notify the Inland Revenue Department (IRD) within 3 months of hiring your first employee by filing Form IR56E.
- This allows you to legally report employee income and fulfill tax obligations.
✅ Step 3: Set Up a Mandatory Provident Fund (MPF) Scheme for Your Employees
- Choose an approved MPF scheme and enroll all eligible employees within 60 days of employment.
- Ensure both employer and employee contribute 5% of relevant income (capped at HKD 1,500 per month each).
✅ Step 4: Implement a Reliable Payroll System
- Select payroll software or services that support Hong Kong-specific compliance, such as Xero, QuickBooks, or local providers like Kingdee.
- Ensure your system can manage:
- Accurate salary calculations
- MPF contributions
- Tax deductions and reporting
- Payslip generation
- Final payment settlements
✅ Step 5: Collect and Maintain Accurate Employee Records
- Keep detailed records for each employee, including:
- HKID copies and personal details
- Signed employment contracts and salary agreements
- MPF enrollment forms
- Tax forms (e.g., IR56E at hiring, IR56F/IR56G for terminations)
✅ Step 6: Process Monthly Payroll on Time and Accurately
- Calculate base salaries, overtime, bonuses, allowances, and commissions correctly.
- Deduct MPF contributions and withhold salaries tax as required.
- Issue payslips and ensure salaries are paid on time to maintain compliance and employee satisfaction.
✅ Step 7: Prepare and Submit Mandatory Tax Forms
- File all required IRD tax forms punctually:
- IR56E – When hiring a new employee
- IR56B – Annual income report for each employee
- IR56F/IR56G – Upon termination or when employees leave Hong Kong
- Complete the BIR60 Employer’s Tax Return annually.
✅ Step 8: Regularly Audit Payroll Processes for Compliance
- Conduct periodic reviews to ensure payroll accuracy and legal compliance.
- Stay updated on changes to MPF rules, tax regulations, and employment law to avoid penalties.
Conclusion
Payroll accounting in Hong Kong is a critical function for ensuring legal compliance, maintaining accurate financial records, and supporting employee satisfaction. With strict regulations surrounding MPF contributions, tax reporting, and employee benefits, employers and HR teams must stay organized and proactive in managing payroll processes. By implementing reliable systems and staying informed about local labor laws, businesses can streamline payroll operations, avoid costly penalties, and foster a positive working environment that attracts and retains top talent.
