Payroll Processing and Administration Guide in Malaysia

Payroll Processing and Administration Guide in Malaysia

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HR & Payroll

Payroll processing in Malaysia requires a thorough understanding of local laws, labor laws and cultural sensitivities To maintain strict compliance even as making sure of clean operations, it’s critical for corporations to get payroll right. The guide below outlines the important thing elements of the payroll system and management in Malaysia.

Registration

In Malaysia, all employers are required to enroll and register their employees with the Employees Provident Fund (EPF),  Social Security Organization (SOCSO) and the Inland Revenue Board of Malaysia (IRBM or Lembaga Hasil Dalam Negeri, LHDN). No matter what is the size of the businesses and the number of employees, registration for all employees is mandatory.

Employer registration: Companies that employ staff in Malaysia must register with LHDN for tax purposes, EPF for mandatory retirement fund, and SOCSO for insurance benefit.

Employee registration: New hires must be registered with both EPF and SOCSO to ensure that they are eligible for the appropriate benefits.

Salary Components

The salary of an employee in Malaysia is made up of three main components which are basic salary, allowances and overtime.

Basic salary is the foundational amount agreed upon in the employment contract. It is the amount that the employee is guaranteed to be paid, regardless of any other factors.

Allowance is the additional payments that are made to the employees such as housing, transportation and medical care.

Overtime is payment for work done outside of regular working hours which is typically 1.5x to 2x the hourly rate.

Statutory Deductions

Statutory deductions are compulsory deductions that employers are legally obligated to make from an employee’s salary or wages as stipulated by government laws and regulations.  

Income tax: This is a deduction at source, commonly referred to as PCB (Potongan Cukai Bulanan) or Monthly Tax Deduction. The amount of income tax deducted depends on the employee’s salary and if there is tax relief or tax deduction payer are allowed to get back the refund from annual income tax filing.

Employees Provident Fund (EPF): This is a retirement savings scheme that is compulsory for all employees in Malaysia. Employees and employers contribute a percentage of the employee’s salary to the EPF. The EPF can be withdraw at the age of 55.

Social Security Organization (SOCSO): SOCSO provides benefits to employees in the event of work-related accidents, injuries, or diseases. Employers and employees contribute a percentage of the employee’s salary to SOCSO.

Employment Insurance System (EIS): EIS is a social security scheme that is designed to insure employees who face job losses and the amount or allowance compensation serves for the purpose of temporary financial assistance.

Leave Entitlements

Employees in Malaysia are entitled to mandatory leaves which vary depending on the employee’s years of service and the specifics of the employment contract. The most common leave entitlements are:

Annual leave: This is paid leave that employees can take for vacation or other personal reasons. The amount of annual leave entitlement varies as such 8 days per year for employees with less than 2 years of service and it increases with the employee’s years of service.

Sick leave: This is paid leave that employees can take if they are sick or injured. The amount of sick leave entitlement varies as such 14 days per year for employees with less than 1 year of service and it increases with the employee’s years of service. In the case of hospitalization, the employee is entitled to 60 days of sick leave.

Maternity leave:  Female employees are entitled to take before and after giving birth. Eligible mothers are entitled to 98 days post-pregnancy of paid maternity leave.

Benefits and Allowances

In addition to the basic salary, employers may extend a range of benefits and perks to their employees’ compensation packages:

Medical and Health Insurance: This can assist in covering the costs of medical care, encompassing doctor’s visits, hospital stays, and prescription drugs.

Transportation Allowances: These can aid in compensating for the expenses related to commuting to and from work.

Bonuses: Typically disbursed either annually or contingent on performance, these can furnish a substantial financial boost.

Phone Allowance: This is an allowance paid to employees to cover their phone bills. 

Work from Home Allowance: This is a financial provision given to employees to defray the costs associated with establishing a home office covering such as internet connectivity, electricity consumption, and office supplies.

Paid Holiday Allowance: Denoting the number of days employees are entitled to take off from work annually with full remuneration, this benefit can be instrumental for employees seeking relaxation, rejuvenation, or travel opportunities to visit family or explore new destinations.

Malaysia Payroll Cycles

The most common payroll cycle in Malaysia is monthly, with salaries disbursed on or before the 7th day of the following month. 

However, some companies may choose to use alternative payroll cycles, such as biweekly or weekly, particularly for part-time or hourly-paid employees. These more frequent payment schedules align with the variable work hours and compensation structures often associated with such roles.

Record Keeping

Businesses that hire or employ any full-time or part-time workers are obligated to maintain documentation for all payroll records. Payroll records encompass personal employee details, offer letters, monthly payslips, proof of EPF and Socso payments, and leave records. It is imperative to retain all these documents for a minimum duration of seven years. The following are the essential documents to be retained:”

Personal details: This includes the employee’s name, address, identity card, contacts, and emergency contact.

Offer Letter: The contract outlines the terms of service as well as basic salary, benefits, job scope, and others.

Pay slips: Pay slips should be issued to employees on a regular basis, and they should show the employee’s pay, deductions, and net pay.

Tax deductions: The amount of tax that is deducted from an employee’s pay should be recorded.

EPF and SOCSO contributions: The employee’s contributions to the Employees Provident Fund (EPF) and the Social Security Organization (SOCSO) should be recorded.

Leave records: The employee’s leave entitlement and usage should be recorded.

Termination and Final Pay

A final pay is given to an employee when the employee is terminated, resigned, or retrenched. This final pay consists of the following:

Last drawn salary: This is the salary that the employee was paid for their last month of work.

Conversion of unused annual leave: If the employee has any unused annual leave, this should be converted into pay. 

Reimbursement for company properties: Employee must return the company properties such as laptop, mobile phone, car, or any other asset that belongs to the company.

Any other benefits commissions or bonuses as specified in the contract:  It should be paid out as part of their final pay.

Compliance and Reporting

Employers in Malaysia are required to report to a number of statutory bodies on a regular basis. The following are some of the reportings that employers are required to submit:

Monthly tax deductions to the Inland Revenue Board (IRB): The monthly tax deductions must be paid to IRB on a monthly basis.

Monthly contributions to the Employees Provident Fund (EPF) and the Social Security Organization (SOCSO): The employer and employee contributions must be paid to the statutory bodies on a monthly basis.

Annual submission of the EA form: Employers must provide an EA form to the employee for annual filing submission for employee income tax purposes.

Technology and Software

Payroll is a complex and time-consuming process and the to use a system that can automate the process. There are a number of benefits that payroll software can help employers to lower human mistakes:

These payroll software can optimize efficiency by automating tasks such as:

  • Calculating salaries and wages
  • Deducting taxes and contributions
  • Generating payslips
  • Submitting reports to statutory bodies
  • Managing leave application
  • Tracking employee hours

Outsourcing Payroll Malaysia

Many companies in Malaysia are choosing to outsource their payroll functions to experts. Time and cost savings are achieved when deciding upon this option since it helps process payroll efficiently and compliantly.

Fastlane Group is renowned as a preferred payroll outsourced administrator, combining extensive experience with cutting-edge payroll software solutions for Malaysian businesses, such as Employment Hero. We automate payroll processes with an LHDN (IRBM) approved platform. With our professionalism, you can expect an effortless experience devoid of hiccups, seamlessly meeting all requirements.

Conclusion

The complexities of payroll processing and administration in Malaysia can seem daunting. However, by partnering with a trusted partner like Fastlane Group, businesses can navigate this landscape efficiently and confidently. Talk to our expert or schedule a meeting now.

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