What’s in this article
Entering the Malaysian market can be an exciting venture for foreign-owned businesses, yet understanding the intricacies of payroll compliance is essential to running a compliant and efficient operation. From taxes to statutory contributions, Malaysia has specific payroll requirements that foreign-owned businesses must adhere to to stay compliant and avoid penalties. This guide provides a detailed overview of the essential payroll regulations, tax obligations, and contributions, including the Employees Provident Fund (EPF), Social Security Organization (SOCSO), Employment Insurance System (EIS), and foreign worker levies, to help foreign businesses navigate Malaysia’s payroll landscape effectively.
Registering Your Business in Malaysia
Establishing a legal entity in Malaysia is the first step toward hiring employees and managing payroll. Foreign companies typically register as a private limited company, known as Sendirian Berhad (Sdn. Bhd.), which provides benefits such as limited liability and the ability to operate as a legally recognized business entity.
Steps for Registration:
- Incorporate with the Companies Commission of Malaysia (SSM): This process requires filling out various forms, including company registration and shareholder information. A minimum of one director and one shareholder is needed, and at least one director must ordinarily reside in Malaysia.
- Obtain Licenses and Permits: Depending on the industry, additional licenses may be necessary. For example, certain sectors like education, telecommunications, and financial services may have additional licensing requirements from relevant government bodies.
Benefits: Registering as an Sdn. Bhd. not only allows you to hire and manage payroll legally but also positions your company as a credible entity in Malaysia, making it easier to enter into contracts, acquire business assets, and protect your liability.
Understanding Tax Obligations
Malaysia’s income tax obligations are governed by the Inland Revenue Board of Malaysia (LHDN). Employers play a crucial role in the tax collection process by withholding taxes from employee salaries through the Monthly Tax Deduction (MTD) system, which helps employees fulfill their annual tax requirements gradually over the year.
Key Points:
- Resident vs. Non-Resident Status: Tax residency impacts the tax rate. Employees who are in Malaysia for 182 days or more in a tax year are considered tax residents and are subject to progressive tax rates ranging from 0% to 30%, while non-residents are taxed at a flat rate of 30%.
- Monthly Tax Deduction (MTD) Calculation: Employers need to calculate MTD for each employee, considering taxable income, EPF contributions, and SOCSO payments. Software and calculators provided by the LHDN can aid in accurate MTD computation.
Importance of Compliance: Monthly deductions must be submitted to the LHDN by the 15th of the following month. Non-compliance can lead to penalties, interest on unpaid taxes, and even legal action, highlighting the need for prompt and accurate tax management.
Mandatory Statutory Contributions
Malaysia has a comprehensive system of statutory contributions that supports employee welfare, retirement, and social security. Employers must make contributions to various funds, which include:
Employees Provident Fund (EPF)
EPF is a retirement fund where both employer and employee make contributions. Employers contribute between 12% to 13% (depending on the employee’s monthly earnings), while employees contribute 9%. Contributions are typically remitted monthly to the EPF Board. For employees aged 60 and above, contributions may be lower or optional. This fund supports employees in building retirement savings and is also accessible under specific conditions like healthcare needs.
You can read more comprehensively about EPF in Malaysia in our guide here.
Social Security Organization (SOCSO)
SOCSO provides protection against work-related injuries and disabilities through the Employment Injury Scheme and the Invalidity Pension Scheme. Employers contribute 1.75% of monthly wages, while employees contribute 0.5%. Registration is mandatory for all employees, and foreign employees are also covered under the Employment Injury Scheme, though they may be excluded from the Invalidity Pension Scheme.
Employment Insurance System (EIS)
EIS is designed to provide temporary financial assistance to workers who have lost their jobs. Both employer and employee contribute 0.2% each of monthly salary, which is used to fund EIS benefits, including job search support and training programs for unemployed individuals. Foreign workers are generally exempt from EIS contributions.
Compliance Reminder: Employers need to remit EPF, SOCSO, and EIS contributions by the 15th of each month. Contributions to these funds are mandatory, and failure to contribute accurately and on time can lead to fines and penalties.
Foreign Worker Levy
The foreign worker levy is a cost that employers must bear when hiring non-citizen employees. This levy varies depending on the industry, with different rates applied to sectors such as manufacturing, plantation, construction, and services. The levy system is a government measure aimed at managing foreign labor and maintaining job opportunities for local citizens.
Important Details:
- Sector-Specific Levy Rates: The levy for hiring foreign workers can range from MYR 1,850 to MYR 10,000 per worker, per year, depending on the industry. Employers need to budget for this levy in addition to payroll expenses.
- Purpose and Compliance: The levy is payable by employers and cannot be deducted from employees’ wages. It must be renewed annually, and failure to pay the levy may result in penalties, revocation of work permits, or legal action.
Payroll Processing Requirements
Malaysia has strict rules governing payroll processing, from timely salary payments to transparent documentation. This includes:
- Payday Requirements: Salaries must be paid no later than the 7th of the following month, ensuring that employees receive their compensation without delay. Late salary payments are a violation of Malaysian labor laws and can lead to penalties and affect employee morale.
- Payslip Distribution: Employers must provide detailed payslips to employees either in electronic or paper format. Payslips should itemize gross salary, statutory deductions (e.g., tax, EPF, SOCSO), and net pay, ensuring clarity and transparency for employees. Digital payslips are increasingly accepted, provided they are accessible to employees and meet record-keeping standards.
Maintaining Accurate Record-keeping
Accurate and organized record-keeping is essential for payroll compliance, allowing businesses to manage employee information, track payroll expenses, and prepare for audits or inspections by regulatory bodies.
Requirements:
- Employee Records: Employers must maintain up-to-date records for each employee, including personal details, employment contracts, salary changes, deductions, and statutory contributions. These records must be kept securely and accessible for audit purposes.
- Retention Period: Payroll records must be retained for at least seven years in Malaysia. This includes records of salary payments, statutory deductions, and any other payroll-related documents. Accurate records are not only legally required but are also useful for tracking expenses, handling disputes, and planning budgets.
Compliance Importance: Proper documentation safeguards the business in the event of an audit or dispute. Failure to maintain accurate records can result in fines and complicate any future inspection processes.
Compliance and Reporting Deadlines
Meeting reporting deadlines is a crucial part of staying compliant. Employers must ensure all statutory contributions and tax deductions are accurately submitted to the relevant authorities on time.
Key Deadlines:
- Monthly Tax Deductions (MTD): MTD payments to the Inland Revenue Board of Malaysia (LHDN) must be made by the 15th of each month. This monthly submission helps employees meet their annual tax requirements gradually.
- EPF Contributions: EPF contributions are due to the EPF Board by the 15th of the month. This mandatory deadline helps ensure retirement savings are promptly credited to employees’ EPF accounts.
- SOCSO and EIS Contributions: Both SOCSO and EIS contributions must be submitted by the 15th of each month. Timely submission helps maintain employee social security benefits and protects employers from compliance issues.
Penalties for Non-Compliance: Missing these deadlines can lead to fines, interest on overdue payments, and potential legal action. Employers can avoid penalties by using payroll software or outsourcing payroll management to stay organized and timely in their submissions.
FAQs
Employers must deduct income tax from employees’ salaries monthly under the Monthly Tax Deduction (MTD) system and remit it to the Inland Revenue Board of Malaysia (LHDN). Tax rates are progressive for residents, while non-residents pay a flat rate of 30%.
Employers must contribute to the Employees Provident Fund (EPF), Social Security Organization (SOCSO), and the Employment Insurance System (EIS) for eligible employees. These funds cover retirement savings, social security, and unemployment insurance.
Foreign workers are generally covered by EPF and the Employment Injury Scheme under SOCSO, though they are exempt from the Invalidity Pension Scheme and EIS. Employers hiring foreign workers must also pay a foreign worker levy.
Employers must pay employees by the 7th day of the following month, in accordance with Malaysian labor law. Late payments may result in penalties.
Missing deadlines for EPF, SOCSO, EIS, or tax payments can lead to fines, interest on overdue amounts, and potential legal action. It’s crucial to make timely contributions by the 15th of each month.
The foreign worker levy is an annual fee employers must pay to hire foreign workers, with rates varying by industry. This fee cannot be deducted from employees’ salaries and must be paid by the employer.
Employers must keep payroll records, including pay slips, contracts, and statutory contribution details, for at least seven years. These records support compliance and may be required for audits.
Businesses must first register with the Companies Commission of Malaysia (SSM) and obtain any industry-specific licenses. Employers must then register with the Inland Revenue Board (LHDN), EPF, SOCSO, and EIS for payroll processing.
Yes, payroll can be outsourced to professional services in Malaysia. Outsourcing ensures compliance with local laws, helps avoid penalties, and reduces administrative burden, making it ideal for foreign-owned businesses unfamiliar with Malaysian regulations.
Yes, there are several local payroll software options, as well as international tools that support Malaysian regulations. These tools help automate tax, EPF, SOCSO, and EIS deductions, making it easier to meet compliance requirements.
