Malaysia is a thriving economy with a per capita GDP of 10,412.3 USD. Surrounded by Indonesia, Singapore, Thailand, and the Philippines, Malaysia occupies a strategic location as a gateway to the rest of Southeast Asia. As one of the leading economies in the region, Malaysia is a premier choice for investors and businesses looking to expand to the Southeast Asian market.
If you’re considering starting or expanding your business in the country, you must understand Malaysia's payroll rules and regulations. Find out the details and complexities of managing payroll in Malaysia in this guide.
How is Payroll Calculated in Malaysia?
The employment compliance laws in Malaysia can get pretty complicated for international businesses. Although understanding the law is one of the trickiest parts, there are many important points you should be aware of before setting up your business.
The payroll system in Malaysia is broadly similar to a lot of countries. The primary components of an employee’s salary in Malaysia include basic pay, allowances, perquisites, overtime, and incentives. Besides, both the employer and employee contribute to the payroll, which is deducted from the employee’s gross salary.
Contributions towards income tax and social security in Malaysia include
- ~Monthly Tax Deduction (MTD) system
- ~Social Security and Employee Provident Fund
- ~~SOCSO social protection schemes (Employment Injury Insurance Scheme and Invalidity Pension Scheme)
- ~~Employees’ Provident Fund (EPF)
- ~Employment Insurance Scheme
Important Elements of Salary Structure in Malaysia
Before you implement the payroll policies and procedures in Malaysia, you must understand the critical elements in the country’s salary structure. Below is a list of the different components that constitute employees’ payroll in Malaysia:
1. Basic salary: Basic salary refers to the monthly income. It is the fixed amount in the overall compensation package and depends on the employee’s designation and the industry. The basic salary excludes overtime pay or any other compensation.
2. Gross pay: Gross pay is the income after adding allowances to the basic salary but excluding taxes and other deductions. For example, an employee earning 2,000 MYR (477.73 USD) per month means that their gross pay is 2,000 MYR, including bonuses, holiday pay, overtime, etc.
3. Net pay: Net pay is what the employee gets after adjusting taxes and other deductions to the gross pay. Using our previous example, if an employee earns 2,000 MYR as gross pay, the amount that will eventually end up in their salary account will be less than the gross income due to deductions.
4. Incentive pay: Payroll in Malaysia also includes various performance-based incentives such as commissions, bonuses, profit shares, and gratuity.
5. Overtime: If an employee agrees to overtime, the employer must pay at least one and a half times more than the standard hourly wage for regular workdays. The employee is entitled to two and three times the hourly rate for overtime on rest days and public holidays, respectively.
6. Perquisites: The payroll in Malaysia also includes perquisites. These are benefits in cash or kind that can be converted into money. Examples of perquisites that the employer reimburses include travel allowances, gift vouchers, and professional subscriptions. Some perquisites are exempt from the payroll tax in Malaysia.
7. Allowances: Employees are paid allowances to cover certain expenses incurred in the line of work. Examples include meals, travel, and phone allowance.
8. Benefits-in-kinds (BIKs): BIKs are benefits that cannot be converted into cash. These typically include medical benefits, driver and company car, and phone provided by the employer. Since BIKs are not cash payments, they may not reflect in the employee’s payslips but may be considered for tax purposes.
How to Set Up a Payroll in Malaysia?
If you are an overseas business looking to set up a payroll in Malaysia, the first step is to register either as a foreign-owned or locally-owned company. Setting up private limited companies is the most popular option among businesses seeking to establish a presence in the Southeast Asian country.
Regardless of your business or company type, you must go through the standard registration procedures before setting up the payroll. The following pointers give an overview of setting up payroll in Malaysia:
- Register with the Companies Commission of Malaysia to reserve your company’s name
- Submit the relevant incorporation documents for company registration
- Pay the registration fee. The fee depends on the size of the share capital of a company.
- Make additional minor payments, including post-incorporation package fees and stamp fees
- Pay the online registration fee
- Open an in-country bank account for payroll
- Register for income tax, Goods and Services Tax, EPF, SOCSO, and PAYE
A Step-by-step Process of Payroll Processing in Malaysia
The Malaysia payroll process can seem overwhelming if you’re new to the country’s business space. Listed below are the key steps you need to follow for processing payroll in Malaysia:
1. Payday: Salaries must be deposited into the employee’s bank account by the 7th of every month via cash, cheque, or bank credit.
2. Computation of salary: Calculating salary means determining the gross pay by adding various benefits and allowances to the basic income. The salary figure also includes sick pay, overtime, and others.
3. Issuing payslips: The payroll rules and regulations in Malaysia mandate that all employers must issue payslips to their employees in hardcopy or electronic format. Further, the payslips must contain all information about the employee’s wages, deductions, allowances, etc.
4. Statutory deductions/contributions: Some of the payroll deductions in Malaysia include income tax under the monthly tax deduction (MTD) system, Social Security and Employee Provident Fund (EPF), and Employee Insurance Scheme (EIS). Both employers and employees need to contribute towards the levies and taxes.
5. Remittance of payment: Remitting payment to the relevant authorities is critical in the Malaysian payroll process. Thus, your payroll staff must know the different contribution scheme deadlines and available payment methods to avoid late charges.
According to the payroll rules and regulations in Malaysia, both the employer and the employee must contribute to the payroll. The contributions also include the share from payroll tax in Malaysia. The following points detail the employer and employee contributions towards the payroll in Malaysia:
The table below enumerates the employer’s contribution toward payroll in Malaysia:
Payroll in Malaysia includes the following contributions from the employee:
Employee Income Tax
Payroll deductions in Malaysia also include the income tax employees pay. The following table lists the taxable income ranges and the payroll tax in Malaysia:
*1 MYR = 0.24 USD
The payroll process typically follows a monthly cycle in Malaysia, and payments are made on the last working day. However, employees’ bank accounts must be credited with their salary by the 7th of every month. In addition, the payroll in Malaysia includes a customary 13th-month pay at the end of each year.
Malaysia Payroll Options for Companies
Overseas businesses have options for managing the payroll in Malaysia. However, the payroll option you choose largely depends on the type of business, and thus, the process will differ with companies. Below we have listed the most prevalent payroll options for companies in Malaysia:
- ~Internal payroll: Your company can internally handle the payroll in Malaysia if time and resources permit.
- ~Payroll outsourcing: Outsourcing payroll in Malaysia is the most convenient and cost-effective option for companies that do not have the resources to run an internal payroll. Multiplier EOR solutions can smoothly take care of your company’s payroll-related compliance measures.
Entitlement and Termination Terms
The Employment Act (1955) and Labour Relations Act (1967) govern employer-employee relations in Malaysia. Furthermore, the laws seek to balance the right of employers to dismiss employees and the employees’ security of tenure without any discriminatory repercussions to either party.
Since Malaysia does not follow an at-will employment system, employers cannot hire and fire employees at will. If an employer wants to dismiss an employee, it has to be done following a fair procedure, and the latter will be entitled to termination benefits. Therefore, the employment contract must include clear entitlement and termination terms that the employer must follow when dismissing an employee. While Malaysia does not have any provision for a statutory notice period, giving a 30-day notice is standard practice. The employer must set out the reason for termination in the notice.
In addition, terminated employees are entitled to severance pay, although the amount differs with the service period. It would be best if you took note of the following severance pay rules before setting up payroll in Malaysia:
Malaysia Payroll Processing Company
If Malaysia’s payroll rules and regulations seem confusing, Multiplier can help you set up payroll in Malaysia. Our digital platform can help you automate payroll and benefits for your international workforce while you can focus on business growth and expansion. Contact us today to support your global payroll and compliance.
How Multiplier Can Help With Global Payroll?
Multinational businesses operating in Malaysia have significant scope for growth and expansion. Malaysia offers lucrative opportunities to foreign business entities seeking to enter the Asian market with an advanced economy and pro-business government regulations. The dynamic business environment, cosmopolitan culture, strategic location, robust infrastructure, and talented workforce make Malaysia a top-tier business destination. However, you must understand the country’s employment laws before setting up a business.
Frequently Asked Questions
Which payroll system is the best in Malaysia?
You have two options for setting up a payroll in Malaysia. Depending on your time and resources, you can either opt for an internal payroll system or hire a payroll processing company to handle your international payroll and compliance.
What is PAYE Malaysia?
In Malaysia, employers withhold tax on employment income under the pay-as-you-earn (PAYE) scheme for remittance to the tax authorities. All tax deductions are made on a PAYE basis.
What happens if you don't pay income tax in Malaysia?
According to the Inland Revenue Board of Malaysia, missing tax payment deadlines entails a 10% increment on the payable tax. However, failure to pay taxes altogether may incur a fine of 200 to 20,000 MYR and imprisonment for six months.