HOW TO PROCESS PAYROLL IN MALAYSIA

30th June 2022

Malaysia is one of Southeast Asia's most populous countries, as well as one of the region's most powerful economies. Malaysia is separated into two landmasses by the South China Sea: the western landmass, known as Peninsular Malaysia, is bordered to the north by Thailand and to the south by Singapore, while the eastern landmass, East Malaysia, is bordered by Brunei and Indonesia. Malaysia has a robust economy that has grown at a rate of roughly 6.5 percent per year over the previous half-century, making it an essential gateway to rich regional markets.

It's easy to see why so many companies opt to establish operations in Malaysia due to its strategic position, market competitiveness, competent multilingual talent pool, and world-class technological skills.

One of the keys to success if your firm is considering expanding into Malaysia is to grasp the payroll process and compliance regulations. The last thing you want is for the government auditors to focus on your freshly founded business. Payroll in Malaysia has a variety of components, including work permits, levies, contributions, taxes, and forms, as well as for instructions on how to complete them on time.

How To Process Payroll In Malaysia

1. Payday : By the 7th of each month, salary payments must be paid into employees' bank accounts. This can be accomplished using cash, checks, or a bank credit card.

2. Salary calculations: In addition to the base salary, overtime, sick pay, and transportation allowance are important salary components.

3. Issuance of payslips: In Malaysia, all employees are required to get payslips, either in hardcopy or electronically. The payslip must include details such as the amount of money earned and any deductions made.

4. Statutory contributions and deductions: Malaysia has its system of taxes and levies, which employees and employers must pay. This covers 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: Due to the many contribution schemes, payroll employees must be conversant with contribution deadlines as well as payment methods to avoid late payment fees.

In Malaysia, there are a few common payroll compliance issues to be aware of.

1. Late MTD payments: If employers fail to pay monthly employee income tax withholdings by the 15th of each month, the Inland Revenue Board (IRB) applies fines.

2. Failure to include perquisites, benefits-in-kind, or equity incentives: As these benefits are not often paid through payroll, they might be readily ignored in compensation reporting.

3. Incorrect classification of employees: During payroll data system entry, foreign workers, non-residents, and secondees are frequently classified erroneously. As a result, your organisation may underpay these employees and deduct the incorrect amount of income tax.

4. Failing to stay up-to-date with regulation changes impacting payroll: In Malaysia, four regulatory agencies influence payroll processing laws, making it more difficult to stay current with payroll obligations.

5. Overlooking cultural norms: '13th-month pay,' a single annual payment on top of an employee's total annual income, is prevalent in Malaysian payroll processing. This payment isn't required and failing to make it isn't deemed non-compliance, but it is a cultural practice that may have an impact on employee satisfaction.

Payroll Process And Compliance Essentials In Malaysia

Before we look at some of the most prevalent payroll compliance issues in Malaysia, it's important to grasp the basics of the payroll process as well as the most important compliance factors. Let's start with a review of the basics of Malaysian payroll.

1. Working conditions and wages

Working hours: In Malaysia, an eight-hour workday is normal, with a weekly average of no more than 48 hours and (most commonly) one day off. Women are prohibited from working in the industrial or agricultural sectors between the hours of 10 p.m. and 5 a.m. under government protection measures. In addition, between each shift, women must have at least 11 hours off.

Pay cycles: Salaries in Malaysia are typically paid monthly.

Minimum wages: The national minimum salary is RM1,100, except for 56 city and municipal governments, which is RM1,200.

Employees covered by the Employment Act 1955 (“EA 1955”) should be paid overtime at 1.5 times their hourly pay rate. Rest days are paid double, and public holidays at three times the hourly pay rate. However, the EA 1955 only applies to:

- Employees whose monthly salary does not exceed RM2,000;

- Employees that work for a private company;

- Employees based in Peninsular Malaysia or Labuan's Federal Territory; and

- Employees (irrespective of salary) involved in manual labor, operating or driving transport vehicles, and domestic servants.

Employers can include relevant overtime clauses in their employment contracts for employees who are not covered by EA 1955.

2. Income Tax

Withholding tax: Employers are required to deduct withholding tax at source under Malaysia's monthly tax deduction (MTD) system. Employers must then remit this tax to the Malaysian Inland Revenue Board (IRB) on behalf of their employees every month.

Income tax rates: The maximum income tax rate in Malaysia is 30%, which applies to persons earning more than MYR 2,000,000 or who are referred to as "non-residents." Employees who work in Malaysia for 60–182 days per year are deemed 'non-residents,' regardless of their citizenship status.

Tax clearing and tax filing: Employees must clear and file their taxes at the end of the year before April. Malaysia's fiscal year spans from January 1 to December 31.

3. Holidays And Leave

Paid public holidays: Employees are eligible to pay on 11 public holidays per year that have been gazetted. Five of the eleven days must be:

1. Hari Kebangsaan or National Day;

2. Birthday of Yang di-Pertuan Agong;

3. Birthday of the Ruler or Yang di-Pertua Negeri or Federal Territory day (varies per state);

4. Labour Day; and

5. Malaysia Day (16 September).

The remaining six paid public holidays are chosen at the employer's option from the list below, and must be conveyed to employees via written notice or as stipulated in their employment contracts:

- Birthday of the Prophet Muhammad (s.a.w);

- Chinese New Year (2 days, except 1 day in the states of Terengganu and Kelantan);

- Vesak Day;

- Hari Raya Puasa (2 days);

- Hari Raya Haji (1 day, except 2 days in the states of Terengganu and Kelantan);

- Deepavali;

- Christmas Day; and

- Awal Muharram.

The government, on the other hand, has the authority to declare extra paid public holidays on an ad hoc basis throughout the year. Employers can choose a replacement day if these days are declared at short notice.

There are also several state-based holidays celebrated around the country. Employers, on the other hand, are not compelled to pay employees for these holidays unless they have chosen to include them in their list of paid public holidays.

EVOLET’s Salary Management System

EVOLET offers easy-to-use tools to make your salary payment system seamless and efficient. Employers' wage management is handled by the application's built-in payroll administration system. Employers gain from a simplified process flow that incorporates quick reconciliation, backup, and record keeping. As a result, the risk of payment data loss is reduced, and human computing errors are eliminated. For all parties concerned, EVOLET's wage management solution makes it safer and faster. It removes the need for employers to withdraw funds from the bank, lowering the danger of robbery or theft. This is also true for employees who send money home to their relatives. They can easily do an e-wallet transfer to banks if needed, compared to previously when they had to physically go to a bank once a month, losing half a day of their day off.

EVOLET is well-suited to two categories of workers: migrants and Malaysians who earn a modest income. In Malaysia, many migrant workers, both documented and undocumented, struggle to open a bank account. Because their countries have been red-flagged by Bank Negara, certain nationalities find it impossible to create bank accounts, even if they have work licenses and visas. Migrants who do not speak Malay or English face an uphill battle. The EVOLET application has been transcribed into 12 different languages for ethnicities such as Nepalese, Bangladeshis, Filipinos, and Indonesians, who make up over 60% of Malaysia's foreign workforce.

EVOLET is a digital wallet app for migrant workers.

Learn more at https://evolet.io/