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Payroll regulations are incredibly complex, and the reality is if you’re an employer and you get it wrong, there can be disastrous implications. With SMEs making up about 97% of all businesses in Malaysia, they’re the backbone of the economy and yet are often left to figure things out by themselves.
What’s in this Malaysia payroll guide?
With so much movement in the economy, plus a rapid rush to retain and recruit employees during the Great Resignation, there’s never been a more important time for Malaysian businesses to make sure they’re paying their employees compliantly.
We want to empower you to feel confident when it comes to paying your team in accordance with the Malaysian payroll system. Hopefully, this guide will do just that.
In this guide you’ll find information on:
- The basics of payroll
- Wages and payments
- Contributions, levies and insurance
- Record keeping
- When non-compliance may occur
- Using a payroll software
- and more!
Disclaimer: The information in this report is relevant as at 14 December 2023, and has been prepared by Employment Hero Pty Ltd ABN (11 160 047 709) (Employment Hero). The views expressed herein are general information only and are provided in good faith to assist employers and their employees. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data. To the maximum extent permitted by law, Employment Hero will not be liable to any party in contract, tort (including for negligence) or otherwise for any loss or damage arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this report. Where liability cannot be excluded by law then, to the extent permissible by law, liability is limited to the resupply of the information or the reasonable cost of having the information re-supplied. If you are unsure about how this information applies to your specific situation, we recommend you seek expert advice for your personal situation or find more information at malaysia.gov.my.
Download this free payroll guide now.
Why is it important for business owners to understand payroll?
If you employ people, then your payroll process is a key part of your business – regardless of whether you’re outsourcing payroll or processing it in-house. It’s a key outgoing expense, it’s what connects your team to their jobs and it’s also a constant business operation.
Very few people become employers to become payroll experts, but having a strong understanding of the practice can be extremely beneficial when it comes to running your business. Our payroll guide can help you get a better understanding of this important subject.
Business compliance
Whether it’s paying your employees the correct amount in the right salary period, keeping track of overtime pay or paying the correct amount in contributions and levies to the Employee Provident Fund (EPF/KWSP), understanding payroll processes and employment income can help you stay compliant.
Whether you employ one person, or one hundred people, the same rule applies to all businesses when it comes to payroll – be compliant or face strict penalties. Remember, it doesn’t pay to take risks.
Employee engagement through a monthly salary
When we think about employee engagement, we frequently focus on company culture and employee perks and benefits.
What we often forget is that one of the best ways to engage your employees is to run payroll correctly and on time, each salary period. When you have a great understanding of payroll processing – including things like paid annual leave you can make sure this process is being completed correctly. You can also easily manage any employee enquiries if an issue were to arise.
Better bookkeeping
Your employees’ salaries are a key part of your business expenses. For some businesses, they could even be the dominant expense.
As they take up such an important part of your outgoings, having a better understanding of payroll operations, the amount at which you pay monthly contributions, and gross monthly remuneration of your workforce is essential. Only then can you have proper oversight over your bookkeeping and accounts.
Which legislation relates to payroll?
In Malaysia, the payroll of most employees is governed by the Employment Act (1995), also referred to as the ‘EA’.
The EA outlines the rights of employees and employers, and their obligations under the law.
The Employment Act covers all employees in Malaysia, irrespective of wages or occupation.
However, employees earning above RM4,000 per month are exempted from certain provisions in the Act, such as:
- Overtime rates for employees working on rest days;
- Overtime rates outside working hours;
- Allowance for shift-based work;
- Overtime on public holidays;
- Overtime for half working days on holidays; and
- Termination, lay-off, retirement benefits.
Gig workers are also covered by the Employment Act. An individual is considered under law to be an employee if the following conditions are met, regardless of whether there is a written contract.
The conditions are:
- Their manner of work is subject to the supervision or control of another person;
- Their working hours are under the supervision or control of another person;
- They receive tools, supplies, or equipment from another individual to do a task;
- Their work is a crucial component of another person’s enterprise;
- Their effort is made purely for another person’s profit; or
- They receive compensation for the task they perform on a regular basis, and this compensation makes up most of their income.
The Employment Act is not applicable to Sabah and Sarawak, as they have their own Labour Ordinances respectively.
Learn more about the EA by downloading our short guide to the Malaysia Employment Act 1995.
Who is responsible for income tax in Malaysia?
An employer is responsible for paying income tax on behalf of their employees each month in the form of the PCB/MTD. Income tax is a complicated system and income tax relief may be applicable to eligible employees.
There are also statutory contributions and levies to be aware of. The three compulsory contributions are to the Employees Provident Fund (EPF/KWSP), the Social Security Organisation (SOCSO) and the Employment Insurance System (EIS). The Human Resources Development Fund (HDRF) also applies to businesses with more than ten employees. Other contributions and levies may apply.
What is the monthly tax deduction (MTD) / Potongan Cukai Bulanan (PCB)?
The monthly tax deduction (MTD), more commonly referred to as the Potongan Cukai Bulanan (PCB), is a monthly payment that is made by an employer to the Lembaga Hasil Dalam Negeri (LHDN) / Inland Revenue Board of Malaysia (IRBM) on their employee’s behalf, on or before the 15th day of the next month.
You can learn more about what’s required to calculate the PCB/MTD in our payroll guide.
Common payroll mistakes businesses make
Inadequate record keeping
Still using old school pieces of paper to log your employees’ payroll documentation? As it’s so easy for paper to be misplaced or incorrectly filed, this could leave you open to liability if you were to be audited.
In today’s digital age, record keeping is easy. With so many software options available to help manage payroll, payslips, timesheets and your employees’ time and attendance, there’s no excuse for not having the correct records.
Incorrect set up of your payroll system
As you can see above, there are plenty of contributions and levies to keep track of in payroll management. As well as paying an employee’s basic salary correctly, you want to make sure that all payments are set up properly and going to the correct place.
Imagine if you’ve been paying a team 10% under their correct EPF/KWSP contributions for the last five years? Think about how much you’d be required to pay back, and the additional penalties that may apply.
Forgetting about the employee experience
Employees want to be informed about their pay just as much as you do. If you aren’t providing them with quick access to their payslips, it can be incredibly frustrating.
Payslips are essential records that you are obligated to provide to your employees, but don’t make them wait for a paper document each salary period. Giving them access to cloud-based payslips (like those on Employment Hero), can help them feel empowered to review their income information anytime, anywhere.
How can payroll software help?
Payroll software can make a significant difference when it comes to processing an employee’s salary.
Fully integrated with the IRBM/LHDN, pay your people faster than ever with automated payroll from Employment Hero. Instantly calculate contributions, generate accurate data and take care of workforce planning – all in one central place. Here are just a few of the helpful features on the platform.
Automated payroll
In a few simple clicks, you can complete your payroll process using the power of automation. Employment Hero Payroll can quickly make accurate calculations, including deductions and EPF/KWSP contributions. Information appears for the administrator during the pay run, clearly displaying the calculations and giving you full transparency over the process.
Time and attendance
Keeping track of your employees’ hours is important when you’re running your business; especially if your team members are not on a full-time salary. Payroll software can help with everything from dynamic rostering to cover peak business times, shift bidding, clocking in and out remotely using the app and much more. Easily approve timesheets and accurately process all time worked.
Record keeping and reports
When you use payroll software, digital records are instantly created for each employee’s payslip. Never lose a payslip again, and quickly access documents in our easy-to-use system. This can help you cut down hours of admin, making it easy to locate essential documents.
When you use Employment Hero payroll, you can also lodge income data electronically and generate accurate reports every time with our powerful tools.
Staying up to date
Understanding and complying with the Employment Act can be one of the biggest challenges facing small to medium businesses, but that’s where software can help. We have calculations of pay rates and deductions built-in, so that you never have to manually generate this.
Our experts also keep up to date with changes to legislation and automatically update when they’re introduced.
See how payroll software could transform your business
Employment Hero can give you the compliance confidence you need. We’re employment law and payroll experts who are obsessed with keeping up to date with the latest legislation, and we’re trusted by users around Malaysia.
Eager to learn more about our Malaysian payroll system? Book a demo with one of our business specialists now.
Download this free payroll guide now.
