Payroll itself is a complex process to understand, so for beginners, understanding the mandatory deductions in Malaysia can be difficult and staying compliant with them is a different issue. Besides, payroll isn’t purely paying employees. There are laws that you need to keep in mind and up to date to ensure your business is compliant such as the labor laws, tax calculations and maintaining records within the stipulated years.
Learn More: Navigating EPF, SOCSO, and EIS Compliance With Payroll Software
The payroll process is pretty straightforward once you’re familiar with it. Employee salary regulations are determined by the Ministry of Human Resources and the Ministry of Finance. The Employment Act of 1955 covers the majority of statutory requirements, meanwhile, income tax falls under the purview of the Income Tax Act of 1967.
Why Do Business Owners Need To Understand Payroll?
When you have employees, you need to have a payroll system, whether you choose to outsource or in-house your processes. It’s an important cost, a link between your team and their jobs. Plus, it’s an ongoing business process that you can’t simply ignore or neglect.
Furthermore, not many individuals start businesses to become payroll specialists, but possessing a thorough grasp of the process can be highly advantageous when managing your company.
Here are the key components of payroll system and administration in Malaysia:
1. Registration
In Malaysia, employers must register their businesses with the Employee Provident Fund (EPF), Social Security Organisation (SOCSO), and the Inland Revenue Board of Malaysia (IRBM), regardless of their size and the number of employees.
For Employers: Must complete their registration with IRBM for tax purposes, EPF for compulsory retirement fund deductions and SOCSO for insurance benefits.
For Employees: Employees should be registered for EPF and SOCSO to ensure eligibility for relevant benefits.
2. Salary Structure
Basic salary: The basic sum specified in the employment agreement that guarantees a set payment to the employee, irrespective of other considerations.
Allowances: Extra compensation given to workers, including housing, transportation, and medical benefits.
Overtime: Payment for services rendered outside of normal working hours is generally at a rate of 1.5 to 3 times the regular hourly wage.
3. Statutory Deductions
Income tax
A method of deducting tax known as Monthly Tax Deduction (MTD). The income tax is deducted based on an employee’s earnings, and any tax relief or deductions can be claimed by the said employee through yearly tax submissions.
Employees Provident Fund (EPF)
Both employers and employees are mandatory to contribute a portion of the employee’s salary to the EPF at 13% and 11% respectively. The funds can be accessed when the employee turns 55 which is the retirement age in Malaysia.
Social Security Organisation (SOCSO)
Employees who experience work-related accidents, injuries, or illnesses are entitled to benefits from SOCSO. Both employers and employees allocate a portion of the employee’s salary to contribute to SOCSO.
Employment Insurance System (EIS)
EIS is an initiative for social security that aims to offer insurance protection for workers who experience unemployment, providing monetary support for temporary aid during these times.
4. Leave Entitlements
Annual leave
Employees can utilise this time off for vacations or personal purposes and it is compensated. The amount of annual leave given varies; for instance, employees with less than 2 years of service receive 8 days per year, and this increases as the employee’s tenure lengthens.
Sick leave
This refers to compensated time away from work that employees can take when they are ill or injured. The company grants varying amounts of sick leave; for example, it entitles employees with less than 1 year of service to 14 days per year, and this entitlement increases with their tenure. If the company hospitalises an employee, it can grant up to 60 days of sick leave.
Maternity leave
Female employees have the entitlement to take maternity leave before and after they have given birth. Mothers who meet the criteria are granted 98 days of paid maternity leave after giving birth.
5. Benefits and Allowances
Medical and health coverage
This can assist with covering the costs associated with medical care, such as visits to the doctor, time spent in the hospital, and purchasing prescription drugs.
Transportation reimbursement
These benefits can cover the expenses for travelling to and from the workplace.
Incentive payments
Usually given out once or twice a year depending on achievements. Bonuses can offer a substantial financial advantage for employees.
Phone allowance
An allowance provided to cover employees’ phone bills. Usually disbursed to customer service employees.
Work-from-home support
Monetary support given to staff members to meet the costs related to establishing a home office, including internet connection, electricity usage, and office materials.
Paid time off
Considering the number of days employees can take as paid time off each year, this perk is important for employees who want to unwind, recharge, or travel to new places while still getting their full pay.
6. Payroll Cycle
Typically, the payroll cycle runs on a monthly basis in Malaysia. Wages are disbursed on or before the 7th day of the subsequent month.
For part-time or hourly workers, business may choose to pay biweekly or weekly basis. These more frequent payment schedules depends on the work hours and compensation arrangements commonly linked with these positions.
7. Record Keeping
Personal information
This includes the employee’s name, address, identification details, contact information, and emergency contact.
Offer letter
This document specifies the conditions of the job, such as the base pay, perks, duties, and other additional details.
Pay slips
Employees should receive pay slips regularly and should clearly show the employee’s earnings, deductions, and net pay.
Tax deductions
The recorded amount of tax deducted from an employee’s pay should be documented.
EPF and SOCSO contributions
Keep detailed records of the employee’s contributions to the Employees Provident Fund (EPF) and the Social Security Organisation (SOCSO).
Leave records
These records should document the employee’s leave entitlements and the actual leave taken.
8. Termination and Final Compensation
Last received salary
This represents the salary the employee earned during their last month of work.
Conversion of unused annual leave
If the employee has any remaining annual leave days, they should be converted into monetary compensation.
Reimbursement for company assets
The employee must return any assets owned by the company, including laptops, mobile phones, vehicles, or other company property.
Any other benefits, commissions, or bonuses as specified in the employment contract
The extra perks, commissions, or bonuses specified in the employment agreement must be paid as a component of the ultimate compensation package.
Stay Compliant with Info-Tech’s Payroll Software
What better ways to stay compliant to the payroll laws than having a software to automate the processes? Info-Tech Payroll Software provides an intuitive start with its user-friendly UI, seamlessly integrating with other software. IRBM approves it, ensuring your payrolls comply with Malaysian laws.