Payroll and Employment Taxes in Malaysia

Overview of Payroll Taxes in Malaysia

Managing payroll taxes in Malaysia is an essential task for employers of all sizes, whether you're a small business owner or the head of a large corporation. Understanding the various taxes your business needs to handle is crucial to ensure compliance with the country's regulations and avoid penalties.

In Malaysia, employers must consider several key taxes, such as income tax withholding, social security contributions, and other local levies. Compliance can be challenging, particularly when it comes to accurately calculating taxes, adhering to filing deadlines, and understanding the intricacies of different tax types based on factors like business size, location, and employee income. Failing to meet these obligations could lead to severe penalties, audits, and potential employee dissatisfaction.

This article will walk you through the key payroll tax aspects in Malaysia, offering practical guidance on how to calculate, file, and submit payroll taxes correctly.

Fiscal Year in Malaysia

1 January - 31 December is the 12-month accounting period that businesses in Malaysia use for financial and tax reporting purposes.

Payroll Cycle in Malaysia

The payroll cycle in Malaysia is usually monthly, with employees being paid on the last working day (no later than 7th day of the following month).

Minimum Wage in Malaysia

As of February 1, 2025, Malaysia's minimum wage rates are:

• RM 1,700 per month. This primarily applies to employers with five or more employees and extends coverage to apprentices.
• Employers with less than five staff must pay a minimum wage of RM 1,500 until any further legislative changes or revisions.

The 2025 rate represents a 12.5% increase from the previous minimum wage of RM 1,500.

Bonus Payments in Malaysia

Although not mandatory, it is common practice in Malaysia to provide a 13-month payment at the end of the year, as specified in the employment agreement.

How is Payroll Calculated in Malaysia?

In Malaysia, payroll calculations are composed of basic salary and various statutory deductions. Employers must calculate income tax based on a progressive tax system. The Employee Provident Fund (EPF), Social Security Organisation (SOCSO) contributions, and Employment Insurance Scheme (EIS) deductions must also be factored in, as these contributions are mandatory for both employees and employers.

Types of Payroll Taxes in Malaysia

In Malaysia, several types of payroll taxes affect both employees and employers. Each of these taxes comes with specific rates and compliance deadlines.

Tax Example 1: Income Tax Withholding

This tax involves withholding a portion of an employee’s salary and remitting it directly to the Inland Revenue Board (IRB). The tax rates follow a progressive structure, with higher rates applied to higher income brackets. Employers are required to file this monthly and failure to comply could result in substantial fines and penalties.

Tax Example 2: Employee Provident Fund (EPF) Contributions

The EPF is a mandatory retirement savings plan for employees in Malaysia. Employers are required to contribute a percentage of the employee's salary, while employees also contribute. The total contribution varies, with the employer contributing 13% (or 12% for those earning less than RM5,000). Non-compliance can result in legal penalties, including interest charges on missed payments.

Tax Example 3: Social Security Organisation (SOCSO) Contributions

SOCSO provides social security protections to employees, including coverage for injury, illness, and death. Employers contribute to SOCSO based on the employee’s monthly salary. Employers must also make contributions to the EIS, which offers insurance benefits. Failure to make timely payments could lead to fines and imprisonment.

How to Set Up a Payroll in Malaysia?

Setting up a payroll system in Malaysia involves several key steps:

Registering with Malaysian Authorities

Employers need to register with the Inland Revenue Board (IRB) for tax purposes and the Employees Provident Fund (EPF) for employee retirement savings. Employers should also register with the Social Security Organisation (SOCSO) for contributions related to social security.

Choosing a Payroll System

Selecting the right payroll system is essential for smooth operations. Options include in-house solutions or outsourcing to payroll providers like Playroll. These systems automate the tax calculations and submissions, reducing the risk of errors.

Onboarding Employees for Payroll

To onboard employees, employers must collect necessary documentation, including identification, tax forms, and bank details. This information is then entered into the payroll system to ensure employees are paid correctly and deductions are made.

Step-by-Step Payroll Processing in Malaysia

Employers should follow these steps for accurate payroll processing:

Collecting Timesheets and Attendance Data

Employers should track employee work hours accurately, especially for hourly employees. Timesheets or attendance records are critical for calculating salaries and benefits.

Calculating Salaries and Deductions

Accurately calculating salaries involves subtracting taxes, EPF, SOCSO, and EIS contributions from the gross salary. Employers must also account for overtime, bonuses, and other allowances.

Generating and Distributing Payslips

Employers must generate payslips that clearly detail the breakdown of the salary, taxes, and deductions. These must be distributed to employees in compliance with Malaysian law.

Submitting Payroll to Authorities

Employers are required to submit the appropriate payroll tax information to the Inland Revenue Board (IRB), EPF, and SOCSO on a monthly basis. This is essential to avoid fines for non-compliance.

Paying Employees

Employers must ensure that employees are paid on time via electronic bank transfers or other payment methods in line with the company's payroll policies.

How to Submit Payroll Tax in Malaysia

Payroll taxes in Malaysia can be submitted to the following authorities:

 
• Inland Revenue Board (IRB): For income tax withholding
 
• Employees Provident Fund (EPF): For retirement contributions
 
• Social Security Organisation (SOCSO): For social security and insurance contributions
 
• Employment Insurance Scheme (EIS): For insurance deductions

Payroll Tax Due Dates in Malaysia

Payroll Contributions in Malaysia

Understanding the tax obligations for both employers and employees is crucial when operating in Malaysia's business landscape. This section explains how taxes and statutory fees affect payroll and individual earnings in Malaysia.

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 18.95% - 22.45% on top of the employee salary in Malaysia.

Employee Payroll Tax Contributions

In Malaysia , the typical estimation for employee payroll contributions cost is around 11.70% - 17.20%%.

Individual Income Tax Contributions

The computation of individual income tax in Malaysia follows a progressive rate structure. Other variables, such as household status and the number of dependents, can influence the overall tax rates.

Pension in Malaysia

Employees in Malaysia are eligible for the state's old-age retirement pension, provided they meet criteria such as being at least 60 years old (flexible withdrawls allowed after age 55). The pension amount is determined by considering both the employee's and employer's contributions. Payment options include lump-sum payments, monthly payments, or a combination of both.

Managing Common Payroll Challenges in Malaysia

Global employers operating in Malaysia often encounter unique payroll challenges that can affect compliance and efficiency, like navigating evolving tax laws and managing employee data. With a need for real-time accuracy, modern organizations must develop strategies to overcome these challenges effectively. Below, we explore some of the most common payroll hurdles and provide actionable solutions to streamline payroll processes in Malaysia.

Maintaining Accurate and Detailed Payroll Reports

Maintaining accurate global payroll reports is often challenging due to currency exchange complexities, data integration issues, and the need to keep employee information up-to-date – including tax information, hours worked, leave balances, and any changes in salary or job status. Generating accurate reports is easy with a comprehensive payroll automation tool that consolidates fragmented data sources, and can keep track of employee payments and deductions.

Keeping Up With Ever-Changing Tax Laws & Compliance Laws

In Malaysia, tax laws and compliance regulations can change frequently, presenting a significant challenge for global employers. Monitoring updates to federal, state, and local tax codes is crucial to avoid non-compliance and costly penalties, but requires significant time and resources. Partnering with local experts or a reputable global HR platform is an effective way to maintain compliance. These services can help employers stay compliant with evolving regulations while freeing up time for more strategic work.

Consolidating Multi-Vendor Payroll Analytics

Managing payroll across multiple vendors often leads to fragmented data and inefficiencies, making it difficult to consolidate analytics. These challenges can hinder decision-making, especially when trying to gain a clear view of workforce costs and trends. To address this, organizations can invest in a centralized payroll management system that unifies data from multiple vendors. A consolidated platform simplifies payroll tracking, ensures data accuracy, and provides actionable insights into payroll expenditures.

Integrating Multiple HR & Payroll Systems

Global companies are prone to using multiple HR or payroll systems across regions, which can easily lead to fragmented payroll data, increasing the risk of delays and errors in employee compensation. To combat this, seamless integration between payroll and other systems is critical.

Payroll management systems that connect with existing HR and financial platforms can help streamline workflows by reducing manual inputs and ensuring that all departments operate with up-to-date, accurate information. In turn, this helps guarantee on-time, accurate payroll, boosting employee satisfaction.

What Does a Global Payroll Management Platform Cover?

A global payroll management platform is a software solution designed to streamline and automate the payroll processes for organizations with employees across multiple countries. It helps ensure accurate and timely payment while maintaining compliance with legal and regulatory requirements in Malaysia.

Key functions of a payroll management platform can include:

   
• Consolidate payroll data: Streamline fragmented payroll data into one source of truth when you’re operating in multiple regions.
   
• Analytics and reporting: Advanced capabilities to analyze payroll data and generate automated reports per region.
   
• Monitor and standardize payroll: Get an accurate view of employee costs, bonuses, and taxes per region, catch variances, and standardize payroll processes across regions to minimize errors.
   
• Compliance and record-keeping: Maintains accurate payroll records and ensures adherence to labor laws and regulations, reducing the risk of legal issues.
   
• Employee self-service: Provides portals where employees can access pay stubs, update personal information, and manage benefits selections.

How Playroll Can Streamline Payroll & Taxes in Malaysia

Expanding globally is an exciting milestone for any company, but it comes coupled with complex payroll challenges. It doesn’t have to be complicated. At Playroll, our easy-to-implement global payroll management software combines automation with hands-on support to make global payroll truly simple. Here's how Playroll helps:

   
• Multi-Vendor Integration: Our platform syncs seamlessly with your providers and in-house systems to unify global payroll services in one platform.
   
• Standardize Payroll Processes: Unify your operations in one dashboard to ensure payroll is running smoothly globally, with advanced approval flows and reports.
   
• Improve Governance & Compliance: Improve compliance by centralizing all your compliance tasks and processes. Easily track your payment obligations, with digitized audit trails.
   
• Advanced Reporting: Access and configure your data, your way, with a comprehensive suite of payroll analytics and reporting tools.