How to Run Payroll in Sri Lanka: Employment Taxes & Setup

Milani Notshe

Research Specialist

Last Updated

February 26, 2026

In This Guide

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Running payroll in Sri Lanka involves many moving parts before your team sees money land in their accounts. Each month you need to calculate gross-to-net correctly, apply statutory withholdings and employer contributions, issue compliant payslips, plus file and remit on schedule. If anything slips through the cracks, you could face penalties, back-pay exposure, and unnecessary friction with your people.

If you’re hiring in Sri Lanka, whether you’re building a local presence or expanding your global footprint, this guide is for you. We’ll walk through the choices and compliance requirements that have the biggest impact on your speed and risk, from entity vs. no-entity hiring to worker classification and the statutory bodies you’ll interact with along the way. By the end, you’ll know exactly what to expect and how to keep payroll running smoothly, wherever you’re hiring.

Key Takeaways

Payroll cycle: Employers in Sri Lanka generally process payroll on a monthly basis.

Tax filing: PAYE income tax and statutory contributions such as EPF and ETF are typically reported and remitted monthly.

Employer taxes: Employer obligations include contributions to the EPF, ETF, and other statutory levies calculated as percentages of employee wages.

Tax year: Sri Lanka’s tax year runs from April 1 to March 31.

Payroll processing methods: Payroll is commonly handled in-house or outsourced to providers familiar with Sri Lankan tax and social security requirements.

How to Choose Your Payroll Structure in Sri Lanka

Expanding into Sri Lanka? Building a compliant payroll setup involves much more than simply paying salaries. You’ll be responsible for employment compliance, monthly tax and social declarations, and mandatory benefits. Even small delays in filings or payments can lead to real penalties.

You have several operating models to choose from to make this easier. The right one depends on your legal footprint, your appetite for risk, and how quickly you need to start hiring. Let’s break down the main options and when to use each.

1. No Local Entity in Sri Lanka: Use an Employer of Record (EOR)

If you don’t yet have a legal entity in Sri Lanka, an Employer of Record is usually the fastest and lowest-risk way to hire. An EOR becomes the legal employer on paper, provides locally compliant employment contracts, and manages payroll under local regulations, while you continue to direct the work and manage performance.

This model is ideal for:

Testing a new market
Hiring your first team members
Scaling a distributed workforce without building local infrastructure,

Why it’s the fastest and least risky option:

You skip the lengthy process (and cost) of setting up an entity.
All local registrations, monthly declarations, and statutory payments are handled by a provider already set up in-country, dramatically reducing your compliance risk.

2. You Have a Sri Lanka Entity: Run In-Country Payroll

If you already operate a local entity, or you’re planning to establish one, running payroll directly gives you maximum flexibility and control. You can set your own policies, design benefits, and align payroll closely with your finance and internal approval processes. But this also comes with greater operational responsibility.

What you’re responsible for:

Registering with relevant authorities and maintaining compliance with statutory bodies (often involving CSS/IPRES or similar local institutions).
Accurately calculating and remitting payroll taxes and contributions every month – plus handling year-end requirements.
Issuing compliant payslips and maintaining audit-ready payroll documentation.

When this option makes sense:

You’re hiring at scale and want payroll fully “in-house,” even if you partner with a local provider for execution.
You need deeper integration with finance systems or custom benefit structures.

If you want to keep the entity but offload the admin, many employers choose global payroll services to handle calculations, filings, and payments while they remain the legal employer.

3. Contractors Only: Use Contractor Management

Paying independent contractors is often simpler than setting up full payroll, especially for short-term or highly specialized work.

However, you need to watch out for misclassification risk. In Sri Lanka, as in many jurisdictions, someone may legally qualify as an employee based on how they work – not what their contract says. If they’re under your direction, working like an employee, you may be responsible for full employer obligations.

When contractor payments work well:

You need specialised expertise for a defined scope or timeframe
The contractor operates independently, not under your control or supervision

You can also use contractor management services to streamline compliant contracts, invoicing, and payments.

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What To Know About Payroll Processing In Sri Lanka

Payroll in Sri Lanka centers on four main obligations: Pay-As-You-Earn (PAYE) income tax withholding, statutory social security contributions to the Employees' Provident Fund (EPF) and Employees' Trust Fund (ETF), other mandatory deductions such as court-ordered garnishments, and periodic payroll reporting to the Inland Revenue Department (IRD) and the Department of Labour. You must track changing tax bands, contribution ceilings, and employee categories, as rules can differ by income level, sector, and whether staff are permanent, casual, or part-time.

Non-compliance can trigger penalties, interest, audits, and even prosecution, while late or incorrect payments quickly erode employee trust and can delay visa renewals or bank loan approvals for your staff. This guide walks you through how to calculate Sri Lankan payroll taxes, align with filing and payment deadlines, structure your payroll calendar, and set up compliant processes whether you operate through your own entity or an Employer of Record.

Fiscal Year in Sri Lanka

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

Payroll Cycle in Sri Lanka

The payroll cycle in Sri Lanka is usually weekly / semi-monthly / monthly, with employees being paid as specified in employment contracts.

Minimum Wage in Sri Lanka

As of May, 2025, Sri Lanka's minimum wage has increased as follows for all workers in any industry or service:

27,000 LKR per month.
The national minimum daily wage is 1,080 LKR

From January 1, 2026, these rates will increase by 3,000 LKR monthly and 120 LKR daily, raising the minimum wages to 30,000 LKR per month and 1,200 LKR per day.

Bonus Payments in Sri Lanka

There is no legal obligation to provide a 13th-month salary in Sri Lanka.

Types Of Payroll Taxes In Sri Lanka

In Sri Lanka, payroll taxes are mainly driven by PAYE income tax, mandatory retirement and welfare funds, and a few ancillary levies that depend on your industry and workforce profile. You will typically manage employee PAYE at progressive rates from 6% to 36%, employer EPF at 12%, employer ETF at 3%, and employee EPF at 8%, all reported and paid on a monthly cycle with strict enforcement by the Inland Revenue Department and the Department of Labour.

Pay-As-You-Earn (PAYE) Income Tax

PAYE is the system under which you withhold individual income tax from employees' employment income and remit it to the Inland Revenue Department on their behalf. Employees bear the tax cost, calculated on chargeable employment income using progressive rates that currently range from 6% to 36%, with thresholds applied on a monthly or annual basis.

You must file monthly PAYE schedules and pay the tax, typically by the 15th of the following month, and reconcile annually through employer statements and employee certificates. Underpayments or late payments can attract penalties of a percentage of the unpaid tax plus interest, and repeated non-compliance can trigger IRD audits and restrictions on tax clearance for your company and senior staff.

Employees' Provident Fund (EPF)

The Employees' Provident Fund is Sri Lanka's primary retirement savings scheme, administered mainly by the Central Bank's EPF Department and, for some sectors, by approved private funds. Employers contribute 12% of the employee's EPF-eligible earnings, while employees contribute 8%, giving a total of 20% of covered wages, subject to specific rules on what allowances are included.

EPF contributions are usually due monthly, paid to the EPF via bank transfer or online channels, together with contribution schedules that identify each employee and their wages. Late or missing EPF payments can result in surcharges, interest, and legal action by the Commissioner of Labour, and can also delay employees' ability to withdraw their retirement balances when they change jobs or leave the country.

Employees' Trust Fund (ETF)

The Employees' Trust Fund is a separate welfare and savings fund managed by the Employees' Trust Fund Board, designed to provide an additional safety net for employees. Only employers contribute to ETF at a rate of 3% of the employee's total earnings that are subject to ETF, and there is no employee contribution.

ETF contributions are generally remitted monthly together with detailed schedules, often aligned with EPF processing to streamline your payroll workflow. Failure to pay ETF on time can lead to surcharges, inspections by the ETF Board, and potential prosecution, and it may also affect employees' access to benefits such as housing loans or medical assistance that rely on ETF balances.

How To Pay Employees In Sri Lanka

Most employers in Sri Lanka pay salaries via bank transfer in Sri Lankan Rupees (LKR), although cash payments are still used in some smaller or rural operations. You should align your payroll cycle with local practice, which is typically monthly, and ensure that salaries are paid on or before the agreed payday stated in the employment contract and in line with the Shop and Office Employees Act and relevant Wages Boards regulations.

If you do not have a Sri Lankan legal entity, you can use an Employer of Record to hire and pay staff compliantly, or you can register a local entity and engage a payroll provider to run calculations and filings on your behalf. Payslips should clearly show gross earnings, itemised allowances, overtime, EPF and ETF contributions, PAYE tax, other deductions, and net pay, and they are commonly provided electronically with secure access for employees.

Payment Method: Use LKR bank transfers as the default, with cash or cheque only where banking access is limited and properly documented.
Pay Frequency: Set a consistent monthly pay date, typically at month-end, and document it in contracts and your payroll policy.
Currency Rules: Pay resident employees in LKR unless a specific Central Bank approval or contract structure allows otherwise.
No-Entity Hiring: Engage an Employer of Record if you need to hire quickly without setting up a Sri Lankan company.
Payslip Content: Include gross salary, all allowances, overtime, EPF and ETF contributions, PAYE, other deductions, and net pay for each period.
Bank Setup: Open a local corporate bank account and register it with authorities for EPF, ETF, and PAYE remittances.
Record Retention: Store payroll records and payslips securely for the statutory retention period to support audits and employee queries.

Payroll Set Up Checklist (Entity Vs No-Entity)

Getting payroll set up correctly in Sri Lanka determines how smoothly you can hire, pay, and stay compliant with the Inland Revenue Department, the Department of Labour, and the Central Bank. Running payroll through your own entity gives you full control but requires multiple registrations and ongoing filings, while using an Employer of Record lets you operate quickly without establishing a local company.

Your team should decide early whether Sri Lanka is a strategic hub that justifies a full legal presence or a smaller market where an asset-light model is more efficient. Either way, you need clear processes for collecting employee data, calculating EPF, ETF, and PAYE, and reconciling payments with statutory reports each month.

Decide Structure: Choose between setting up a Sri Lankan entity or using an Employer of Record based on headcount, risk appetite, and long-term plans.
Register With IRD: Obtain a Taxpayer Identification Number (TIN) and register as an employer for PAYE with the Inland Revenue Department.
Register For EPF/ETF: Enrol with the Employees' Provident Fund and Employees' Trust Fund through the Department of Labour and ETF Board.
Open Bank Accounts: Set up a local LKR corporate bank account dedicated to salary and statutory payments.
Collect Employee Data: Gather NIC/passport details, addresses, bank details, tax numbers, and signed contracts for each employee.
Configure Payroll Software: Implement payroll software or a provider that supports Sri Lankan tax bands, EPF/ETF rules, and local reporting formats.
Define Payroll Calendar: Establish cut-off dates for timesheets, approvals, and statutory payment runs aligned with legal due dates.
Internal Controls: Segregate duties for data entry, approval, and payment release to reduce fraud and error risk.
Policy Documentation: Document your payroll, overtime, leave, and benefits policies and communicate them to employees.

Example Of Salary Tax Calculation

Assume a full-time employee earns a monthly gross salary of LKR 300,000 with no other taxable benefits. You will first calculate EPF and ETF on EPF-eligible earnings, then determine the employee's PAYE based on the applicable monthly tax brackets, and finally arrive at net pay.

On LKR 300,000, the employer contributes 12% EPF (LKR 36,000) and 3% ETF (LKR 9,000), while the employee contributes 8% EPF (LKR 24,000). You then apply the progressive PAYE rates to the employee's chargeable income after any allowable reliefs, and deduct both PAYE and the employee's EPF from gross to get the net salary.

Step 1 – Determine Gross: Confirm the monthly gross salary and which allowances are EPF/ETF-eligible.
Step 2 – Calculate EPF/ETF: Compute 12% employer EPF, 3% employer ETF, and 8% employee EPF on eligible earnings.
Step 3 – Apply PAYE: Use the current monthly tax bands to calculate PAYE on chargeable income after reliefs.
Step 4 – Derive Net Pay: Subtract employee EPF and PAYE from gross to arrive at net salary for payment.
Step 5 – Book Entries: Record salary expense, employer contributions, and statutory payables in your accounting system.

Submitting Employee Tax In Sri Lanka

To submit employee taxes in Sri Lanka, you will typically use the Inland Revenue Department's online portal and the EPF/ETF payment channels supported by local banks. Before each run, ensure you have your employer tax number, EPF and ETF registration numbers, payroll period details, contribution schedules, and payment references ready.

IRD e-Services Portal: File monthly PAYE schedules and generate payment slips through the IRD online system.
Bank Transfers: Pay PAYE, EPF, and ETF via online banking or over-the-counter using the correct reference numbers.
Payroll Software Integration: Use payroll tools that export IRD- and EPF-compliant files to reduce manual data entry.
Third-Party Providers: Engage a local payroll bureau or Employer of Record to handle filings and payments on your behalf.
Reconciliation Process: Reconcile payment confirmations with filed schedules each month and correct discrepancies promptly.

Payroll Tax Due Dates In Sri Lanka

Tax Type	Due Dates
PAYE Income Tax	On or before the 15th day of the month following the month in which salaries are paid.
Employees' Provident Fund (EPF)	On or before the last working day of the month following the month in which wages are paid.
Employees' Trust Fund (ETF)	On or before the last working day of the month following the month in which wages are paid.
Annual Employer PAYE Statement	Typically due by 30 April following the end of the tax year.
Employee PAYE Certificates	Typically to be issued to employees by 30 April following the end of the tax year.
EPF Annual Return	Generally due within the first quarter following the calendar year end.
ETF Annual Return	Generally due within the first quarter following the calendar year end.

Running Payroll Processing in Sri Lanka

So, what does it actually take to run payroll in Sri Lanka? It involves calculating monthly salaries, applying the right statutory deductions, and making sure your team gets paid accurately and on time, while staying fully compliant with local tax and labour laws.

Let’s walk through what that looks like in practice:

Monthly Payroll Workflow

Gather all the essentials: hours worked, leave taken, new joiners, leavers, and any salary or benefit changes.
Double-check timesheets, leave balances, overtime, and any variable pay to make sure everything is accurate.
Work out gross earnings, including base salary, bonuses, commissions, and allowances.
Apply mandatory and voluntary deductions, like income tax, pension contributions, benefits, and any company-specific deductions. Then, calculate net pay after all deductions.
Run internal reviews, compare with previous payroll cycles, and get the necessary approvals.
Pay employees via bank transfer and share payslips through email or your payroll system.
Send statutory payments and required reports to tax authorities.
Update your records and ensure payroll entries flow correctly into your accounting system.
Share payroll summaries with finance and address any open questions or discrepancies.

How Playroll Streamlines Processing

Keeping track of all these steps, especially in a new market, is no easy task. Regulations change, requirements shift, and it’s easy for things to fall through the cracks. Playroll makes this effortless by managing the entire payroll process for you: onboarding employees, handling calculations and deductions, issuing payslips, transferring funds in Sri Lankan Rupee, and taking care of statutory filings and compliance.

Income Tax And Social Security In Sri Lanka

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

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 15% – 18% on top of the employee salary in Sri Lanka. This range mainly reflects the 12% EPF and 3% ETF contributions, plus any sector-specific levies or insurance costs that some employers add to their total employment cost.

Tax Type	Tax Rate
Employees' Provident Fund (Employer Share)	12% of EPF-eligible earnings.
Employees' Trust Fund (Employer Only)	3% of ETF-eligible earnings.
Gratuity Accrual (for eligible employers)	Equivalent to 8.33% of basic salary for employees with 5+ years' service, accrued by employer.
Social Security Levy (if applicable to business)	2.5% on specified turnover, not deducted from employee pay but part of employer tax cost.
Workmen's Compensation / Insurance	Rate varies by industry risk, typically 1% – 3% of payroll cost.
Vocational Training or Sectoral Levies	Applicable only to certain sectors at rates set by regulation.

Employee Payroll Tax Contributions

In Sri Lanka, the typical estimation for employee payroll contributions cost is around 10%.

Tax Type	Tax Rate
Employees' Provident Fund (Employee Share)	8% of EPF-eligible earnings.
PAYE Income Tax	Progressive rates from 6% to 36% on chargeable employment income.
Voluntary Pension or Savings Schemes	Optional contributions at rates agreed between employee and provider.
Trade Union Dues (if applicable)	Typically 1% – 2% of basic salary, as per union rules.
Court-Ordered Deductions	Rate and amount set by court order or garnishment notice.
Other Statutory Deductions	Applied only where specific laws or sectoral schemes require them.

Individual Income Tax Contributions

Individual income tax in Sri Lanka is charged on residents' worldwide income and non-residents' Sri Lanka-sourced income using progressive tax bands. Employment income is typically taxed through PAYE, with final liability reconciled via annual returns where required.

Income Bracket	Tax Rate
0 – 1,200,000 LKR per year	0%
1,200,001 – 1,800,000 LKR per year	6%
1,800,001 – 2,400,000 LKR per year	12%
2,400,001 – 3,000,000 LKR per year	18%
3,000,001 – 3,600,000 LKR per year	24%
3,600,001 – 4,800,000 LKR per year	30%
Above 4,800,000 LKR per year	36%

Pension in Sri Lanka

Pension coverage in Sri Lanka is primarily delivered through the mandatory EPF system for private sector employees and separate public service pension schemes for government staff. Private employers must contribute 12% and withhold 8% of eligible earnings for EPF, while employees can also participate in voluntary retirement savings or insurance-based products to supplement their statutory benefits.

Managing Common Payroll Challenges in Sri Lanka

Global employers operating in Sri Lanka 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 Sri Lanka.

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 Sri Lanka, 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.

How Playroll Can Streamline Payroll & Taxes In Sri Lanka

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.

Disclaimer

THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Playroll does not provide legal or tax advice. The information is general and not tailored to a specific company or workforce and does not reflect Playroll’s product delivery in any given jurisdiction. Playroll makes no representations or warranties concerning the accuracy, completeness, or timeliness of this information and shall have no liability arising out of or in connection with it, including any loss caused by use of, or reliance on, the information.

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