Payroll Processing in Malaysia: Everything Employers Need to Know

Payroll processing in Malaysia requires accurate calculation and timely disbursal of salaries, while meeting a range of statutory obligations. The process becomes more complicated for HR and finance teams, as they have to manage requirements across multiple government portals, including LHDN, KWSP, and PERKESO for SOCSO and EIS.

This article covers the key aspects of payroll management in Malaysia. It includes everything from statutory registration and salary calculations to tax deductions, mandatory contributions, reporting requirements and compliance obligations.

Payroll Laws and Regulatory Authorities in Malaysia

Employment Act 1955

This is the primary legislation that regulates the employer-employee relationship. The Act sets forth the standards related to employment matters such as employment contracts, working conditions, wage payments, working hours, rest days, leave entitlements, overtime and termination.

Employees Provident Fund 1991 (EPF)

The EPF Act requires both employers and employees to make mandatory contributions toward an employee’s retirement savings. Employers are responsible for deducting and remitting EPF contributions monthly. 

Employee’s Social Security Act 1969 (SOCSO)

SOCSO provides social security coverage for eligible employees in Malaysia. The scheme offers benefits to employees and their dependents in the event of workplace injuries, occupational diseases, disability, or death. 

Employment Insurance System (EIS)

The Employment Insurance System (EIS) is a PERKESO-administered scheme that provides temporary financial assistance and re-employment support to eligible employees who lose their jobs involuntarily. Benefits may include job search assistance, training support, and early re-employment incentives.

Inland Revenue Board (LHDN) and PCB (Monthly Tax Deduction)

Monthly Tax Deduction (PCB/MTD) is Malaysia’s payroll tax withholding system under which employers automatically deduct income tax from an employee’s monthly salary and remit it to the Inland Revenue Board of Malaysia (LHDN). 

The system helps employees spread their tax payments throughout the year, reducing the likelihood of a large tax liability at year-end. Generally, employees with an annual taxable income above RM37,333 or more may be subject to PCB deductions. 

Human Resources Development Corporation (HRD Corp) Levy (if applicable)

HRD Corp (formerly HRDF) is a statutory body under Malaysia’s Ministry of Human Resources. It collects a mandatory levy from eligible employers to support employee training and workforce development under the PSMB Act 2001. 

Employee Classification in Malaysia

Employee classification is important in Malaysian payroll because statutory contributions, tax deductions, leave entitlements, and employment protections may vary based on the employee’s work arrangement and eligibility. 

Full-time Employees

These employees are hired on a permanent or fixed-term basis and work the standard contractual hours. In general, they are entitled to statutory benefits and protections and are subject to applicable payroll deductions and employer contributions. 

Part-time Employees

Part-time employees work fewer hours than full-time employees. Their wages, leave entitlements, and statutory contributions are determined based on their employment terms and applicable laws. 

Fixed Term Employees

Fixed-term employees are hired for a specific period or project. They have a specified start and end date. During their contract period, they are generally entitled to the same statutory payroll benefits and protections as other employees under applicable Malaysian employment laws. 

Probationary Employees

Probationary employees are employed on a trial period, which generally lasts three to six months, depending on the employment contract. They are generally entitled to the same statutory rights and protections as confirmed employees and cannot be dismissed without just cause or a fair process. 

Foreign Employees

Foreign employees must have a valid work pass to work legally in Malaysia. Employers must comply with the applicable payroll, tax, statutory contribution, and immigration requirements for foreign workers. 

Core Components of Processing Payroll in Malaysia

Basic Salary: Refers to the fixed monthly pay agreed upon in the employment contract, excluding allowances, bonuses, overtime, and other benefits.

Allowances: Employers may provide allowances such as housing, transport, meal, shift, or communication allowances. Some of these might be subject to statutory contributions and income tax depending on their nature. 

Bonuses and commissions: These are generally not mandatory under the law. However, they may form part of an employee’s gross pay for statutory contribution calculations where applicable. 

Overtime Pay: The total number of hours, including overtime, cannot exceed more than 12 hours a day. Overtime pay in Malaysia on a normal working day has to be paid at a minimum of 1.5 times the hourly rate. However, work on a rest day is generally paid at twice the hourly rate, while work on a public holiday is paid at three times the hourly rate. 

Statutory Deductions and Contributions: Payroll processing in Malaysia includes deductions such as EPF, SOCSO, EIS and PCB.

Payroll Cycle, Currency, and Deadlines

Official Currency and Payment Rules

The official currency of Malaysia is the Malaysian Ringgit (MYR). Under the Employment Act of Malaysia, wages must generally be paid no later than the seventh day after the end of the wage period. Salaries are commonly paid through bank transfer, although other lawful payment methods may be used with the employee’s agreement. 

Statutory Deductions and Contributions

Payroll processing in Malaysia includes mandatory employee deductions and employer contributions:

Employees Provident Fund (EPF)

Employees contribute 11%, while employers contribute 13% for monthly wages of RM 5,000 or less and 12% for monthly wages above RM 5,000. Different rates apply based on age and employment status.

Social Security Organisation (SOCSO), also known as PERKESO

SOCSO contributions are based on the employee’s monthly wages using PERKESO’s prescribed contribution table. The wage ceiling is set at RM 6,000 per month.

Employment Insurance System (EIS)

EIS contributions total 0.4% of the employee’s monthly wages, shared equally between the employer and employee at 0.2% each, subject to the prescribed wage ceiling of RM6,000.

Minimum Wage and Working Hours

Minimum Wage

The minimum wage in Malaysia is RM 1,700 per month. Employers must ensure that eligible employees are paid at least the prescribed minimum wage to comply with payroll requirements. 

Standard Working Hours

Under the Employment Act 1955 (as amended), standard working hours generally must not exceed 8 hours per day or 45 hours per week. 

Besides, employees are entitled to one whole rest day (weekly off) each week, with the employer determining the day and maintaining a roster where required. If an employee works on their rest day, they must be compensated at the applicable statutory rates.

Payroll Taxes in Malaysia

Income Tax Filing

Employees are required to file an annual income tax return with the Inland Revenue Board of Malaysia (LHDN). They must remit it to the LHDN by the 15th of the following month.

Annual Payroll Tax Reporting

• Employers must issue Form EA to employees each year.
• Employers must submit Form E/Borang E together with C.P.8D to LHDN within the prescribed deadlines.

Tax Considerations for Foreign Employees

Generally, non-resident individuals are taxed at a flat rate of 30% on their taxable income earned in Malaysia. 

Leave Entitlements in Payroll Malaysia

Leave entitlements are an important part of payroll processing in Malaysia, as employers must correctly track eligible leave and ensure correct leave balance and salary calculations. 

Annual leave: 8 days (<2 years), 12 days (2–5 years), and 16 days (5+ years).

Sick leave: 14 days (<2 years), 18 days (2–5 years), and 22 days (5+ years), plus up to 60 days for hospitalization. 

Public holidays: 11 paid gazetted holidays annually, including five mandatory holidays.

Maternity leave: 98 consecutive days of paid leave per confinement. 

Paternity leave: 7 consecutive days of paid leave for eligible married male employees.

Notice Period and Final Settlement

Notice Periods

Under the Employment Act 1955, the minimum notice period for terminating an employment contract depends on the employee’s length of continuous service, unless the employment contract provides for a longer notice period. 

Payment for Unused Leave

Upon termination, employees are generally entitled to payment for any accrued but unused annual leave. During employment, the treatment of unused leave depends on the Employment Act 1955, the employment contract, and the employer’s leave policy. 

Retrenchment and Termination Benefits

Eligible employees with at least 12 months of continuous service may be entitled to termination or lay-off benefits. The statutory benefit is 10 days’ wages per year for less than 2 years of service, 15 days for 2 to less than 5 years, and 20 days for 5 years or more.

How to Process Payroll in Malaysia

Following a systematic payroll process in Malaysia helps employers calculate salaries accurately and meet statutory obligations. 

Payroll processing is simpler when completed in the right sequence. 

HR and Payroll Software Simplifies Payroll Processing in Malaysia

From calculating EPF, SOCSO, EIS, and PCB deductions to complying with Malaysian tax and labour laws, payroll processing can be a challenging task. Payroll software for Malaysia, such as Empxtrack can help businesses simplify the process by automating calculations, streamlining compliance, and reducing manual effort.

Businesses can get started immediately with Empxtrack free payroll offering and scale with advanced HR and payroll features as their workforce grows.

With Empxtrack Payroll, businesses can:

• Automate payroll calculations
• Manage EPF, SOCSO, EIS, and PCB calculations
• Generate statutory reports and itemized payslips
• Integrate leave and attendance data
• Provide employee self-service access
• Maintain audit-ready payroll records
• Support payroll compliance with accurate employee and salary data 

Conclusion

Accurate payroll processing is essential for every business operating in Malaysia. Therefore, employers need to have a good understanding of the local payroll requirements and stay compliant with labour laws, tax and statutory contribution rules.

With the right payroll system, payroll processing in Malaysia can become easier, more accurate and less time-consuming. Ultimately, a structured payroll process helps businesses reduce errors, maintain proper records, and build greater confidence in every payroll cycle.