A thorough understanding of the payroll process will ensure employee retention and adherence to regulatory obligations. This guide seeks to provide essential insights into the intricacies of salary calculation in Malaysia.
This article covers:
- What are the fundamental components of a salary?
- What legal framework governs salary structures in Malaysia?
- What do I need to do before I can start running payroll?
- What deadlines should I be aware of?
- How is salary prorated for incomplete month of work?
- How is overtime calculated?
- How do you calculate unpaid leave?
- What is the calculation method for unused leave payable?
- What are the common compliance issues with payrolls in Malaysia?
What are the fundamental components of a salary?
In Malaysia, an employee’s salary comprises several key components including basic pay, allowances, overtime, incentives and benefits-in-kind. It is essential to comprehend those elements before implementing salary policies and procedures:
| Basic Salary | Basic salary is the fixed amount an employee receives each month under their employment contract, which does not include additional payments like allowances, incentives, or benefits-in-kind. |
| Gross Salary | Gross salary is calculated by summing up the basic salary, fixed allowances, and any variable components. For example, an employee receiving a basic salary of MYR 1,500, overtime of MYR 200, and a bonus of MYR 300 will have a gross salary of MYR 2,000. Some deductions, such as unpaid leave, can reduce the gross salary. |
| Net Salary | Net salary is the amount an employee receives after statutory deductions from gross salary. Deductions typically include employee contributions for tax (PCB), retirement savings (EPF), and social protection (SOCSO and EIS). |
| Overtime | Overtime compensation in Malaysia entails payment for work performed beyond the working hours specified in the employee’s contract, typically at a rate of 1.5 to 3 times the normal hourly wage, depending on when the overtime was performed. It is mandatory under the Employment Act to pay overtime to certain employees like those receiving monthly wages up to RM 4,000 or manual workers. For more details, please read overtime rates according to the Employment Act. |
| Allowances | Employees are paid allowances for specific purposes or to cover certain expenses related to their work such as travel, meals, or phone allowances. Certain allowances benefit from tax exemptions. |
| Incentives | Incentives are additional payments like bonuses, profit shares, or sales-based commissions given to employees based on their and/or the company’s performance. |
| Benefits-in-Kind | Benefits-in-kind are benefits not convertible to cash like a company car or living accommodation provided by the employer. Taxable benefits-in-kind should be included in the payroll to ensure they are added to the taxable income in PCB calculations. |
What legal framework governs salary structures in Malaysia?
The legal framework for the calculation of salaries in Malaysia aims to protect the rights of employees, prevent exploitation, and ensure that all workers receive fair and competitive compensation for their services. Additional legislation is aimed at regulating the payment of tax, pension and social security contributions. Employers need to understand those regulations to maintain a harmonious and legally-compliant working environment.
Employment Act 1955
The Employment Act 1955 is the primary legislation that establishes minimum standards for various aspects of employment, including salary and overtime calculations, working hours, leave entitlements, and termination procedures.
Minimum Wages Order
The main legislation related to minimum wages in Malaysia is the National Wages Consultative Council Act 2011 [Act 732] and the Minimum Wages Order 2022. The government periodically revises the minimum wage to ensure that all workers receive a fair and reasonable level of compensation. The minimum monthly wage is RM 1,500 from 2022.
Income Tax Act 1967
The Income Tax Act 1967 covers the legislation governing the taxation of income, including available tax exemptions and deductions. The Inland Revenue Board (LHDN) also publishes Public Rulings and PCB specifications giving additional details regarding the calculation of annual tax and monthly tax deductions (PCB).
Other Statutory Contributions
Key regulations include the Employees’ Provident Fund Act 1991, mandating contributions to the Employees’ Provident Fund (EPF) for retirement savings. The Employees’ Social Security Act 1969 requires contributions to the Social Security Organization (SOCSO) for social security protections. Additionally, the Employment Insurance System Act 2017 introduced the Employment Insurance System (EIS) to assist employees facing job loss. Finally, under the Pembangunan Sumber Manusia Act 2001, companies with at least 10 full-time Malaysian employees must contribute to their HRDF fund to meet their employees’ training needs.
Personal Data Protection Act 2010
The Personal Data Protection Act 2010 governs the collection, processing, and handling of personal data in Malaysia. It aims to safeguard individuals’ personal data, including salary information, by setting out guidelines for its proper handling and ensuring that individuals have control over how their data is used.
Employment Contracts
The terms and conditions of employment, including salary details, are typically documented in a written employment contract agreed upon by both parties. Employment contracts should follow the minimum specifications required under employment legislation.
What do I need to do before I can start running payroll?
You will need to obtain the registration numbers, documents and data listed below before you start running payroll.
- Register with the following statutory bodies as an employer: EPF (KWSP), SOCSO (PERKESO), LHDN and, for employers with at least 10 full-time Malaysian employees, HRDCorp. The registration numbers issued will be essential for submitting and paying mandatory contributions either via the statutory portals or via your bank portal. For more details, please refer to How to register as an employer.
- Obtain your employees’ personal details such as their IC or passport number, EPF employee number or tax number (for employees above the tax threshold). You will also require additional details like marital status (including whether their spouse is working or not) and dependent children details to ensure accurate PCB calculations.
- As an employer, you are required by LHDN to provide your employees with forms TP1 and TP3 to collect relevant information for accurate PCB calculations. Employees have the option to complete form TP1 for any payroll month if they want to claim optional tax deductions for certain personal expenses. New employees must complete and sign form TP3 to provide details of accumulated income and deductions paid under any previous employment during the year to ensure PCB calculations are based on the correct annual chargeable income and previous contributions paid during the year.
- For your payroll calculations, you will need to obtain details of part-time employees’ hours, unpaid leave days, unused annual leave days payable to resigning or terminated employees, as well as overtime hours for employees who should be paid when working outside normal working hours or during rest days and public holidays. Employers are also required to include in employees’ payslips details of numbers of workdays and public holidays during the wage period, as well as annual and sick leave taken and remaining.
- Access the statutory portals to calculate employee and employer contribution amounts based on each employee’s wages. Keep in mind that you should only enter the amount of wages which are subject to that particular contribution. For example, an annual bonus will be subject to all contributions except SOCSO and EIS, so it should not be included in the wages subject to contribution in the PERKESO portal. Alternatively, you can subscribe to a payroll software like PayrollPanda for automatic calculation of statutory contributions and to generate statutory files for submission via the statutory portals or via your bank portal.
What deadlines should I be aware of?
There are a number of monthly and yearly submission and payment deadlines you should be aware of, as well as submission deadlines based on employees’ join date or leaving date.
- Under the Employment Act, salaries must be paid within 7 days of the end of each wage period. You should set a monthly wage period for your payroll based on a specific cut-off date and then pay your employees within 7 days of that date. For example, your wage period could be from the first to the last day of the month, which means you should pay your employees by the 7th of the following month. Or you could set your cut-off date on the 25th of the month which means your wage period will be 26th of the previous month until 25th of the payroll month and you should pay your employees within 7 days of the 25th. Payment to terminated or resigning employees should be made no later than the day on which the contract terminates.
- All monthly statutory contributions must be submitted and paid by the 15th of the following month (or the previous workday if the 15th is a public holiday, apart from EPF contributions which can be paid by the following workday). Contributions are named after the wage month (e.g. Jan PCB contributions for Jan wages), apart from EPF contributions which are named after the month of the submission deadline (e.g. Feb EPF contributions for Jan wages).
- Employers must provide their EA form to each employee by the last day of February following the end of each tax year. The EA form contains details of the employee’s taxable and exempt income received during the year, as well as employee contributions paid and tax deductions claimed, in order for the employee to have all the data required to fill in their tax form, should they need to submit a tax return.
- Employers must also submit their E form to LHDN by 31 March of the following tax year (or 30 April if they submit online). The E form contains details of all their employees’ taxable and exempt income received during the year, as well as employee contributions paid and tax deductions claimed.
- Form CP22 must be submitted to LHDN for any new employee who is or may be subject to tax within 30 days of the employee’s join date, while form CP22A (or CP21 if the employee is leaving Malaysia for more than 3 months) must be submitted for certain employees leaving the company at least 30 days before the employee’s leaving date.
How is salary prorated for incomplete month of work?
Calculation of salary for an incomplete month (salary proration) may be required when an employee joins or leaves your company during the wage period.
The calculation formula under the Employment Act is:
Monthly Salary x Number of days eligible * in the wage period / Number of days in the wage period (calendar days)
*eligible days in the month:
For new hires, that refers to the number of days from the start date to the last day of the wage period. For employees leaving the company, it refers to the number of days from the first day of the wage period until their last day of work. This includes weekends, non-working days, and public holidays.
Example: Amir joined Company ABC on 10 April 2024 with a monthly salary of RM 4,500. The company’s cut-off date is 27th of the month.
Monthly Salary = RM 4,500
Number of days in the wage period (28 Mar to 27 Apr) = 31
Eligible days in the wage period (10 to 27 Apr) = 18
Prorated salary = 4,500 x 18 / 31 = RM 2,612.90
How is overtime calculated?
Employees typically receive a basic salary based on a set number of hours outlined in their employment contract. Under the Employment Act, if employees are eligible for overtime (including those earning monthly wages not exceeding RM 4,000 or manual workers), employers must compensate them for any hours worked beyond their contractual hours.
The Employment Act specifies that the minimum hourly rate for overtime should be calculated as follows:
Monthly wages / 26 days / Number of working hours under the employee’s contract
The hourly rate is then multiplied by the overtime multiplier rate based on when the overtime was performed. The main overtime multiplier rates are:
- overtime on normal workday: x1.5
- overtime on rest-day (outside normal working hours): x2
- overtime on public holiday (outside normal working hours): x3
The following are also payable in addition to the monthly wages:
- work on a rest-day (during normal working hours where work does not exceed half of normal working hours): half a day’s wage
- work on a rest-day (during normal working hours where work exceeds half of normal working hours): 1 day’s wage
- work on a public holiday (during normal working hours): 2 days’ wages
Example:
Mei works on 1 May (Workers’ Day public holiday). Her normal work hours are 7.5 hours, but she worked for 9 hours on that day. Her monthly salary is RM3,800.
Daily rate = RM 3,800 / 26 = RM 146.15
Hourly rate = RM 146.15 daily rate / 7.5 hours = MYR 19.49
Overtime on public holiday outside normal working hours = 1.5 hours x RM 19.49 hourly rate x 3 overtime multiplier = RM 87.71
Additional 2 days’ wages for work on public holiday = RM 146.15 daily rate x 2 = MYR 292.30
Total overtime payment for work on 1 May = RM 87.71 + RM 292.30 = RM 380.01
How do you calculate unpaid leave?
When an employee takes unpaid leave due to either a zero leave balance or overutilisation of accrued annual leave, the equivalent amount of the unpaid leave days is deducted from their monthly salary.
The calculation formula under the Employment Act is:
Monthly wages x Number of days during unpaid leave period / Number of days in the wage period (calendar days)
Example:
Amirah took 2 days of unpaid leave in July. Her monthly salary is RM 2,800.
Daily Rate = RM 2,800 / 31 calendar days = RM90.32
Unpaid leave = RM 90.32 x 2 days = RM 180.64
What is the calculation method for unused leave payable?
When employees leave the company, they should receive payment for any unused annual leave after their leave entitlement has been prorated based on the date their contract terminates (any fraction of a day which is less than one half of a day is disregarded, while any fraction which is one half or more is deemed to be one day). Just as for overtime calculations, the minimum daily rate for unused leave pay under the Employment Act is calculated based on 26 days.
Example:
Arun is resigning and his remaining annual leave balance after his leave has been prorated is 5 days. His monthly salary is RM6,000.
Daily rate = RM 6,000 / 26 = RM 230.77
Leave pay = RM 230.77 daily rate x 5 unused leave days = RM 1,153.85
What are the common compliance issues with payrolls in Malaysia?
Incorrectly calculating employee payroll in Malaysia can result in substantial fines, damaging your company’s reputation and causing employee dissatisfaction. Several common compliance issues should be noted to avoid such mistakes:
- Issues in Attendance Tracking: Implementing a manual attendance tracking system leaves room for errors and inaccuracies, leading to non-compliance issues. Without a reliable system in place, recording employees’ daily attendance and leave becomes challenging and prone to mistakes.
- Lack of Integration Between Attendance and Payroll Systems: When attendance tracking systems are not integrated with the payroll system, it results in non-compliance issues. Inaccurate attendance data leads to errors in salary calculations, overtime, and leave management, potentially causing dissatisfaction among employees.
- Failure to Manage Leave Balances Accurately: Inadequate management of leave balances poses compliance risks. Without a systematic approach to updating and managing leave balances, employees may not receive accurate information about their entitlements, leading to dissatisfaction and potential disputes.
- Exceeding Legal Working Hour Limits: Non-compliance with legal working hour limits, as stipulated by employment regulations, can result in penalties and legal repercussions. Without proper monitoring and enforcement mechanisms, organizations risk exceeding these limits, compromising employee well-being, and violating labour laws.
- Delays in Payments or Underpaying Contributions: Delays in payments or underpaying contributions can result in heavy penalties. For instance, you may incur minimum fines of RM200 per employee per month where the PCB is underpaid, if audited by the Inland Revenue Board (LHDN).
- Excluding Benefits-in-Kind and Equity Incentives: Neglecting to include benefits-in-kind and equity incentives in compensation reporting is common, potentially leading to oversight and inaccuracies in financial reporting.
- Incorrect Employee Classification: Incorrectly classifying employees, such as foreign workers or non-residents, during payroll data entry can result in erroneous salary calculations and statutory deductions.
Remaining unaware of changing regulations impacting payroll is problematic. Keeping abreast of updates and announcements from statutory and other governing bodies can be challenging but necessary to ensure compliance. Using a reliable payroll software like PayrollPanda offers a flexible and cost-effective solution, ensuring ongoing compliance with payroll regulations and allowing businesses to focus on revenue generation.
Important Cautionary Note
This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.