Reporting When Hiring in Malaysia

Introduction

In the evolving economic landscape of Malaysia, efficient payroll management is a cornerstone of successful business operations. The intricacies of payroll in Malaysia encompass a broad spectrum of legal mandates and fiscal responsibilities, necessitating a deep understanding and meticulous approach to ensure compliance and enhance employee satisfaction. This article aims to provide a detailed exploration of the payroll requirements and obligations in Malaysia, offering valuable insights for employers and HR professionals.

The Malaysian payroll system is characterized by its adherence to stringent legal standards, designed to protect both employer and employee interests. At its core, the system revolves around the calculation of wages, deductions, and contributions, governed by a monthly or, less commonly, weekly cycle. Employers must navigate these cycles with precision, ensuring timely and accurate remuneration of their workforce.

Underpinning the payroll system are the requirements set forth by the Employment Act 1955, which delineates the framework for minimum wages, overtime pay, and other compensation-related matters. Beyond the act, employers are obligated to make statutory contributions to the Employees Provident Fund (EPF), Social Security Organization (SOCSO), and Employment Insurance System (EIS), and adhere to income tax deductions (PCB). These contributions are not merely fiscal formalities but are integral to the social and economic welfare of the workforce.

Employees Provident Fund Organization

The Employees Provident Fund (EPF) is managed by the Employees Provident Fund Organization, a government agency responsible for overseeing the collection of contributions, management of the fund’s investments, and the administration of member accounts and withdrawals. The organization operates under the purview of the Ministry of Finance and is regulated by laws and regulations set forth to protect the interests of contributors.

It is a key component of Malaysia’s retirement savings plan and serves as a mandatory savings and retirement planning scheme for both Malaysian citizens and permanent residents, though it is also available to foreign workers under certain conditions.

The primary goal of the EPF is to ensure that employees have financial security upon retirement. It functions as a safety net, enabling individuals to save a portion of their monthly earnings throughout their working life, which can then be accessed upon reaching retirement age or under specific circumstances outlined by the EPF such as purchasing a home or covering medical expenses.

Contributions to the EPF are mandatory for employees and employers, with rates determined by the employee’s age and salary. The current contribution rate is generally 11% of the employee’s monthly wages for employees, while employers are required to contribute a minimum of 12%, with variations depending on the employee’s wage level and age. The EPF also allows for voluntary contributions, enabling individuals to increase their retirement savings.

Social Security Organization (SOCSO)

The Social Security Organization (SOCSO), known in Malay as Pertubuhan Keselamatan Sosial (PERKESO), administers comprehensive social security protections for employees in Malaysia, covering workplace injuries and occupational diseases, as well as providing a safety net for those who lose their jobs. SOCSO’s schemes are pivotal in ensuring workers’ welfare, and with the introduction of the Employment Insurance System (EIS) in 2018, its scope has broadened to include employment loss coverage.

For SOCSO the coverage is divided into two schemes: the Employment Injury Scheme and the Invalidity Scheme. The Employment Injury Scheme offers protection against accidents at the workplace or occupational diseases, providing medical benefits, temporary or permanent disability benefits, and rehabilitation services. The Invalidity Scheme, on the other hand, provides coverage for employees who suffer from invalidity or death due to any cause, not limited to workplace incidents. Contributions to SOCSO are compulsory for both employers and employees, with rates based on the employee’s monthly salary.

The EIS is designed to provide temporary financial assistance to employees who have lost their jobs, while also offering job search assistance, re-skilling, and up-skilling programs. The system aims to protect employees against job loss and to facilitate workforce mobility and adaptability. Contributions to the EIS are mandatory for both employers and employees, with the contribution rate being a small percentage of the employee’s monthly salary. The EIS serves as a critical safety net, ensuring that employees who are involuntarily unemployed can receive support during their transition period.

The combined framework of SOCSO’s traditional schemes and the EIS offers a comprehensive safety net for Malaysian workers. Through its various benefits and programs, SOCSO helps protect employees from the financial hardships associated with workplace injuries, diseases, invalidity, and unemployment. The introduction of the EIS further enhances this protection by addressing the challenges of job loss, promoting workforce adaptability, and supporting economic stability by aiding in the efficient reallocation of labor resources.

Inland Revenue Board of Malaysia (IRB)

The Lembaga Hasil Dalam Negeri (LHDN) or Inland Revenue Board of Malaysia (IRB) is the authority responsible for tax collection in Malaysia. Employers in Malaysia have specific responsibilities towards IRB, primarily revolving around the deduction, remittance, and reporting of employee taxes. These responsibilities are critical for the compliance of businesses with Malaysian tax laws and regulations.

Employers are required to register with IRB upon commencing their business operations or when they start employing staff. This ensures that they are recognized as a withholding agent to deduct employee income tax.

PCB stands for “Potongan Cukai Bulanan,” which translates to monthly tax deductions. It is a mechanism whereby employers deduct income tax from their employee’s monthly wages and remit it directly to the IRB. The PCB is an installment payment towards the employee’s annual income tax liability. The deduction rate is determined based on the employee’s taxable income, considering personal and dependent reliefs, and any applicable tax rates. The PCB system streamlines the process of income tax collection, reducing the burden on employees to settle their tax liabilities in a lump sum and ensuring a steady revenue stream for the government.

After deducting the PCB from employees’ salaries, employers are responsible for remitting these amounts to IRB by the 15th of the following month. Failure to remit the deducted amounts on time can result in penalties.

Employers are responsible for furnishing end-of-year tax documents, namely Form EA and Form E, to their employees and the Inland Revenue Board (IRB). The EA Form is an annual statement that employers must provide to each of their employees. It details the employee’s earnings, benefits, and deductions for the previous calendar year. The primary purpose of the EA Form is to assist employees in filing their personal income tax returns with IRB. Form E is a mandatory annual submission that employers must make to IRB. It is a declaration of the employer’s remittance of taxes on behalf of their employees for the given assessment year. This form consolidates the income payment and tax deduction details for all employees within the company.

When new employees are hired or when employees leave the company, employers are required to inform the IRB by submitting the CP22 and CP22A forms, respectively.

Conclusion

Adhering to the payroll requirements and obligations in Malaysia is a complex but essential component of business operations. Through diligent compliance, the integration of technological solutions, and a commitment to continuous improvement, employers can navigate the nuances of the Malaysian payroll system with confidence. The journey towards efficient payroll management is ongoing, marked by challenges and opportunities for growth. By embracing these principles, businesses can ensure not only legal compliance but also the satisfaction and loyalty of their most valuable asset—their employees.