Malaysia
Payroll Guide

Country Overview

Malaysia, a vibrant and diverse Southeast Asian nation, sharing borders with Singapore, Thailand, Indonesia and Brunei. It has a total. Known for its bustling cities, lush rainforests, and beautiful beaches, Malaysia is much more than an attractive tourist destination. It has emerged as a significant player in the global economy, thanks to its robust infrastructure, strategic location, and government initiatives.

Since gaining independence in 1957, Malaysia has transformed from an agriculture-based economy to a thriving industrial and service-oriented economy. Malaysia’s evolution into a premier exporter of electrical appliances, parts, and components has lifted the nation from a low-income status to an upper-middle-income economy within a single generation, showcasing its rapid development and economic resilience.

The country is currently on the cusp of achieving high-income status, driven by domestic demand and a rebound in exports. In 2024, the GDP of Malaysia was 408.305 USD Billion and the economy surged with an impressive growth rate of 4.2% in the first quarter of 2024.  In the second quarter of 2024 the GDP increased by 5.9%.

Along with its strategic development policies and ongoing commitment to growth, the government is also working on improving social protection and raising social assistance coverage to reduce poverty and inequality.

Malaysia’s 2025 Budget, aiming to fortify the country’s financial health. The budget outlines strategies to decrease the fiscal deficit to 3.8% in 2025. Additionally, it projects an increase in revenue from RM 322 billion in 2024 to RM 340 billion in 2025. Key measures include the broadening the scope of existing taxes, and implementing updated initiatives designed to attract and retain foreign direct investments.

Malaysia is well-positioned to secure a prosperous future for its citizens and become a key player in the international arena. However, Malaysia faces challenges such as slower growth, income inequality, and a lower proportion of high-skilled employment compared to its peers. To address these issues, Malaysia is focusing on broader economic development, emphasizing quality over quantity of growth.

Market Glimpse

Malaysia’s economy is distinguished by steady GDP growth, moderate inflation, and far-sighted fiscal policies. With a diverse and multicultural population of around 36 million, the nation presents a growing consumer base that medium to large-sized enterprises can strategically leverage. In addition to that, the population possess high English proficiency and cultural affinity with Western countries, making them a great workforce that can lead to growth of a company.

Located at the intersection of key Asian trade routes, Malaysia provides exceptional access to ASEAN markets and beyond. Its advanced infrastructure and ports ensure efficient logistics and facilitate global trade. Technological advancements, particularly in the manufacturing and electronics sectors, access to a skilled workforce and innovative digital services, all these factors, combined with a growing startup ecosystem position Malaysia as an attractive destination for international enterprises.

The Malaysian Government is committed to nurture this business-friendly environment further with various support initiatives and incentives to encourage foreign investors –

• A company with Pioneer Status (PS) enjoys 70% income tax exemption on its statutory income for 5 years.
• A company can apply for Investment Tax Allowance and be entitled to an allowance of 60% on its qualifying capital expenditure.
• 15 years of The Reinvestment Allowance (RA) benefit is offered to manufacturing and selected agricultural companies, operational for at least 36 months, for reinvestments in expansion, automation or diversification.
• Import duty and sales tax exemption on imported raw material/components, machinery and equipment for selected activities in the agriculture sector.
• Tax incentive for angel investors.
• Capital allowance on costs of dismantling and removing assets.

Along with all the upsides, there are a few pointers that need to be taken care of before setting up a new business.

Shifting from the broader economic landscape, let us delve into the intricacies of payroll management, a critical component for any thriving business. This e-book will guide through the essential aspects of payroll, ensuring compliance and efficiency in business operations.

Payroll Compliance Essentials

To start a business in Malaysia, the company need to register its name with the Companies Commission of Malaysia (SSM). Following this, the company needs to prepare and submit the necessary incorporation documents, including the company’s constitution and details of directors and shareholders. Once the application is approved, a Certificate of Incorporation will be issued. Additionally, obtaining relevant business licenses and permits, depending on the industry is mandatory.

As the company commence with its operation it is crucial to ensure compliance with local regulations and tax obligations.

In this guide, the statutory details right from onboarding to offboarding of an employee will be discussed in depth and the links to relevant official sites are embedded below:

*Note: Other public rulings can be referred at link provided here on LHDN website.

Onboarding Simplified

The employee onboarding process is regulated by relevant labour laws to ensure adherence to established standards. To onboard a new employee, the employer must submit SOCSO through Form 2, Form SIP 2, and Form CP22 to notify SOCSO, EIS, and the Inland Revenue Board (IRB) of the new hire.

The following information is required for the new employee setup:

• Personal details form
• A copy of the ID card
• TP3 form pertaining to tax reliefs claimed with previous employer if employed in Malaysia within the commencing year

This process requires a clearly defined employment contract that specifies all essential working conditions and payroll details, thereby facilitating smooth payroll operations. The requirements for onboarding an employee are outlined below:

Employee Classification

The Employment Act 1955 (“Labour Law”) in Malaysia categorises employees into 4 significant types. The list is provided below”

2. Employment Contract

Every employment contract be it for indefinite period or for specified period exceeding 1 month shall be in writing. Labour Law does not mandate any specific details to be mentioned in the contract.

3. Probation Period

Probationary periods are not regulated under the Labour Law, however, generally it can range from 3 to 6 months based on company policy and can extend to another 3 months. The probation period must be agreed upon through the employee contract.

4. Minimum Wages

The minimum wage in Malaysia is determined by the National Wages Consultative Council (NWCC) through Minimum Wage Order. This council reviews the minimum wage at least once every two years, considering several factors such as cost of living, employment rate and economic situation to ensure that the minimum wage is fair, reasonable, and reflective of current economy. As of 2024, the minimum wage in Malaysia is set at RM 7.21 per hour which equals to a minimum monthly wage of RM 1,500.

The Minimum Wage Order 2024 with revised wage limits to enhance purchase power parity released recently is applicable to employers with 5 or more employees effective February 01,2025 however it is applicable to all the employer regardless of employee count effective August 01,2025.

Workplace Protocols

1. Working Hours

Malaysia has a 6-day work week and working hours are as follows:

* Must not exceed a spread over period of 10 hours/day including break period.

**In cases where the number of working hours falls below 8 hours/day on one or more days.

2. Breaks

The period of rest is also important for the employees and the country has specific rules for this matter.

3. Rest Day

Employers are obliged to provide employees 1 rest day each week. Rest day count does not apply for employees on maternity leave, sick leave and period of temporary disablement.

Employees who work on their designated rest day are entitled to extra pay as mentioned below:

Note: The “ordinary rate of pay” refers to the wages an employee is entitled to receive under their contract of service for the normal hours of work for one day. This can be calculated by the month, week, day, hour, piece rate, or other methods.

The payroll frequency calculations for the ordinary rate of pay are as follows:

Monthly Payroll Frequency: Monthly rate of pay divided by 26.

Weekly Payroll Frequency: Weekly rate of pay divided by 6.

Daily/Hourly Payroll Frequency: Basic wage divided by the actual number of days worked.

4. Overtime

Work exceeding more than spread over period of 10 hours a day is permissible, provided that the employee receives appropriate compensation for the overtime hours as per Labour Law.

Any work performed on a gazetted public holiday is considered overtime and is compensated at 3 times the hourly ordinary rate of pay.

5. Night Work Pay

In Malaysia, employees working night shifts are not mandated to receive additional compensation. It is based on agreement between employer and employee.

6. Leaves Entitlement

In Malaysia, the employees are entitled to get paid public holidays mentioned below:

Note: If public holiday falls on rest day or other public holiday then immediate working day shall be a paid holiday in substitution of the first mentioned public holiday.

Apart from these, employees are entitled to several other paid statutory leaves as per Labour Law, provided below:

*In case of hospitalisation, 60 days of sick leave can be given in each calendar year as certified by medical practitioner.

Holiday Pay

If an employee works on public holidays, then they are eligible for holiday pay as per below table:

Note: Travelling allowance is also paid if an employee works on holiday.

Other Payouts

In Malaysia some other statutory benefits are as follows:

a) Annual Leave Encashment:

If employee agrees in writing not to avail the eligible leave days, then they are allowed to encash the remaining leaves.

b) Maternity Allowance:

Female employees:

• Who have worked for at least 90 days in the last 9 months
• Are employed within 4 months before confinement
• Have less than five surviving children
• Notify their employer 60 days before expected confinement

All are eligible for maternity allowance. Maternity leave can start 30 days before or after confinement, with flexibility for medical reasons.

7. Event-based Compensation

In Malaysia, there is no specific Workmen’s Compensation Act in place.

8. Other Benefits

Although there are no other statutory benefits available, the employees may receive one-time or additional payment benefits, subject to their employment contract, such as:

• Bonuses
• Commissions
• Health insurance etc.

Salary Essentials

1. Salary Components

In Malaysia, Director General of Inland Revenue through relevant Public Rulings, outlines the mandatory salary components. Follow the below table to understand various salary components that constitute the gross salary in the country’s payroll.

2. Payslip Components

Employment Regulations 1957 mandates employer to furnish statement containing details stipulated under Section 5(c) on or before the payment of wages:

1. For time-based pay (hour, day, week, or month), include the rate of pay and total wages for normal and overtime hours.
2. For work-based pay (piece, volume or task) include the rate of pay and total wages for normal and overtime work.
3. Total number of days work or total number of pieces, volume or task of work done on rest days and holidays with pay during each wage period.
4. Amount of wage paid in lieu of annual leave with pay in each wage period.
5. Details of other allowances payable during each wage period.
6. Total amount of wages and allowances earned during each wage period under points (1) to (5).
7. Details of advances made during each wage period.
8. Details of deductions made during each wage period.
9. Balance of wages and allowances payable at the end of each wage period.
10. Details of holidays, annual leave, and sick leave with pay granted during each wage period.
11. Date of payment.
12. Signature of the employee.

Decoding Deductions

Employers are obliged to make several mandatory deductions in the below form:

1. Withholding Taxes

Malaysia operates on a January to December tax year and the official authority for administering Income Tax is Lembaga Hasil Dalam Negeri Malaysia (LHDN).

LHDN is responsible for bringing out new regulations or amending the existing ITA and for releasing the relevant public rulings and MTD specifications to determine the taxable income and income tax respectively. It also requires employers to deduct income tax in the form of Potongan Cukai Berjadual (PCB) from employees’ monthly salaries in accordance with the computation methodology released in specification for Monthly tax deduction (MTD).

Understanding the calculation of income tax in Malaysia is essential to ensure compliance and accurate payroll processing. The Malaysian tax system follows a structured approach to determine the tax payable, here are the detailed steps to calculate tax:

• Calculate Total Gross Income:It includes all income received from employment, such as salary, benefits, and perquisites.
• Deduct Expenses: Subtract any expenses directly related to earn employment income.
• Add Other Sources of Income:Include adjusted income from all other sources to calculate the total aggregate income.
• Calculate Total Income:Deduct allowable amounts for gifts and contributions to determine the total income.
• Calculate Total Chargeable Income:Deduct allowable amounts under ITA Sections 45A to 49 to arrive at the total chargeable income.
• Calculate Tax on Chargeable Income:

As per the MTD specification once the chargeable income is determined the further computation methodology for Malaysian Residents will differ based below remuneration category approved by Inland Revenue Board of Malaysia (IRBM) mentioned under:

1. Normal Remuneration
2. Additional Remuneration
3. Approved Individual Under the Returning Expert Program (REP)
4. Knowledge Workers in The Specified Region
5. An Individual Resident who is not a citizen and holds C Suite position in an approved company

Apply the tax rates to the chargeable income, ITA provides for the applicable tax rates based on residential status as tabled below:

Tax rates for Malaysian Residents:

• Subtract Tax Rebates:Deduct applicable tax rebates in case of Malaysian residents only as per ITA Section 6A (2), (2A), and (3) of the ITA before any tax credit (Section 132/133) or set off (Section 110) is allowed.

By following these steps, employers can ensure accurate tax calculations and compliance with Malaysian tax laws.

Reporting and Remittance:

• PCB is remitted and filed monthly by 15^thof the following month.
• IRBM facilitates registration, updating, remittance and filing of PCB deductions from employee’s salary through e-CP39 portal.
• Employers are obliged to issue Form EA to employees as withholding evidence for PCB deduction by end of February.
• Employers must submit CP-8D/e-Data Praisi Formto IRB the report on remuneration from employment, claims for deductions, and other particulars by 31^st March of the following year.
• The employer declaration Form E must be submitted with details such as number of employees, their income etc. to the IRB by 31^stMarch of the following year.

Non-compliance:

2. Social Security

In Malaysia, the Pertubuhan Keselamatan Sosial (PERKESO) administers employee’s social security providing coverage for employment injury and invalidity. Employers are mandated to register their employees with SOCSO and contribute to the social security schemes. Wage slabs and Citizenship is another important criterion for determining social security rates.

The social security schemes can be divided into 3 sections as mentioned below:

a. Employee Provident Fund (EPF)

EPF is essentially a mandatory savings scheme designed to ensure financial security for employees upon retirement. It is administered by Kumpulan Wang Simpanan Pekerja (KWSP) and governed through Employees Provident Fund Act 1991 (“Act 452”). This is mandatorily applicable to Malaysian citizen and permanent resident employees up till 60 years of age and it is optional for Malaysian Citizens more than 60 years of age and for non-Malaysian citizens regardless of age.

The EPF requires contributions from both employees and employers based on the employee’s salary. The contribution rates are as follows:

The contribution amount depends on the employee’s salary.

Employee’s salary includes all monetary remuneration due under the contract of service or apprenticeship, whether paid monthly, weekly, daily, or otherwise. This encompasses bonuses, commissions, and allowances payable by the employer, regardless of whether they are stipulated in the contract. However, it excludes:

• Service charges
• Overtime payments
• Gratuities
• Retirement benefits
• Retrenchment, lay-off, or termination benefits
• Travelling allowances or the value of any travelling concessions
• Any other remuneration or payment exempted by the Minister

Refer to Third Schedule of Act 452 for complete details on EPF Rates based on monthly wage slabs.

Reporting and Remittance:

• EPF contributions must be remitted and filed monthly by 15^thof the following month.
• The EPF authority facilitates registration, updating, remittance and filing of SOCSO contributions through EPF i-Akaun

Non-compliance:

b. Employee’s Social Security (PERKESO)

PERKESO is a social insurance program that encompasses both the SOCSO and EIS schemes. It is managed by the Pertubuhan Keselamatan Sosial (PERKESO) and regulated under the Employee Social Security Act 1969 (“Act 4”).

SOCSO provides protection to employees against employment injuries, occupational diseases, and invalidity. The SOCSO program is classified into two categories based on the age and employee type as tabled below:

The SOCSO scheme, which was previously limited to Malaysian citizens, was expanded on July 1, 2024, to include non-Malaysian citizens. This extension aims to offer greater protection to foreign workers by covering them against employment injury and invalidity, ensuring fair and equal social security rights.

The first category provides coverage against both employment injury and invalidity while the second category covers only employment injury.

Employment Insurance System (EIS) is also a part of this scheme, implemented by the Employment Insurance System Act 2017 (“Act 800”). EIS benefits include job search allowance, reduced income allowance, and training allowance, helping employees transition between jobs and enhancing their employability.

The contributions are structured as follows subject to a maximum cap limit of RM 6,000:

*Refer to Third Schedule of Act 4 and second schedule of Act 800 for complete details on SOCSO and EIS rate table based on monthly wage slabs. Here wages include all monetary remuneration payable by an employer to an employee, such as payments for leave, holidays, overtime, and extra work on holidays. However, it excludes:

• Contributions to any pension or provident fund
• Travelling allowances or concessions
• Sums paid to cover special employment-related expenses
• Gratuities on discharge or retirement
• Annual bonuses
• Any other prescribed remuneration

For complete SOCSO rate table click here.

For complete EIS rate table click here.

Reporting and Remittance:

• SOCSO and EIS contributions must be remitted and filed monthly by 15^thof the following month.
• The PERKESO authority facilitates registration, updating, remittance and filing of SOCSO contributions through Automated SOCSO Integrated System (ASSIST) online self-service portal.

Non-compliance:

c. Human Resource Development Fund (HRDF)

In Malaysia, HRDF levy aims to promote training and development of employees, apprentices, and trainees. It is managed by the Human Resources Development Corporation (HRD Corp) and governed by Pembangunan Sumber Manusia Berhad Act 2001(“the Act”). It is a mandatory obligation for certain class of employers covered under the Act in certain industry to contribute 1% per month on the employee’s salary. Here employee’s salary includes the basic salary and fixed allowances, or other emoluments paid in cash, including leave pay and arrears of wages. However, it excludes:

• Employer contributions to pension, provident, superannuation, retrenchment, termination, lay-off, retirement, thrift, or other welfare schemes
• Travelling allowances or concessions
• Sums paid to cover special employment-related expenses
• Gratuities on discharge or retirement
• Bonuses or commissions
• Allowances paid to apprentices under apprenticeship contracts

Reporting and Remittance:

• HRDF contribution is remitted and filed monthly by 15^thof the following month.
• The HRD Corp facilitates registration, updating, remittance and filing of HRDF payments through e-TRiS portal.

Non-Compliance:

3. Minimum Take Home Pay

As per Labour Law, the total deductions in any month should not exceed 50% of the employee’s wages, except for indemnity payments, final wage payments upon termination, and housing loan repayments.

Allowed salary deductions include:

• Overpayment of wages immediately preceding 3 months
• Indemnity due to employer
• Recovery of advances

Some deductions require a written request and prior permission from the employee.

Seamless Offboarding

Employers must prioritise compliance during the offboarding process, as it is a critical aspect of employment management. Offboarding typically occurs when an employee retires, resigns, or is terminated for serious misconduct. Properly handling this process is not only important to maintain a positive impression of the company but also to ensure legal compliance.

The provision regarding the termination eligibility is governed by the Employment (Termination and Lay off benefits) Regulations 1980.

Termination Benefits

Upon termination or separation, employees are eligible to termination benefits. The eligibility to receive the termination benefits are as follows:

• Termination upon reaching the retirement age as stipulated in the contract of service.
• Termination due to misconduct that violates the conditions of service, following due inquiry.
• Voluntary resignationby the employee.
• Continuous service contract for at least twelve months ending on the relevant date.

The calculation of termination benefits amount is outlined below:

Note: Daily wage is calculated as the average of the actual 12 months’ wage for the completed year of service immediately preceding the relevant date. The wage includes basic pay and all other cash payments payable to an employee for work done under their contract of service subject to certain exceptions.

Notice Period:

The employees need to serve a notice period before termination. The length of notice periods depends on the length of service:

1. Retirement

The retirement age in Malaysia is 60 years, however, employees can retire at the optional retirement age, as agreed in contract of service or collective agreement.

The retiring employee is eligible for the following benefits –

• A notice period with full pay
• Compensation for any unused leave entitlement
• Termination benefit as mentioned above

2. Resignation

Employees intending to resign need to serve a notice period as mentioned above. After resignation, the employee is entitled to receive the following termination benefits:

• A notice period with full pay
• Compensation for any unused leave entitlement
• Termination benefit as mentioned above

3. Dismissal

Employees who are laid off may be eligible for certain benefits if specific eligibilities are met. The eligibility criteria are as follows:

• The employer does not provide work for at least 12 normal working days within a period of 4 consecutive weeks.
• The employee is not entitled to any remuneration under the contract for the period(s) within the 4 consecutive weeks when work is not provided.
• The employee has a continuous contract of service for at least 12 months ending on the relevant date for lay off.

The termination benefit amount for dismissal employees will be consistent with the figures outlined in the above table.

Conclusion

Malaysia offers a dynamic and conducive environment for business operations, supported by government initiatives for economic growth. The country’s growing middle class and robust consumer market appeal as a prime destination for international businesses. However, navigating payroll compliance in Malaysia presents its own set of challenges. Employers must manage diverse deductions and statutory contributions based on the employee type and residential status and ensure timely and accurate reporting.

To effectively manage these complexities, it is essential to invest in robust HRMS systems that can handle the intricacies of Malaysian payroll regulations. Staying updated about legislative changes is also crucial for maintaining compliance and avoiding potential penalties.