Hey there, new business owner, looks like you’re about to hire your first employee!
This article is an overview of the five sources of payroll deductions (PCB, EPF, SOCSO, EIS, and HRDF) that all employers in Malaysia must be familiar with. By the end, readers will understand which employees qualify, the registration process, and rates owed by employees and employers.
Here’s a quick summary of what we’ll be covering:
- Potongan Cukai Bulanan: 0 – 30% from employee’s monthly wages depending on income bracket
- Employee Provident Fund: 11% from employee’s monthly wages and 12-13% employer’s contribution
- Social Security Organisation: 0.5% from employee’s monthly wages and 1.75% employer’s contribution
- Employment Insurance Scheme: 0.2% from employee’s monthly wages and 0.2% employer’s contribution
- Human Resource Development Fund: 1% of employee’s monthly wages fully contributed by employer
- Foreign worker payroll obligations for employers hiring overseas employees
- The benefits of implementing payroll software to automate and simplify compliance with various payroll obligations
Quick note: Worker Status and Coverage
A frequent source of confusion is whether a particular worker falls under EPF, SOCSO and EIS.
This can be easily determined as every employee falls under one of the following four categories:
- Full-time employee – works on a weekly basis (full week)
- Part-time employee – work hours 30% – 70% of full-time worker under same employer
- Freelancer – work hours maximum 30% of a full-time worker under same employer
- Home-working employee – works from home, maximum 30% of full-time worker under same employer
Full-time and part-time employees are covered by EPF, SOCSO and EIS, while freelancers and home employees are not.
Note that the above refers to Malaysian or Permanent Residents, and that the categories rely on a typical weekly workload – not duration of time in employment.
An employee may work for the same business for ten years and remain a casual employee, while another employee is, by definition, a part-timer the moment their workload exceeds the 30% threshold.
For foreign worker obligations, click here.
Monthly Tax Deduction (PCB)
Rate: 0 – 30% of employee’s monthly wages depending on income bracket and other conditional factors
PCB, MTD, or Monthly Tax Deduction, is essentially employers doing their employees’ income tax for them by deducting the amount from their monthly salary. The MTD rate is based on the employee’s income and other factors such as marital status and tax reliefs. Registration can be done manually or online via LHDN’s portal.
The MTD rates are different for each income bracket and as of 2021, are as follows:
- For monthly income up to RM2,500, the MTD rate is 0%
- For monthly income between RM2,501 and RM5,000, the MTD rate is 1%
- For monthly income between RM5,001 and RM10,000, the MTD rate is 3%
- For monthly income between RM10,001 and RM20,000, the MTD rate is 8%
- For monthly income above RM20,000, the MTD rate is 11%
Employee Provident Fund (EPF)
Rate: 11% deducted from employee’s monthly wages and 12-13% employer’s contribution
Businesses with at least one employee must register with EPF as an employer within seven days of the date of hire. Registration may be done physically at an EPF branch, or online via EPF’s portal.
Employee registration must be completed before the first contribution, and for Malaysians and Permanent Residents, the fastest way is via the employer’s i-Akaun account.
Following that, employers must commit to monthly EPF payments, consisting of 11% deducted from the employee’s monthly wages and an additional 12-13% from the employer’s pocket.
Social Security Organisation (SOCSO/PERKESO)
Rate: 0.5% deducted from employee’s monthly wages and 1.75% employer’s contribution
New employers and employees must register with the National Social Security Organisation SOCSO within 30 days of hiring, which can be done via SOCO’s ASSIST Portal. As mentioned above, part-time and temporary workers are covered by SOCSO and must register.
Employers must pay monthly contributions for each eligible employee according to the rate specified under the Employees’ Social Security Act 1969. For employees under 60 years old, the rate is 1.75% employer’s share and 0.5% employees’ monthly wages.
Employment Insurance Scheme (EIS)
Rate: 0.2% deducted from employee’s monthly wages and 0.2% employer’s contribution
This is an extension of SOCSO to support retrenched employees until they secure new employment. Registration for EIS for both employers and employees is automatically bundled together with SOCSO registration. Any worker who is covered by SOCSO will be covered by EIS and vice versa.
EIS contributions are set at 0.4% of the employee’s assumed monthly salary, with 0.2% paid by the employer while 0.2% will be deducted from the employee’s monthly salary.
Human Resources Development Fund (HRDF)
Rate: 1% of employee’s monthly wages fully contributed by employer
Businesses with 10 or more Malaysian employees (including part timers) must register with HRDF, while those with < 10 employees are not obligated to join, but may do so if desired. Registration can be done online through the HRDF online portal.
Upon registration, HRDF imposes a monthly levy of 1% (mandatory category) or 0.5% (optional category) on the company’s monthly wages plus fixed allowances. This qualifies businesses to leverage HRD Corp’s grant system to retrain or upskill employees. Once a training programme is completed, HRDF will reimburse expenses incurred.
Foreign worker payroll obligations
Foreign workers are subject to slightly different monthly payroll obligations.
The deduction and remittance process is identical to that of Malaysian employees, though the percentage differs depending on whether said worker is a resident (>182 days spent in Malaysia) or non-resident:
- Resident: 0% to 30% depending on income
- Non-resident: 30% flat rate
EPF for foreigners is optional, but for those who choose to contribute the rate is 5.5% of their monthly wages plus an employer’s share of RM5.00 (minimum).
Except for domestic servants, all foreign workers in Malaysia including expatriates with valid working permits are covered by SOCSO and must register. The rate for foreign workers is 1.25% of monthly wages to be paid by the employer.
EIS & HRDF
Foreign workers do not have any compulsory or optional EIS or HRDF obligations.
Payroll Obligations Have Massive Impact
While all employers know they have payroll duties, a surface-level understanding puts the business at risk of legal action as well as financially irresponsible decisions. Without knowing key requirements, owners have no way of telling whether the business is unintentionally breaking the law. Though recordkeeping can be (and often is) outsourced, owners must be able to audit the auditors, so to speak.
Finally, by understanding the various employer contributions, business owners can accurately assess cash outflow and make smart decisions when hiring or offering raises and bonuses (yes, those are taxed too!).
Payroll Software is a Lifesaver
Outside of hiring or engaging qualified HR professionals, the best thing business owners can do is implement payroll software as part of their day-to-day operations.
Payroll SaaS has been designed to automate the process of managing employee payroll, allowing those without professional training to easily handle all payroll obligations from one interface, including:
- automatically calculating deductions
- issuing payment slips
- direct deposits into employee bank accounts
- expense claims overviews
- employee file storage
- time and attendance tracking
- monthly and annual expense reports
With well-designed payroll software, even inexperienced users can closely replicate the work of a seasoned HR professional at a fraction of the cost. Most software today also comes with free trials and comprehensive onboarding that allow anyone to fully make use of its features and functions.
For business owners currently without payroll software in place, we’d like to recommend our partner BrioHR. Their fully customisable service bundles only charge you for what you need and nothing more. Talk to us about a free demo today!