Running payroll in Malaysia

According to the Worldbank’s 2020 Ease of Doing Business Index, Malaysia is the 12th best country in the world for conducting business and there are plenty of local opportunities for foreing companies. What’s more, with its prime location in the center of Southeast Asia, Malaysia is the perfect location for global players seeking to establish a presence in the fast-growing region. 

Before hiring employees in Malaysia, however, employers should make sure they fully understand the local payroll requirements and obligations they have towards their employees.

In theory, there is no legal requirement for foreign companies to establish a local presence in order to hire someone in Malaysia. In this case, however, the company is not allowed to conduct any business in Malaysia, i.e. the employee may work for the non-resident company, but must not carry out any business activities in the employer’s name. Otherwise, the employer will have to incorporate in Malaysia. With regard to payroll, employers have to register with several statutory bodies, notably:

• Inland Revenue Board of Malaysia (IRMB): registration for an employer tax number which is needed for PAYE; new employees need to be declared to the Revenue Board within 30 days

• Employee Provident Fund (EPF): registration must be completed within 7 days after the first employee is hired; employees are required to register separately 

• Social Security Organization (SOCSO): registration must be completed within 30 days from when the employer becomes liable for contributions; employees must be registered in the same timeframe 

Furthermore, employers must register with the Employment Insurance System (EIS), which is administered by the SOCSO, and the Human Resources Development Fund (HRDF) - if applicable. There are no specific requirements to set up a local bank account to issue employment-related payments.

Employers in Malaysia act as withholding agents for both income tax and social security contributions. There are 4 main authorities employers need to liaise with in order to fulfill their statutory obligations. Tax rates as well as social security rates are different for residents and non-residents. 

Tax considerations

Personal income tax rates are progressive. The first MYR 5,000 of an employee’s income are tax-exempt. Thereafter, rates increase from 1% to 30%. Non-residents are taxed at a 30% flat rate. 

Taxable employment income includes salaries and wages, bonuses as well as most benefits provided by the employer, regardless of whether they are paid in cash or in kind. However, there are several tax deductions and allowances which are available to resident employees. 

Personal deductions include medical expenses, approved pension fund and other insurance contributions and education fees among others. Employment expenses, charitable contributions, interest payments on mortgages and social security contributions are also (at least partially) deductible. There also is a personal tax relief employees can apply for. The amount of the latter depends on the employee’s family situation. 

Individuals count as tax residents if they spend more than 182 days in Malaysia during any given calendar year. A shorter stay may be sufficient to qualify an individual for tax residency if this stay adjoins a 182-day stay in the previous or following calendar year. 

Under new regulations, Malaysian residents are exempt from paying income tax on income earned abroad. This regulation is expected to continue until December 2026. An employee’s taxable income is thus limited to income sourced in Malaysia. Non-residents are generally exempt from paying income tax on foreing income.

Expatriates working and earning income in Malaysia on a short-term assignment may be exempt from paying income tax in Malaysia if they fulfill certain conditions. 

Tax withholding and reporting 

Malaysia operates a PAYE scheme under which employers are obligated to withhold income tax from employee salaries and wages on a monthly basis. This is known as Monthly Tax Deduction (MTD). The deadline for remitting the withheld amounts for the Inland Revenue Board of Malaysia (IRBM) is the 15th of the month following the payment to the employee.

Along with the MTD payment, employers must submit a monthly payroll tax report. Since 2019, it is mandatory to submit the report electronically. The tax year is the same as the calendar year. Employees file an individual tax return by 30 April of the following year. Joint filing is permitted. 

Social security contributions

Malaysia’s social security system consists of various bodies, namely the Social Security Organization (SOCSO), the Employee Provident Fund (EPF), the Employment Insurance System (EIS) and the Human Resources Development Fund (HRDF). The Employee Provident Fund is the statutory pension scheme to which all Malaysian residents and citizens must contribute. The Employment Insurance System covers employees in case of job loss while the function of the SOCSO is to protect employees against invalidity and accidents at work. 

Apart from the Human Resources Development Fund which is entirely funded by employer contributions, all social security funds levy contributions on both employee and employer. EPF contributions amount to 12% for employers (13% if the employee’s monthly salary is lower than MYR 5,000) and to 11% for employees. Rates are lower for employees aged 60 or older and differ with regard to whether the employee is a Malaysian citizen or not. Rates are also different for non-resident EPF members.

SOCSO contributions are levied on employers at a rate of 1.75% while employees contribute at a rate of 0.5% of their wages. Contributions are capped at MYR 4,000 per month. As for EPF contributions, rates change as soon as the employee reaches the age of 60. Employers hiring foreign workers are required to pay SOCSO contributions on their behalf at a rate of 1.25%. The Employment Insurance contribution rate is fixed at 0.4%, which is split between employee and employer. The Employment Insurance System is administered by the SOCSO who also collects EIS contributions. 

SOCSO, EIS and EPF contributions must be paid by the 15th of the month following the respective payroll run. HRD levies must be paid separately to the Human Resources Development Fund. However, not all employers are required to contribute. 

* The contribution rate is 13% if employee earnings are below MYR 5,000 per month. Different rates apply for employees aged 60 or older.

** Capped at MYR 4,000 per month.

*** The HRDF levy does not apply to all employers.

Employees in Malaysia are entitled to various benefits. These include:

• Annual leave and public holidays: between 8 and 16 days, depending on seniority; plus 11 public holidays (5 are national, 6 are regional) 

• Maternity leave: 98 days (up from 60 days in 2022), during which the employee receives a maternity allowance (certain conditions must be met)

• Paternity leave: 7 days of paid paternity leave (new law in 2022)

• Parental leave: no legal provisions for parental leave

• Sick leave: between 14 and 22 days of outpatient sick leave (depending on seniority); 60 days of hospitalization leave

For more information on employee benefits and other employment requirements in Malaysia (including severance pay and termination procedures), check out our Global Hiring Guide.

In May 2022, the national minimum wage will rise to MYR 1,500 per month. Currently (as of March 2022), the monthly minimum pay is set at MYR 1,200. Employees who are required to work additional hours are entitled to overtime pay which should not be less than 150% of the employee’s normal wages.

On rest days, overtime is subject to double pay. Overtime on public holidays must be remunerated at triple rates. There is no legal requirement to provide employees with a 13th month bonus.  

Employees in Malaysia should be paid once a month. Payments must be made by the 7th of the following month. Payment methods include cash payment, check and bank transfer. It is mandatory to provide employees with a payslip for each pay period.

Payslips can be issued in paper form or electronically and should provide information on wages and salaries, social security contributions and other deductions. Payroll records must be kept for at least 7 years.