Hello there, aspiring entrepreneur, it appears that you are on the verge of recruiting your initial staff member!
In this insightful piece, we will delve into the core aspects of five crucial payroll deductions (PCB, EPF, SOCSO, EIS, and HRDF) that employers in Malaysia must familiarize themselves with. By the end, you will have a clear understanding of the eligibility criteria, registration procedures, and the rates to be adhered to by both employees and employers.
Here's a brief overview of the topics we'll be discussing:
Potongan Cukai Bulanan: 0 – 30% of employee’s monthly wages depending on income bracket
Employee Provident Fund: 11% of the 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 the employee’s monthly wages and 0.2% employer’s contribution
Human Resource Development Fund: 1% of employee’s monthly wages fully contributed by the 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
One area that often leads to confusion is identifying whether specific employment is classified under EPF, SOCSO, and EIS.
This can be easily clarified as every employee falls into 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 workers under the same employer
Freelancer – work hours maximum 30% of a full-time worker under the same employer
Home-working employee – works from home, a maximum of 30% of full-time workers under the same employer
IMPORTANT - Full-time and part-time employees are covered by EPF, SOCSO, and EIS, while freelancers and home-based employees are not. The classification is based on the weekly workload rather than the duration of employment.
Monthly Tax Deduction (PCB)
Rate: 0 – 30% of employee’s monthly wages depending on income bracket and other conditional factors
The Monthly Tax Deduction (MTD), also known as PCB (Potongan Cukai Bulanan), streamlines the income tax process for employees as their employers deduct the tax amount from their monthly salary. The MTD rate is determined based on factors such as the employee's income, marital status, and applicable tax reliefs. To register for MTD, individuals can choose between manual submission or the convenient online portal provided by LHDN (Lembaga Hasil Dalam Negeri).
It's important to note that MTD rates vary depending on the income brackets, and here are the specific rates for the year 2021:
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
Any business even with one employee must register with EPF as an employer within seven days of the date the employer hired.
Employee registration must be done before the first involvement, as for Malaysian and Permanent Residents, through the employer’s i-Akaun account.
After 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 including part-time and temporary workers are required to register with the National Social Security Organisation SOSCO within 30 days of employment, which also can be easily done at SOCO’s Assist Portal.
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% of 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 expansion of SOCSO to provide assistance to retrenched employees until they find new employment. Enrollment for EIS, encompassing both employers and employees, is automatically included in the process of registering for SOCSO. Any employee who is covered by SOCSO will also be covered by EIS, etc.
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 the employee’s monthly wages fully contributed by the employer
Businesses that have 10 and above Malaysian employees including part-timers must be registered with HRDF. If you have lesser than 10 employees then they will not require to register with HRDF, but it's recommended to be registered. Registration also can be done online at HRDF Portal.
Upon sign-up, HRDF will impose a monthly levy of 1% (mandatory) or 0.5% (optional) on the company’s monthly wages and additional fixed allowance. This certified businesses to leverage HRD Corp’s grant system to retrain or brush up the employee's skills. After the training ends, HRDF will reimburse expenses.
Payroll Obligations Have a Massive Impact
While all employers are aware of their payroll responsibilities, having a surface understanding of these duties exposes the business to potential legal consequences and financially imprudent choices. Without a comprehensive understanding of the essential requirements, owners are unable to determine if their business is inadvertently violating any laws.