Efficient Payroll Processing in Malaysia: A Comprehensive Guide

Many of you are in business, and your goal is to always maintain a great bottom line for your company. Unless your business is a one-person show, you must have employees to help you make that great bottom line.

In exchange, they get their monthly pay. The thing is that paying your staff (the process, not the pay themselves) is costly when done on your own or with the help of your in-house payroll staff. Still, a great bottom line means one that keeps on growing. Thus, it makes sense to be more cost-effective on your spending. So, how could you be more cost-effective in your payroll processing?

If you’re adamant about keeping it in-house and low-cost, then you should keep your payroll team small, and make sure that they are processing payroll correctly.

If you’re adamant about keeping it in-house and low-cost, then you should keep your payroll team small, and make sure that they are processing payroll correctly.

Payroll processing is about one thing, which is to ensure that all due wages are calculated correctly, and paid out punctually to your employees. The term “wages” in this article refers to salaries and wages earned by employees.

The thing is that it is not all up to you, the employer. The Law of Malaysia has much for you to comply with. Failing to comply will lead to fines, imprisonment, or both.

The thing is that it is not all up to you, the employer. The Law of Malaysia has much for you to comply with. Failing to comply will lead to fines, imprisonment, or both.

  1. every payroll documentation for each employee is submitted for payroll processing;
  2. every payroll documentation for each employee is submitted for payroll processing;
  3. wage payments are made to your employees once the calculations are approved.

We will cover each of the mentioned but let us first talk a little bit about what laws concerns your your payroll and your payroll cycle.

What laws in Malaysia concerns my payroll processing?

To give you an idea of how each statute plays a role, the part of payroll processing that each statute touches can be describe as the following:

NoStatutesEmployment Insurance System Act 2017 (EIS Act 2017)
1– Employment Act 1955 (for Peninsular Malaysia only, including Labuan);
– Sabah Labour Ordinance; and
– Sarawak Labour Ordinance.
– payroll cycle (when does payroll begin and end)
– pay rate
– lawful deductions
2Income Tax Act 1967 (ITA 1967)– monthly tax deductions (MTD)
– EA forms
3Employees’ Provident Fund Act 1991 (EPF Act 1991)– employees’ contribution to their EPF;
– employers’ contribution to employees’ EPF
4Employees’ Social Security Act 1969 (SOCSO Act 1969)– employees’ SOCSO contribution
5Employment Insurance System Act 2017 (EIS Act 2017)– employees’ EIS contribution

For details, you may refer to the following articles:

  • What is the process for monthly tax deductions in Malaysia?
  • EPF Contributions: Employer’s Obligations
  • EIS & SOCSO Contributions: Employer’s Obligations

What is the typical payroll cycle in Malaysia?

Malaysian labour law defines that the wage period is no more than a month. Payroll processing begins on the payroll cut-off date, which is the date by when all relevant payroll documentation for processing.

image 17

By month-end, your payroll calculations should be finalised, and then payment should be made. Your employees are to receive their monthly pay by the seventh (7th) day after month-end.

Refer to our article “What is the typical payroll cycle in Malaysia?” for more details.

What payroll documentation is relevant for payroll calculations?

Payroll documentation relevant to the payroll calculations should provide facts and figures needed to perform the calculation. At minimum, there should be the following:

  • employment letter and/or employees’ latest salary letter;
  • verified overtime slips;
  • monthly leave records;
  • verified expense claim slips for the month; and
  • verified commission slips for the month.

The format of payroll documentation is defined by individual companies. However, they all serve to provide details such as current basic pay amount, unpaid leaves amount, entitled reimbursement amount, and entitled commission amount.

Refer to our article “What payroll documentation is relevant for payroll calculations?” for more details.

How is payroll calculation performed?

Typically, the calculation of employees’ monthly can be described (not calculated) as follows:

  • monthly pay = basic salary + overtime + reimbursements + commissions – deductions
  • reimbursements = total amount claims verified and entitled as per documentation
  • commissions = total amount verified and entitled as per documentation
  • deductions = statutory deductions + lawful deductions

Please bear in mind that the formulae above are not exact formulae but rather a general description as to the general flow of the calculation.

Apart from respective deduction/contribution rate, the each statutory deduction (MTD, EPF, SOCSO, and EIS) has its own calculation method, and also its own specification as to what amount is to be deducted from (e.g., only income is deductable for MTD, and so the amount should not include reimbursements).

For more details, refer to our articles:

How is wage normally paid in Malaysia?

Wage is usually paid once the pay calculations are verified. In most companies, monthly payroll reports, detailing the payroll amount and calculation for each employee, are sent to designated reviewers (responsible persons, such as CEOs, CFOs, COOs, or even HR Directors).

The reviewers must check on whether all details are correct. If there are no issues, the reviewers would approve the reports, and they will be forwarded to the persons responsible for making the actual payment (usually the finance team, but really whomever the company assigns the responsibility).

Labour laws require that wage payments be made by transfers into employees’ bank accounts. However, you may pay your employees’ by cheque or legal tender, but only with written requests/consents from respective employees. If you wish to pay your employees by cheque or legal tender, we advise that you obtain written consents from your employees, and file them together with the employees’ records.

Are there any documents to be generated from payroll processing?

Together with your wage payments, you are to issue payslips, each one detailing the monthly pay details and calculations (including statutory deductions), to respective employees. Some companies issue printed slips, whilst others opt for soft or electronic copies. Either is fine, just as long as your employees get them.

You are also required to issue EA forms to each employee, which details his or her income from your company and the monthly tax deductions you have made on their behalf. As the payslip is a requirement under Labour Law, the EA Form is a requirement of ITA 1967. However, unlike payslips, EA forms are issued once a year, and usually by 28 February after the Year of Assessment (YA) has ended. Individuals’ income tax are assessed yearly, from January 1 until 31 December. For example, you are required issue EA forms to your employees for YA2022 by 28 February 2023.

What happens if I make mistakes in payroll processing?

Where mistakes lead to non-compliance with the Law of Malaysia, you may expect penalties such as hefty fines and/or imprisonment. Otherwise, especially for non-remittance of MTD to Inland Revenue Board of Malaysia (LHDNM), the amount will become a debt to the Government of Malaysia, and interest may be charged as wait longer to pay. Although the MTD comes from your employees, it is you, the employer, who is responsible for making the deduction and remittance.

The following are examples of cost that your company could bear for infractions with the law:

NoInfractionPenaltyActAmount (RM)
1Refusing to pay an employee’s earned pay as ordered by the labour departmentA fine of 10,000 and additional RM100 for every day until the order is complied withEmployment Act 195510,000
2Not making any monthly tax deduction (MTD) of past and existing employeeThe total amount of MTD owed becomes your company’s debt to LHDNM, and you as the director are liable to pay.Income Tax Act 196710,000 (hypothetical)
3Deducts the employee’s share of contributions from the wages and fails to pay to EPF.A fine of up to RM20,000; 6 years’ imprisonment; or bothEPF Act 199320,000
4Failure or late in payment of employee contribution to SOCSO (SOCSO or EIS)A fine of up to RM10,000; 2 years’ imprisonment; or bothSOCSO Act 196910,000

Apart from fines, you may also face lawsuits from employees and the Government alike. There is no telling of how much you could end up paying. However, it is safe to say that, if it is clear that you owe money to the plaintiff and that you have not paid, then the Courts could mostly likely award damages to the plaintiff, payable by you.

It seems too much for me to do alone. I don’t want to pay fines or go to prison. Could it be cost-effective if I were to have my own payroll staff?

Having a competent in-house payroll staff would more likely get your payroll processing done correctly and on time than if you were to do it alone. Although not a regulated profession, payroll processors are generally well-versed in payroll-related laws, payroll technology, and payroll practices. In addition, mistakes are more likely to be reduced when duties in the process are segregated between team members, and each team member validates the output of the other.

However, hiring an in-house payroll staff would add to your present headcount, which means you must spend more money on wages. Furthermore, it isn’t cheap to hire payroll professionals. Suppose you maintain a small payroll team of one (1) manager and two (2) assistants. Suppose that the lowest salary per person that they would accept are RM7,000 and RM2,000 respectively. In total, you could spend RM11,000 just on their salary, without taking staff benefits and training cost into account.

Of course, the amount RM11,000 may preferable to fines, legal costs, and imprisonment. Besides, we advise you to get your payroll done correctly, and, if you prefer an-house staff, then that would serve the purpose as well.

On the hand, an in-house team is not your only alternative. There is another solution, which is possibly far more economical. Combined with getting the same level of service as you would get from an in-house team, this is likely to be the most cost-effective payroll processing solution.

A Viable Alternative: Outsource Your Payroll Processing To a Payroll Service Vendor

You’re probably stunned at the mere mention of this. You’re thinking outsourcing is costly for small companies, and only large firms can afford it. This isn’t true.

How would I benefit from outsourcing my payroll processing?

Putting it layman’s terms, you get the same level of service as you would from an in-house team, but possibly at a lower cost.

Payroll service vendors are essentially teams of payroll professionals for hire. They recruit experienced payroll specialists to provide payroll processing for their clients such as yourself.

They serve multiple clients at one time. Thus, with a relatively fixed overhead, they could charge very minimal fees (when compared with how much you would spend on hiring your own team).

To illustrate our point, consider the following example:

Monthly Spending
ItemsIn-houseOutsourced
CostSalary for manager = RM7,000
Salary for 2 assistants = RM4,000
Monthly payroll processing fee = RM100 per headcount
TotalRM11,000 to process 30 peopleRM3,000 to process 30 people

In addition, whilst payroll service vendors offer multiple services with different fees, you, as the client, chooses which service to utilise, and also for how many headcount. Hence, you can increase or decrease your spending anytime, subject to the terms and conditions of the agreement between you and the vendor.

To answer the question, your biggest gain from outsourcing is possibly a better bottom-line (assuming that revenue and other costs haven’t changed considerably) because you needn’t commit so much spending to payroll processing.

Apart from monthly payroll processing, what other services could payroll services vendor offer?

Payroll service vendors may also offer any of the following services:

  • making wage payments on your behalf;
  • registering your (employer’s) EPF account; and
  • drafting EA forms for your employees.

These are just a few examples. Different vendor offers different sets of services.

Could I terminate an agreement with payroll service vendor?

It is always your right as the client to terminate your agreement with a payroll service vendor. The terms and conditions for termination are usually stated in the agreement itself. We suggest that you go through those terms carefully before signing any agreement.

However, generally, the terms and conditions should not be severe or harmful to your business. There may be some minimal charges or perhaps a notice period before the actual termination.

How would monthly payroll processing work with an outsourced payroll team?

image 18

Payroll service vendors processes your payroll just like your in-house team would. Their payroll processors would calculate the monthly pay of each employee using documents that clients submit (such as payroll details of each employee, claim slips, and commission slips), and then generate payroll reports to their clients, showing the salary amount due to each employee for the month.

Some vendors also provide assistance in making salary payments on behalf of employers. Such a service is usually separate from monthly payroll proccessing, and so it would be charged separately. The fees are stated per month for one headcount processed.

Are there any risks to my company from outsourcing our payroll processing?

Risks are always present but managed. Payroll service vendors generally understand the risk that failure in processing poses to their clients. Thus, they take steps to manage the risks.

Example of risks that are present are as follows:

  1. risk of processing failure due to vendor’s facilities being out of commission;
  2. risk of errors in payroll calculations by the vendor; and
  3. risk of employees’ data being leaked by the vendor.

Concerning the first mentioned risk, all vendors would have business continuity plans, spelling out emergency procedures and the alternate sites of operations (in case their main sites are inoperative), to guide their personnel towards continuing operations as scheduled.

With regards to the second mentioned risk, in the event of errors leading to non-compliance and/or losses suffered by employees, you could settle the fines and losses first, and then claim the amount from the vendor. Please ensure that there is a clause addressing this issue in the agreement.

Lastly, concerning data leakage, as per Personal Data Protection Act 2010, your vendor may not share your employees’ data with a third party without the consent of your employees. In the event that this occurs, your vendor would be liable to pay fines and compensate your employees for losses. This is so whether or not it is mentioned in your agreement with the vendor.

How can you go about finding the right payroll processing vendor for you?

The steps that we recommend would be as follows:

  1. define explicitly your purpose for engaging a vendor;
  2. search for potential vendors;
  3. narrow the list down to a handful of vendors based on your purpose and industry;
  4. interview each shortlisted vendor by speaking with their representatives; and
  5. select the vendor that you’re most satisfied with, and proceed with finalising the service arrangement and the pricing.

Visit our HR Consultancy & Payroll Outsourcing Services page for more information on what we can do for you.

Share with your friends & colleagues