Payroll in Malaysia: A Complete Guide for US Businesses

Malaysia offers access to a highly skilled, multilingual workforce at competitive labor costs: an attractive combination for any growing business. But behind Malaysia’s thriving talent market lies a payroll system that’s strict, rule-bound and unforgiving of mistakes. One late salary payment, miscalculated tax or missed contribution to the Employees Provident Fund can quickly lead to fines or legal trouble.

This guide covers every essential element of processing payroll in Malaysia. From statutory registration and calculating the employee’s salary to handling monthly tax deductions and final settlements, we explain what every employer needs to know to avoid penalties and build an efficient, compliant payroll system. We'll also talk about how BatchTransfer can help your team do international payroll.

Understanding Payroll Requirements In Malaysia

Before you can pay an employee’s salary in Malaysia, you must complete several mandatory registrations with government authorities. These include registering with the Inland Revenue Board (LHDN) for income tax deductions, the Employees Provident Fund (EPF) for retirement savings, the Social Security Organization (PERKESO) for social security coverage, and the Employment Insurance System (EIS) for unemployment protection.

Before paying any employee, businesses must complete several mandatory registrations:

• Inland Revenue Board (LHDN) – Handles monthly income tax deductions (known as PCB or Potongan Cukai Bulanan).¹
• Employees Provident Fund (EPF) – Manages retirement savings through compulsory contributions from both employer and employee.²
• Social Security Organization (PERKESO) – Provides coverage for workplace injuries, illnesses, and disability benefits.³
• Employment Insurance System (EIS) – Offers unemployment protection, job placement assistance, and skills training for laid-off workers.⁴

Employers are legally required to pay employee salaries at least once a month, with payment deadlines no later than the seventh day of the following month. In addition, all employers must comply with Malaysia’s national minimum wage, which is currently set at RM 1,700 per month.⁸ Some industries may have higher wage requirements based on collective agreements or regional policies.

Components Of Employee’s Salary And Payroll Calculations

An employee’s salary in Malaysia includes several key components, each subject to specific payroll rules and statutory deductions.

• Basic Salary: the fixed monthly wage agreed upon in the employment contract
• Allowances: variable payments such as transport, meal or housing allowances, which can vary by company policy and employee role
• Bonuses and Overtime Pay: additional earnings based on performance targets, commissions, or extra hours worked beyond contractual obligations

Working hours in Malaysia are capped at 45 hours per week, following the latest amendments to the Employment Act.⁹ Any hours worked beyond this limit qualify for overtime pay, which is calculated at 150% of the standard hourly rate on normal working days. Overtime rates increase further for work on weekends, public holidays or during rest days, with specific multipliers mandated by law.

Payroll processing in Malaysia follows a structured three-phase cycle:

• Pre-Payroll: employers prepare by setting clear salary structures, collecting accurate employee details and confirming payment cycles in line with company policies
• Payroll Calculation: this stage involves determining gross salary, applying deductions for statutory contributions (EPF, PERKESO, EIS) and calculating the monthly tax deduction to determine net salary
• Post-Payroll: Employers pay the final employee’s salary, issue detailed payslips, file MTD returns with the tax authorities, and submit contributions to EPF, PERKESO and EIS.

For example, an employee with a gross salary of RM 6,000 will have deductions applied for EPF (11% employee share), PERKESO, EIS and MTD. After these statutory deductions, the net take-home pay will be lower than the gross salary, reflecting compliance with Malaysia’s payroll requirements.

Employee Benefits and Severance Pay In Malaysia

Payroll in Malaysia is directly tied to statutory employee benefits, which include leave entitlements and termination compensation. These benefits are clearly outlined in the Employment Act and vary based on the employee’s length of service with the company.

Leave entitlements are structured to reward employee loyalty.

• Annual leave allowances increase with tenure, starting at eight days and extending up to 16 days of paid leave per year. Employees who have been with the company for more than five years usually qualify for the full 16 days.
• Sick leave follows a similar approach, with paid leave ranging from 14 to 22 days annually. The exact number typically depends on how long the employee has been with the company and any applicable internal policies.
• If an illness or injury requires a hospital stay, employees are entitled to 60 days of paid hospitalization leave. This ensures financial security during more serious medical issues that require extended care.
• Maternity leave entitlements are also well-defined. Female employees are granted 98 consecutive days of fully paid leave to support their recovery and bonding time with their newborn.⁷

When employment is terminated, employers are legally required to pay severance pay, also referred to as termination benefits. The amount depends on how long the employee has been with the company. Employees who have worked for less than two years are entitled to 10 days’ wages for each year of service. Those who have worked between two and five years receive 15 days’ wages per year. Employees with more than five years of service are entitled to 20 days’ wages for every year worked.

In addition to severance pay, employers must comply with notice period requirements, either providing advance written notice or pay in lieu of notice. These obligations are strictly enforced under Malaysian labor law and form a key part of payroll compliance.

Common Payroll Compliance Mistakes To Avoid

Accurate payroll processing in Malaysia is essential for staying compliant with employment laws and maintaining employee satisfaction. Mistakes can lead to penalties, tax audits and reputational damage. Below are the most frequent errors employers should avoid when handling payroll in Malaysia.

Miscalculating an Employee’s Salary And Overtime Pay

One of the most common payroll errors is incorrectly calculating an employee’s salary. This often happens when overtime pay is miscalculated or allowances and bonuses are not processed according to company policy. Errors in computing overtime pay, especially with Malaysia’s specific rates for weekends and public holidays, can result in underpayment and employee disputes.

Failing To Apply The Correct Income Tax Rates

Malaysia uses a progressive income tax system with annual updates. Employers must ensure they apply the correct monthly tax deduction based on the latest tax tables issued by LHDN. Failure to update tax rates or apply the proper deductions can trigger fines and backdated tax liabilities.

Missing Statutory Contribution Deadlines

Employers are legally required to make timely contributions to the EPF, PERKESO and EIS. Late payments can lead to penalties, interest charges and audits by government agencies. Consistent delays may also damage the employer reputation among current and prospective employees.

Poor Record-Keeping And Documentation

Insufficient payroll documentation can create compliance risks during audits. Employers must keep detailed records of the employee’s salary payments, payslips, tax filings and statutory remittances. Poor record-keeping makes it difficult to defend against disputes or regulatory inquiries.

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Ignoring Updates To Employment Laws

Payroll compliance requires employers to stay up to date with regular changes to Malaysia’s employment laws, including minimum wage adjustments, working hours limits and statutory contribution rates. Employers who fail to adjust their payroll systems in response to legal updates risk non-compliance penalties.

In-House Vs Outsourced Payroll Processing In Malaysia

When setting up payroll in Malaysia, employers must decide between managing payroll internally or outsourcing it to a provider. This table highlights the main differences to help you choose the best approach for your business.

Category	In-House Payroll	Outsourced Payroll
Who Handles Payroll	Internal HR or finance team manages all aspects of payroll	A payroll provider or Employer of Record (EOR), such as Multiplier or Lano, manages payroll on your behalf
Control	Full control over payroll processes, salary adjustments and employee data	Less day-to-day control but clear oversight through reports and service-level agreements
Compliance Responsibility	Company is fully responsible for statutory compliance, tax filings and contribution deadlines	Compliance with local laws, income tax and social security is handled by the provider
Resource Requirement	Requires dedicated internal resources, regular legal updates and payroll software	Reduces internal workload; no need for dedicated payroll staff or in-house systems
Flexibility	Immediate changes possible; better for handling unique pay structures or bonuses	Better suited for standardized payroll processes; limited flexibility for last-minute adjustments
Best For	Large companies with in-house HR departments and established local operations	Small to mid-sized businesses, startups and foreign companies entering Malaysia
Cost	Fixed HR costs, but potentially lower long-term expenses if processes are efficient	Service fees apply, but savings on administrative costs and legal risk management

Payroll Technology And Tools For Malaysia

Leveraging payroll technology is key to reducing errors and improving efficiency. Local payroll software, such as Dayforce, automates deductions for income tax, EPF, PERKESO and EIS.

For businesses with global operations, EOR platforms like Multiplier and Lano offer centralized payroll processing, allowing companies to manage salaries and taxes across multiple jurisdictions.^5,6

Integrating payroll tools with your company’s HR management system (HRIS) or enterprise resource planning (ERP) system helps streamline salary calculations and reporting.

Best Practices For Managing Payroll In Malaysia

Payroll in Malaysia requires accuracy, consistency and strict compliance with statutory requirements. Implementing the right processes helps reduce errors, avoid penalties and build trust with employees. Below are key best practices every employer should follow when handling payroll.

Automate Salary Calculations And Deductions

Manual payroll calculations are time-consuming and prone to human error, especially when factoring in statutory deductions for the Employees Provident Fund, Social Security Organization, Employment Insurance System and monthly tax deduction. Using reliable payroll software ensures accurate, automatic calculations that stay updated with the latest tax rates and contribution requirements.

Conduct Regular Payroll Reviews

Mistakes can happen even with automated systems. Employers should regularly review payroll records, verify contributions and cross-check payslips to ensure accuracy. Routine checks can catch discrepancies early and prevent costly corrections or disputes with employees.

Maintain Transparent Payroll Policies

Clear, written payroll policies help set expectations with employees and reduce confusion about salary structure, overtime pay, bonuses and deductions. Transparent policies also make it easier to manage salary adjustments and address employee questions about their pay.

Provide Consistent Payslip Distribution

Employers should issue payslips every month, showing a detailed breakdown of the employee’s salary, allowances, deductions and net pay. Consistent payslip distribution is a legal requirement.

Schedule Regular Payroll Audits

Internal payroll audits help ensure compliance with Malaysian employment laws and income tax regulations. Regular audits help identify miscalculations, missed statutory payments or outdated payroll practices that could lead to penalties during government inspections.

Outsource When Resources Are Limited

Companies with small HR teams or limited administrative capacity should consider outsourcing payroll to a professional provider. Outsourcing reduces internal workload, improves compliance and allows companies to focus on core business operations, especially when expanding into Malaysia for the first time.

Final Thoughts

Payroll in Malaysia is a legal obligation you can’t afford to get wrong. Employers must stay on top of monthly tax deductions, contributions to the Employees Provident Fund, Social Security Organization and Employment Insurance System, and ensure overtime pay and severance pay are correctly handled.

Mistakes lead to fines, audits and unhappy employees. Late payments, incorrect income tax deductions, or missing statutory contributions quickly trigger penalties. These are entirely avoidable with the right systems in place.

A proper payroll process keeps your business compliant and employees satisfied. When you pay salaries on time and issue clear payslips, you reduce disputes, build trust and strengthen your workforce. With good payroll management, you also simplify cash flow planning and avoid last-minute tax issues.

Frequently Asked Questions

How Is Income Tax Deducted In Malaysia?

Employers are required to deduct income tax from an employee’s salary using the monthly tax deduction system, also known as PCB (Potongan Cukai Bulanan). The deducted amount must be submitted to the Inland Revenue Board (LHDN) each month. MTD ensures that employees meet their annual tax obligations progressively throughout the year.

What Are the Mandatory Contributions for Employees?

In addition to income tax, employers must make mandatory contributions to three key social protection schemes: the Employees Provident Fund (EPF) for retirement savings, the Social Security Organization (PERKESO) for workplace injury coverage, and the Employment Insurance System (EIS) for unemployment benefits. These deductions are withheld from the employee’s salary and matched or supplemented by employer contributions.

When Must Salaries Be Paid in Malaysia?

Malaysian law requires that employees be paid at least once a month. Salaries must be credited no later than seven days after the end of the salary period. Failure to pay on time can result in fines and employee complaints to the Labour Department.

How Is Overtime Pay Calculated?

Overtime pay applies to work performed beyond the standard 45-hour workweek. For regular working days, overtime is calculated at 1.5 times the employee’s hourly wage. Higher rates apply for overtime on rest days, public holidays and weekends, following the rates outlined in the Employment Act.

Is Severance Pay Mandatory in Malaysia?

Yes, severance pay is a statutory requirement under Malaysian labor law. The exact amount depends on the employee’s length of service, with longer-serving employees entitled to higher severance payouts. Employers must also provide proper notice or pay in lieu of notice when terminating employees.

Are Employers Required to Provide Payslips in Malaysia?

Yes, employers must provide monthly payslips to employees as part of payroll compliance. Payslips must clearly show gross salary, allowances, overtime pay, statutory deductions — including EPF, PERKESO, EIS and monthly tax deduction — and the final net salary. Issuing payslips ensures transparency and helps employees understand their salary breakdown.

Do Foreign Employees Pay Statutory Contributions in Malaysia?

Foreign employees are generally exempt from contributing to PERKESO and EIS but are still required to contribute to the Employees Provident Fund, unless exempted under specific conditions. Income tax applies to both local and foreign employees, and employers must follow the same monthly tax deduction rules for all staff. Special tax rates or agreements may apply based on Malaysia’s Double Taxation Agreements (DTAs).

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Sources:

1. Inland Revenue Board of Malaysia (HASiL)
2. Employees Provident Fund (KWSP)
3. Social Security Organisation (PERKESO)
4. EIS Contribution Guide – OmniHR Blog
5. Hiring Employees in Malaysia – Multiplier
6. Global Hiring in Malaysia – Lano
7. Leave Entitlement – Payroll Panda
8. Malaysia Minimum Wage – Roedl
9. Working Hours in Malaysia – Central HR