How to run payroll in Malaysia

In Malaysia, most employers pay employees monthly, typically on the last working day of the month. Here's the complete payroll cycle.

Payment frequency and timing

Malaysian law requires monthly salary payments for most employees. You must pay salaries by the 7th day of the following month, but most companies pay on the last working day of the current month to maintain good employee relations.

For hourly workers and daily-rated employees, you can pay weekly or bi-weekly, but monthly remains the standard practice across all employment types.

13th month bonus payments

Malaysia doesn't mandate 13th month payments, but many companies provide annual bonuses as part of their compensation packages. These are typically paid during Hari Raya or Chinese New Year periods.

When you do pay bonuses, they're subject to the same tax withholding as regular salary. For bonuses exceeding RM2,000, you'll need to calculate tax using the bonus tax tables rather than the monthly tax computation method.

Holiday and vacation pay

Employees earn annual leave based on their length of service. You must pay vacation time at the employee's regular daily rate, calculated as monthly salary divided by the number of working days in that month.

For unused annual leave, you must pay out the balance when employment ends. Public holiday work requires double pay unless you provide a replacement holiday.

Payment methods and requirements

Bank transfers are mandatory for all salary payments in Malaysia. You cannot pay salaries in cash except in exceptional circumstances with written employee consent.

Set up local MYR bank accounts for all employees. International wire transfers for salary payments create unnecessary complications and currency conversion costs that most employees prefer to avoid.

Payslip requirements

You must provide detailed payslips showing all earnings, deductions, and net pay. Payslips can be electronic, but employees must be able to access and print them easily.

Required payslip elements:

• Employee name and identification number
• Pay period dates
• Basic salary and allowances breakdown
• Overtime calculations (if applicable)
• EPF, SOCSO, and EIS contributions
• Income tax deductions (PCB)
• Net salary amount

Maintain payslip records for seven years minimum. The Labour Department can request these during inspections, and you'll face penalties if records are incomplete or missing.

Think you just withhold federal tax? Malaysia adds state taxes and local council rates that catch many employers off guard.

Malaysia's income tax system operates on a progressive scale, with rates climbing from 0% to 30% for 2026. The good news? Your employees get a generous tax-free threshold of RM5,000 annually before any withholding kicks in.

Income tax brackets

Malaysia uses a progressive tax structure that applies to both residents and non-residents, though at different rates.

Resident employee tax rates

Non-resident employee tax rates

Non-resident employees face a flat 30% tax rate on all Malaysian-sourced income, with no tax-free threshold. This applies from the first ringgit earned.

Withholding requirements

You're responsible for withholding income tax through the Potongan Cukai Berjadual (PCB) system. This isn't optional – it's mandatory for all employers paying Malaysian-sourced income.

Monthly filing obligations

Submit your PCB returns by the 15th of the following month. Late submissions trigger penalties of RM200 plus 10% annual interest on outstanding amounts.

File your monthly PCB through the MyTax portal or approved third-party software. Paper submissions aren't accepted for companies with more than 10 employees.

Annual reconciliation

Complete Form EA for each employee by February 28, 2027 for the 2026 tax year. Employees need these forms to file their individual tax returns by April 30, 2027.

Submit the consolidated Form E by March 31, 2027, reconciling all PCB deductions against actual tax liability.

Tax registration

Register for PCB withholding before your first payroll run. The process takes 7-14 working days through LHDN's online system.

You'll need your company registration documents, business license, and authorized signatory details. Foreign companies must also provide their Malaysian branch registration.

Special tax considerations

Tax treaties and expatriate employees

Malaysia has tax treaties with over 70 countries that can reduce withholding rates for certain types of income. Expatriate employees may qualify for reduced rates on specific allowances or benefits.

Short-term assignments under 60 days may qualify for tax exemptions under treaty provisions, but you'll still need to withhold initially and allow employees to claim refunds.

Regional variations

Some states impose additional taxes on specific industries or property types. Sabah and Sarawak have separate tax considerations for certain sectors.

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Common tax mistakes

Misclassifying employee residency leads to incorrect withholding rates. Use the 182-day rule carefully – it's about physical presence, not visa status. Penalties reach RM20,000 plus prosecution.

Missing PCB deadlines costs RM200 per late filing plus 10% annual interest. Set up automatic reminders for the 15th of each month.

Incorrect benefit valuations trigger additional assessments. Company cars, housing allowances, and meal benefits must be valued at market rates, not cost.

Forgetting annual reconciliation results in RM300-1,000 penalties per employee. Block calendar time in February for Form EA preparation.

Employer contributions in Malaysia add 25% to every salary. Budget for it.

Malaysia's employer contributions cover social security, pension funds, and employment insurance. The rates are straightforward, but the caps can catch you off guard if you're not watching high earners.

Contribution breakdown

Here's what you'll pay on top of every salary:

EPF rates: 13% for employees earning above RM5,000, 12% for those earning RM5,000 or below.

SOCSO categories: Category 1 covers employees under 60. Category 2 covers employees 60+ or those earning above RM4,000 monthly.

Total employer cost example

For a RM60,000 annual salary (RM5,000 monthly):

• Base salary: RM60,000
• EPF contribution: RM7,800 (13%)
• SOCSO contribution: RM1,050 (1.75%)
• EIS contribution: RM120 (0.2%)
• HRDF levy: RM600 (1%)
• Total employer cost: RM69,570
• Cost multiplier: 1.16 (16% more than base salary)

Contribution caps and ceilings

The caps hit differently depending on the contribution:

EPF cap: Calculated on maximum RM6,000 monthly salary. High earners pay a flat RM780 monthly regardless of actual salary.

SOCSO cap: Calculated on maximum RM5,000 monthly salary. You'll pay RM87.50 monthly for anyone earning above this.

EIS cap: Calculated on maximum RM4,000 monthly salary. Capped at RM8 monthly per employee.

HRDF levy: No cap. You'll pay 1% on the full salary for employees in manufacturing, mining, and service sectors.

Registration requirements

You'll need to register with multiple agencies before your first payroll:

EPF registration: Complete within 30 days of hiring your first employee. Submit Form 1 online through i-Akaun portal.

SOCSO registration: Register within 30 days. Use Form 1 (Employer Registration) and Form 2 (Employee Registration).

EIS registration: Usually processed together with SOCSO. Same 30-day deadline applies.

HRDF registration: Required for companies with 10+ employees in covered sectors. Register within 6 months of reaching the threshold.

Payment deadlines

EPF and SOCSO: Due by the 15th of the following month. Late payments incur 6% annual interest.

EIS: Paid together with SOCSO contributions. Same 15th deadline.

HRDF levy: Due by the last day of the following month. Late payment penalty is 10% of the levy amount.

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Payment methods: All contributions can be paid online through respective portals or via bank transfer. Keep payment confirmations for audit purposes.

Malaysia has 11 public holidays in 2026, plus state-specific holidays that vary by location. Work on public holidays? You'll pay double time or provide replacement leave.

Here's what you need to calculate for Malaysian payroll leave and benefits.

Annual leave

Malaysian employees get 8 days minimum annual leave in their first year, increasing to 12 days in year two, and 16 days from year three onwards. Many companies provide more generous entitlements.

Vacation pay calculation: Pay employees their normal daily rate during annual leave. Calculate this as monthly salary ÷ working days in the month.

Carryover rules: Employees can carry forward unused annual leave, but you're not legally required to allow this. Most companies cap carryover at 10-15 days.

Termination payout: You must pay cash for all unused annual leave when employment ends. Calculate this at the employee's final daily rate.

Sick leave

Sick leave entitlement depends on service length:

• 0-2 years: 14 days
• 2-5 years: 18 days
• 5+ years: 22 days

Who pays: You pay the first 14 days at full salary. After that, employees can claim Social Security (SOCSO) benefits directly.

Medical certificates: Required for sick leave over 2 consecutive days. One day sick leave needs no certification.

Payroll impact: Pay normal salary for the first 14 days, then stop payroll payments while SOCSO handles extended sick pay.

Parental leave

Maternity leave: 98 days (14 weeks) at full pay. The first 60 days are your responsibility as the employer. SOCSO pays the remaining 38 days directly to the employee.

Paternity leave: 7 days at full pay, paid entirely by the employer. Must be taken within 30 days of birth.

Payroll calculation: Pay normal salary during leave periods you're responsible for. Deduct SOCSO contributions as usual - they'll handle their portion of maternity pay separately.

Public holidays 2026

State holidays: Each state has 2-4 additional holidays. Johor, Kedah, Kelantan, and Terengganu observe Friday-Saturday weekends.

Holiday pay: Pay double time for work on public holidays, or provide replacement leave within 30 days.

Mandatory benefits affecting payroll

SOCSO contributions: Deduct 0.5% from employee salary (capped at RM19.75 monthly). You contribute 1.75% (capped at RM69.25).

EPF contributions: Deduct 11% from employee salary. You contribute 12-13% depending on salary level.

EIS contributions: Deduct 0.2% from employee salary (capped at RM7.90). You contribute 0.2% (capped at RM7.90).

PCB tax: Deduct monthly tax based on PCB tables. This varies by salary and tax relief claimed.

Medical benefits: Not mandatory, but 80% of Malaysian companies provide medical insurance or clinic benefits. These don't affect payroll calculations unless you provide taxable cash allowances.

Employment contracts in Malaysia must include specific salary breakdowns, working hours, and termination clauses or they're legally invalid. Miss these elements and you'll face complications during labor disputes and government inspections.

The good news? Malaysia's compliance framework is straightforward once you know the deadlines. Here's what you need to stay compliant in 2026.

Monthly filing requirements

EPF and SOCSO contributions are due by the 15th of each month for the previous month's payroll. File through the i-Contribute portal for EPF and ASSIST Portal for SOCSO.

Late EPF filing triggers penalties of 6% per annum on outstanding amounts. SOCSO penalties start at RM10 per employee per month for late submissions.

EIS contributions follow the same 15th deadline through the ASSIST Portal. The penalty matches SOCSO at RM10 per employee monthly.

Monthly Tax Deduction (MTD) reports are due by the 15th via the MyTax portal. Late filing incurs 10% penalty on the tax amount owed, with a minimum penalty of RM200.

Annual reporting

Form BE (Employer's Return) must be submitted by March 31, 2026 for the 2025 tax year. This reconciles all MTD payments against actual employee tax liabilities.

EA Forms (employee tax statements) must be issued to employees by February 28, 2026 and submitted to LHDN by March 31, 2026. Employees need these for their individual tax returns.

Late BE submission carries a RM200-2,000 penalty depending on company size. Missing EA deadline results in RM100 per employee penalty.

EPF annual reconciliation happens automatically through monthly filings, but you must verify accuracy by February 28, 2026.

Employee documentation

Employment contracts must be bilingual (English and Bahasa Malaysia) and include:

• Detailed salary breakdown (basic pay, allowances, overtime rates)
• Working hours and rest days
• Annual leave entitlement
• Termination notice periods
• Job description and reporting structure

Payslips must show gross pay, all deductions, net pay, and cumulative year-to-date figures. Issue within 7 days of salary payment.

Keep all payroll records for 6 years minimum. This includes contracts, payslips, leave records, and statutory filing confirmations.

Penalties overview

Regulatory bodies

Employees Provident Fund (EPF) oversees retirement savings compliance. Access the i-Contribute portal at www.kwsp.gov.my for monthly filings.

Social Security Organisation (SOCSO) manages work injury and employment insurance. Use the ASSIST Portal at www.perkeso.gov.my for all submissions.

Inland Revenue Board (LHDN) handles income tax matters. File through MyTax at mytax.hasil.gov.my for MTD and annual returns.

Department of Labour enforces employment law compliance. Contact your state office for contract disputes or workplace issues.

Keep contact details for your local EPF, SOCSO, and Labour Department offices. Response times improve when you work directly with assigned officers rather than general hotlines.

2026 brought several significant payroll changes to Malaysia. Here's what you need to update.

Minimum Wage Increase - Effective January 1, 2026

• National minimum wage increased to RM1,700 per month (up from RM1,500 in 2025)
• Represents a 13.3% increase affecting all sectors
• Part-time workers now earn minimum RM8.18 per hour (previously RM7.21)

This impacts payroll calculations for approximately 2.8 million workers nationwide. Review all salary structures below RM2,000 monthly to ensure compliance.

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EPF Contribution Rate Adjustment - Effective March 1, 2026

• Employee contribution remains at 11% of monthly wages
• Employer contribution increased to 13% (up from 12% in 2025)
• Additional 1% employer contribution applies to all salary levels

For a RM5,000 monthly salary, employer EPF contributions increased from RM600 to RM650 monthly - an additional RM600 annual cost per employee.

SOCSO Rate Updates - Effective April 1, 2026

• Employment Injury Scheme rates unchanged
• Employment Insurance System (EIS) employee contribution increased to 0.3% (from 0.2%)
• EIS employer contribution remains at 0.2%

Maximum monthly EIS contribution is now RM12 for employees earning above RM4,000.

Tax Relief Expansion - Effective January 1, 2026

• Personal tax relief increased to RM11,000 (from RM9,000 in 2025)
• New RM2,500 relief for digital skills training expenses
• Childcare relief cap raised to RM3,500 per child

Update your payroll system's tax calculation tables to reflect these changes for accurate monthly tax deductions.