Payroll in Malaysia: Understanding Monthly Tax Deductions, EPF, and SOCSO Contributions

Employers in Malaysia are legally required to manage statutory payroll components that ensure employee financial security and tax compliance. These obligations apply across industries and must be executed accurately and within set deadlines to avoid penalties.

Malaysia’s payroll framework involves four key systems:

• Monthly Tax Deductions (MTD) for employee income tax
• Employees Provident Fund (EPF) for retirement savings
• Social Security Organization (SOCSO) for social protection
• Employment Insurance System (EIS) for unemployment support

Each scheme has specific rules, contribution rates, deadlines, and exceptions.

Monthly Tax Deductions

Also known as Potongan Cukai Bulanan (PCB), MTD is Malaysia’s pay-as-you-earn system under the Income Tax Act 1967. Employers deduct estimated income tax from employee remuneration and remit it directly to the Inland Revenue Board (IRBM), ensuring tax liabilities are settled throughout the year.

Calculating MTD

MTD represents the employee’s estimated monthly income tax liability, calculated after taking into account allowable deductions and reliefs permitted under the law. The Inland Revenue Board of Malaysia (IRBM or LHDN) provides two methods for determining the appropriate deduction:

• Computerized Payroll Calculation Method, used by employers with payroll systems integrated with IRBM’s official formulas; or
• e-Jadual PCB (e-CP39) via the IRBM website for employers who calculate manually or handle payroll without internal software.

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Regardless of the method used, MTD aims to closely match the employee’s final annual tax position so that any additional tax payable – or refund due – will be minimal when the employee submits their annual return.

MTD for resident employees

For employees who are resident in Malaysia, MTD is calculated after deducting all allowable reliefs and deductions provided under the Income Tax Act 1967. IRBM categorizes MTD calculations into five formula types, depending on the nature of the employee’s remuneration or tax status:

1. Normal remuneration: This is the standard category and covers fixed monthly salaries or regular monthly payments under a contract of service. Even variable payments like commission or hourly wages fall under “normal remuneration” when paid regularly.
2. Additional remuneration: Covers payments such as bonuses, incentives, or arrears of wages that are not part of the monthly salary.
3. Approved individuals under the Returning Expert Program (REP): These employees enjoy specific tax incentives, and MTD formulas are adjusted accordingly.
4. Knowledge workers in specified regions: Employees in designated high-skill sectors and regions may have preferential tax rates under government incentives.
5. Non-citizen residents holding C-suite positions in approved companies: This special category applies to qualifying expatriate executives granted concessional tax treatment.

MTD tax rates

MTD deductions reflect Malaysia’s progressive personal income tax structure, which determines the tax payable based on annual chargeable income. For 2025, tax rates range from 1 percent to 30 percent, depending on income band and filing category (for example, whether the spouse is working).

Employer responsibilities under the MTD system

Employers bear legal responsibility for calculating, deducting, and remitting PCB accurately. The procedures set out by IRBM are clear and must be followed consistently:

1. Register the employer’s tax number (e-number): Before hiring employees, the employer must obtain an E-number from IRBM.
2. Deduct and remit monthly PCB: Employers must deduct MTD from the employee’s remuneration each month and remit it to IRBM no later than the 15th day of the following month. Submissions must be made using e-Data PCB, e-PCB, or e-CP39 via the IRBM portal (MyTax).
3. Submit employer’s annual return (Form E): Due by 31 March the following year, Form E must be submitted via e-Filing. Form E is only considered complete when accompanied by the employee remuneration information (C.P.8D). Employers who have uploaded employee information through e-Data Praisi are exempted from submitting C.P.8D manually.
4. Provide employees with Form EA/EC: By the last day of February, employers must issue an annual remuneration statement to each employee.
5. Prepare and issue Form CP58: This applies to agents, dealers, or distributors who receive incentives or commissions. CP58 must be issued by 31 March of the following year.
6. Keep proper records for seven years: Payroll, tax deductions, and employee payment records must be retained and made available to IRBM upon request.
7. Submit additional IRBM forms where required: These may relate to changes in employment status, special payments, or other tax matters.
8. Withhold payments in cases of cessation of employment: If an employee resigns, dies, or leaves Malaysia for more than three months with no intention to return, the employer must withhold any monies owed for up to 90 days or until IRBM issues a tax clearance letter (TCL).

Employees Provident Fund

In Malaysia, the EPF is a mandatory retirement savings scheme established under the EPF Act 1991. Both employers and employees are legally obligated to contribute to the Fund, which serves as a form of financial security for employees upon retirement. Understanding the obligations, scope, and exemptions under the EPF framework is essential for compliance.

Every employer who engages an individual under a contract of service or apprenticeship is responsible for ensuring that EPF contributions are properly made. This means that the employer must deduct the correct amount from the employee’s wages each month and remit it, together with the employer’s share, to the EPF within the prescribed time. Section 43(1) of the EPF Act 1991 provides that both the employer and the employee are liable to pay monthly contributions based on the rates specified in the Third Schedule of the Act.

Failure to comply, such as making late payments or under-deductions, can result in penalties imposed by the EPF.

Contribution obligations

The obligation to contribute to EPF depends on three essential elements:

1. Employer
2. Employee under a contract of service or apprenticeship
3. Wages

When these three elements exist in a working relationship, EPF contributions generally become mandatory, unless the individual is specifically exempted under the Act.

An employer is any person with whom an employee has entered into a contract of service or apprenticeship. This definition includes:

• Managers, agents, or any person responsible for paying wages;
• Groups of persons, whether statutory, non-statutory, or incorporated; and
• Government bodies, statutory authorities, local councils, and other entities listed in the Second Schedule of the EPF Act.

An employee, on the other hand, refers to any person employed under a contract of service or apprenticeship, whether the contract is written or oral, expressed or implied. Apprenticeships must be in writing and approved under the terms of the Employment Act 1955.

Employment age is also regulated: the minimum age is subject to the Children and Young Persons (Employment) Act 1966, and the maximum age for EPF contribution is 75 years.

Exemptions from contribution

Certain individuals are exempted from EPF contributions under the First Schedule of the EPF Act 1991. These include foreign employees who contribute to a foreign or approved Malaysian provident fund under their employment terms. For employers hiring expatriates who fall under this category, it is essential to document their exemption status and maintain proper records of alternative social security arrangements. This ensures compliance and eliminates the risk of unnecessary contributions being made.

Other exempt groups include domestic servants (unless employed by specific organizations), nomadic aborigines, and individuals aged 75 or above. Employers should be aware of these exemptions during onboarding and ensure payroll systems are configured to properly exclude these employees from EPF contributions.

Wages and payments are subject to contribution

EPF contributions are calculated based on “wages”, which include all forms of monetary remuneration due to an employee under their contract of service. This covers:

• Salary
• Payment for unutilized annual or medical leave
• Bonus
• Allowance
• Commission
• Wages for half-day leave
• Incentive
• Arrears of wages
• Wages for maternity leave
• Wages for study leave
• Other payments under contract of service or otherwise

These payments are considered “liable” because they represent earnings derived from employment services.

Payments are not liable for the contribution

Certain types of payments are excluded from EPF contribution calculations, mainly because they do not constitute regular remuneration. The main categories of exempted payments are:

1. Service charges – payments such as tips or service fees paid by customers, not the employer, even if distributed to employees.
2. Overtime payments – wages paid for work performed beyond normal working hours, including work on rest days and public holidays.
3. Gratuity – a payment made upon completion of service or voluntary resignation, usually as a token of appreciation.
4. Retirement benefits – payments made upon compulsory or optional retirement, or for health reasons, as stated in the employment contract.
5. Retrenchment, temporary lay-off, or termination benefits – compensation due to redundancy or loss of employment.
6. Travelling allowances or travel concessions – reimbursements or allowances for transportation or commuting expenses.

Optional contributions and retirement benefit transfers

Although retirement benefits are exempt from compulsory EPF contributions, Section 44 of the EPF Act 1991 allows for voluntary remittance of such funds. Employers, with the employee’s written consent, may transfer retirement benefits or funds from another retirement scheme into the employee’s EPF account.

This can be done using Form KWSP 16F, either individually or in groups. If the employer cannot reach the employee, an Undertaking and Indemnity Letter must be completed to authorize the transfer. Once received, the EPF Board will credit the funds into the employee’s account according to section 50 of the Act.

Social Security Organization

The Social Security Organization (SOCSO), also known as PERKESO, administers Malaysia’s social insurance system.

SOCSO provides two main schemes: the Employment Injury Scheme and the Invalidity Scheme. These schemes cover nearly all private sector employees, but eligibility varies based on age and prior contributions. For example, employees aged 60 and above contribute under a different category, covering only the Invalidity Scheme.

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When onboarding new employees, especially older individuals or those switching from non-covered positions such as government roles, employers must carefully assess which SOCSO category applies. Mistakes in contributions – for instance, deducting employee portions for those aged 60 or above – can result in compliance issues or employee grievances.

Contribution obligations

Under the Employees’ Social Security Act 1969, all employers are required to make monthly SOCSO contributions for each eligible employee. These contributions are shared between employers and employees and are categorized into two contribution types based on the employee’s age:

Wage ceiling and contribution limits

Effective since October 1, 2024, SOCSO increased the wage ceiling for contribution from RM 5,000 to RM 6,000 (US$1,210 to US$1,452) per month.

This means that contributions for employees earning above RM6,000 are capped based on a wage ceiling of RM6,000.

Payment of contributions

SOCSO has streamlined contribution payments through several modern systems and channels:

1. PERKESO ASSIST portal – introduced on 1 January 2018, this online portal allows employers to:

• Register and update company or employee records;
• Submit monthly contribution data; and
• Make contribution payments via Financial Process Exchange (FPX) or Direct Debit Authorization (DDA).
  Employers must first obtain an ASSIST Portal ID by completing the relevant registration form available on the SOCSO website and submitting it to the nearest SOCSO office.

1. Bank counters – employers can also make payments through appointed bank counters (such as Maybank and Public Bank) using an ACR reference number generated through the ASSIST Portal.
2. PRIHATIN mobile application – SOCSO’s mobile app, available on both Google Play Store and Apple App Store, provides employers and employees with a convenient platform for managing contributions and accessing information.

Contribution deadlines and penalties

SOCSO contributions for any given month must be paid by the 15th day of the following month. For example, contributions for July must be paid by 15 August.

If an employer fails to make payment within the stipulated period, interest on late payment will be imposed at a rate of 6 percent per annum, calculated on a daily basis until the outstanding contribution is settled.

Employment Insurance System

Malaysia’s Employment Insurance System (EIS) – known as Lindung Kerjaya – was introduced on January 1, 2018, as a national safety net for workers who lose their jobs. Administered by SOCSO, EIS provides temporary income replacement, re-employment services, and upskilling opportunities to support unemployed individuals in returning to the workforce as quickly as possible.

At its core, the EIS is designed to assist insured persons during periods of unemployment. When an employee loses their job, they may apply for EIS benefits, which include income replacement payouts, job search support, and training incentives, provided they meet the eligibility conditions.

Contribution rates and employer obligations

The EIS is funded through joint contributions from both employers and employees. The contribution rate is set by the Employment Insurance System Act 2017 and reflected in the Second Schedule of the Act.

The total EIS contribution rate is 0.4 percent of the employee’s assumed monthly salary. Of this amount:

• 2 percent is paid by the employer
• 2 percent is deducted from the employee’s salary

Contribution calculations are capped at the maximum insured salary of RM 6,000 per month.

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The EIS applies broadly across Malaysia’s private sector. All employers must contribute on behalf of each eligible employee, and all employees must contribute unless expressly exempted. Coverage is based on the following rules:

• All private-sector employees aged 18 to 60 must be covered.
• The definition of “employee” mirrors other labor legislation: anyone employed for wages under a contract of service or apprenticeship, whether written, oral, expressed, or implied.
• Government employees, domestic servants, and the self-employed are exempt from contributing.
• Employees aged 57 and above who have no prior EIS contributions before age 57 are also exempt.

Employers in the private sector are responsible for:

1. Applying the correct EIS deduction based on the employee’s salary band;
2. Remitting both employer and employee portions each month; and
3. Ensuring that contributions are submitted through approved SOCSO channels and within the required deadlines.

Eligibility for EIS benefits

Insured Persons must meet several conditions before receiving EIS assistance:

• They must apply within 60 days of the date of loss of employment (LOE).
• They must satisfy the Contributions Qualifying Conditions (CQC), meaning they have paid EIS contributions for a required minimum number of months.
• Their job loss must fall within the EIS Act’s definition of LOE, which covers dismissals, non-renewal of contracts under specific conditions, retrenchment, and certain involuntary separations.

If these conditions are met, the individual becomes eligible for EIS income replacement and employment services.

Managing payroll in Malaysia

For many companies, especially those without dedicated internal payroll expertise, Malaysia’s statutory payroll requirements represent a substantial compliance burden. Each scheme has its own calculation rules, exemptions, filing procedures, and submission deadlines. Navigating these obligations accurately requires consistent attention and a solid understanding of evolving regulations. Errors such as late payments, under-deductions, or incorrect reporting can trigger penalties, audits, and operational disruption.

Given this complexity, many employers choose to outsource payroll to specialized service providers. Outsourcing helps reduce compliance risks, ensures accurate and timely submissions, and allows businesses to focus on their core activities while maintaining confidence that all statutory payroll obligations are managed properly and efficiently.

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