Hiring in Malaysia 2025 | Payroll, Contributions & EOR Compliance Guide

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Introduction

Malaysia has rapidly become one of Southeast Asia’s most attractive markets for international hiring. With a strong legal framework, multilingual talent pool, and cost-competitive employment landscape, it’s a prime destination for companies expanding into the region. But hiring in Malaysia in 2025 involves more than finding the right candidate—it means understanding the local payroll structure, statutory obligations, and compliance environment in detail.

Whether you’re testing the waters with one employee or planning to build a full-scale team, getting familiar with how Malaysia’s employment system works is essential. From navigating monthly payroll and tax deductions to contributing to national schemes like EPF and SOCSO, employers—especially those without a local legal entity—must take a structured and compliant approach.

This guide breaks down:

How payroll in Malaysia works, including timelines and required deductions
What statutory contributions employers are responsible for
Core compliance requirements under Malaysian employment law
How to hire in Malaysia without setting up an entity, using options like Employer of Record (EOR)
When it makes sense to use EOR Malaysia services to simplify hiring

Who this guide is for:

Business owners, HR leaders, and expansion teams planning to hire Malaysian employees
Companies exploring market entry without a local entity
Global employers evaluating EOR services across Southeast Asia

Section 1: Hiring Requirements in Malaysia – What Employers Need to Know

Hiring in Malaysia involves more than just issuing a job offer—it requires full compliance with employment laws, proper registration with statutory bodies, and understanding local hiring norms. Whether you’re a foreign company entering Malaysia or a domestic business scaling your workforce, these foundational steps are critical.

1.1 Legal Eligibility to Hire

Before hiring in Malaysia, companies must be legally registered with the Companies Commission of Malaysia (SSM). This applies to both local and foreign-owned businesses that establish a local entity. Incorporation involves appointing at least one resident director, registering a business address, and fulfilling paid-up capital requirements. You can learn more about incorporation requirements directly from SSM’s official site.

For companies without a local entity, engaging an Employer of Record (EOR) service provider is an alternative route. This model allows foreign businesses to legally hire employees under the EOR’s registered entity, bypassing the need to incorporate locally.

1.2 Work Permits and Employment Passes

If you’re hiring foreign talent, you must apply for a valid work permit. The most common permit for professional expatriates is the Employment Pass (EP), administered by the Expatriate Services Division (ESD). The EP is typically issued to foreign nationals in managerial, technical, or professional roles earning a minimum monthly salary of RM5,000. Employers must first register with ESD and secure approval before sponsoring a pass.

In some cases, employers may also apply for a Professional Visit Pass or Temporary Employment Pass, depending on the job type and sector.

1.3 Statutory Body Registration and Mandatory Contributions

Once your company is ready to onboard employees, it must be registered with the following statutory bodies:

KWSP (Employees Provident Fund): A mandatory retirement savings scheme where employers contribute 12%–13% of an employee’s monthly salary. View contribution rates here.
SOCSO (Social Security Organisation): Provides coverage for workplace injuries and invalidity. Contribution rates depend on the employee’s salary and category. Learn more from SOCSO’s official site.
EIS (Employment Insurance System): Offers income replacement for retrenched workers. Both employer and employee contribute 0.2% of monthly wages. See EIS contribution details here.
LHDN (Inland Revenue Board of Malaysia): Employers must register for a tax file number and deduct PCB (Potongan Cukai Bulanan) from employee salaries monthly, in accordance with the Income Tax Act 1967.

These registrations must be completed promptly upon hiring the first employee. Delays or omissions can result in fines or non-compliance penalties.

Statutory Body	Registration Requirement	Employer Contribution Rate
KWSP (EPF)	Mandatory for all employees	12%–13%
SOCSO	Mandatory for employees earning < RM5,000	~1.75%
EIS	Mandatory for all employees	0.2%
LHDN	Mandatory for tax deduction (PCB)	Based on salary bracket

1.4 Employment Contracts & Labour Law Compliance

Employers must issue written employment contracts that specify terms such as job scope, salary, working hours, and termination clauses. Under Malaysia’s Employment Act 1955, these contracts are legally enforceable, particularly for employees earning RM4,000 and below.

Key legal stipulations include:

Maximum 48 working hours per week
Overtime pay for hours exceeding normal work hours
Minimum of 11 public holidays per year
At least 8 days of annual leave and 14 days of sick leave (after one year of service)
‍

Employers must also adhere to guidelines on probationary periods, termination notice, and maternity protections.

1.5 Additional Sector-Specific Compliance

In regulated industries, additional licensing or registration may be required before hiring can proceed. For example:

Education Sector: Employers must register with the Ministry of Education and obtain licenses to operate educational institutions.
Construction Industry: Requires registration with CIDB (Construction Industry Development Board).
Oil & Gas: Additional safety and competency certifications may be needed (e.g., PETRONAS licensing).

Failure to obtain the appropriate permits may result in delays or legal consequences.

Section 2: Payroll Setup, Taxation & Statutory Benefits in Malaysia

Successfully managing payroll in Malaysia goes far beyond simply transferring salaries each month. For employers—especially foreign companies or those operating without a local legal entity—understanding the country’s complex statutory framework is essential to ensure compliance, avoid costly penalties, and maintain employee trust. Malaysia’s payroll system encompasses multiple layers of mandatory contributions, tax deductions, and administrative obligations that collectively safeguard employee rights and government revenue.

This section will guide you through the full payroll compliance landscape in Malaysia for 2025, explaining registration requirements, monthly contribution calculations, tax withholding, and the penalties for non-compliance. Additionally, we’ll offer practical examples and regional comparisons to clarify how Malaysia fits within Southeast Asia’s broader employment environment.

2.1 Employer Registration: Your First Payroll Compliance Step

Before your first salary can be paid, your company must register with the key Malaysian statutory bodies overseeing payroll-related contributions and taxes. This requirement applies regardless of whether your company has a local legal entity or works through an Employer of Record (EOR).

The main agencies to register with include:

Inland Revenue Board of Malaysia (LHDN) for tax deduction at source, known as Potongan Cukai Bulanan (PCB)
Employees Provident Fund (EPF or KWSP), Malaysia’s compulsory retirement savings plan
Social Security Organisation (SOCSO or PERKESO), providing workplace injury and invalidity protection
Employment Insurance System (EIS), a relatively new safety net offering retrenchment support
Human Resources Development Fund (HRDF), applicable in some industries as a levy for workforce training
‍

Registration must be completed within seven days of hiring your first employee to avoid penalties and ensure timely compliance.

Example: A manufacturing firm expanding into Malaysia delayed registering with EPF and SOCSO, resulting in monthly fines of RM200 per employee and complications in backdated contributions. Registering promptly could have prevented these issues.

2.2 Monthly Statutory Contributions: Understanding the Breakdown

Once registered, employers must calculate and remit monthly contributions for each employee. Malaysia’s system is notable for its relatively modest contribution rates compared to some neighboring countries, but accuracy is critical.

‍

Contribution Scheme	Employer Contribution	Employee Contribution	Purpose & Coverage
EPF (KWSP)	12%–13%*	11%	Retirement savings
SOCSO	1.25%–1.75%	0.5%	Employment injury and invalidity insurance
EIS	0.2%	PCB), which mandates employers to deduct monthly tax installments from employees’ gross pay. The Inland Revenue Board (LHDN) requires employers to submit these deductions and file monthly returns via electronic systems by the 15th day of the following month. The PCB amount depends on multiple factors: Employee’s gross monthly salary Tax reliefs and rebates claimed by the employee (e.g., spouse, children) EPF contributions, which are tax-deductible and reduce taxable income Employers must utilize LHDN’s official PCB calculator or approved payroll software to ensure accurate deduction amounts. Failure to comply can lead to fines, interest on underpaid tax, or even prosecution for tax evasion. Example: A regional marketing firm failed to deduct PCB on bonuses paid to foreign employees, resulting in a tax audit that imposed back taxes and penalties totaling over RM100,000. 2.4 Payroll Cycles, Payslip Requirements, and Recordkeeping Most Malaysian companies operate a monthly payroll cycle, disbursing salaries on or before the last working day of the month. It’s mandatory to provide each employee with a detailed payslip outlining all components of pay and deductions. This promotes transparency and satisfies requirements under the Employment Act 1955. Payslips must include: Gross salary and any allowances Statutory contributions (EPF, SOCSO, EIS) and PCB tax deductions Net pay Employers must retain payroll records, payslips, and statutory submission confirmations for at least six years to comply with tax and employment audits. 2.5 Penalties and Compliance Risks: The Cost of Negligence Failing to meet payroll obligations can have severe consequences. EPF can impose interest penalties of 6% per annum on late payments, and SOCSO has the power to fine employers up to RM5,000 or imprison responsible persons for up to two years under the Employees’ Social Security Act 1969. LHDN may issue penalties for late PCB remittance, ranging from 10% to 100% of the tax amount owed. In extreme cases, repeated offenses can lead to criminal charges. 2.6 Regional Comparison: How Malaysia’s Payroll System Stacks Up Compared to regional neighbors, Malaysia offers a moderate employer burden. For example: Singapore requires employers to contribute 17% of wages to the Central Provident Fund (CPF), a higher rate than Malaysia’s EPF. Indonesia has multiple compulsory social security schemes (BPJS Kesehatan for healthcare, BPJS Ketenagakerjaan for employment), with combined employer rates exceeding 20% Thailand requires social security contributions at roughly 5% from employers Malaysia’s relatively lower contribution rates, combined with multiple specialized schemes (EIS, HRDF), provide flexibility but demand administrative rigor. Expand in Asia with AYP's local HR expertise Onboard in minutes, stay compliant — let AYP handle the rest Speak to Expert Section 3: Payroll Setup and Ongoing Compliance in Malaysia Expanding your business into Malaysia introduces you to a complex and carefully regulated payroll ecosystem. More than simply transferring salaries, compliance with Malaysia’s payroll requirements involves a comprehensive understanding of statutory deductions, employer contributions, tax withholdings, and meticulous reporting obligations. Mismanaging payroll can expose your company to costly fines, legal risks, and damage employee trust. This section walks you through the full payroll landscape, ensuring you build a compliant, efficient, and transparent payroll process. 3.1 Understanding Malaysia’s Payroll Cycle and Salary Payment Regulations Although Malaysian labour law does not explicitly prescribe a mandatory payroll cycle, monthly salary payments are the industry norm. According to Section 19 of the Employment Act 1955, employees must receive their wages no later than seven days after the end of the wage period. Practically, if the pay period closes on July 31, payment must be issued by August 7. Delays in salary payment are not merely administrative slip-ups; they constitute violations that can trigger enforcement action from the Ministry of Human Resources. Beyond legal penalties, untimely salary disbursement damages workforce morale and may lead to costly disputes or employee turnover. To ensure smooth payroll operations, companies often leverage payroll automation tools or partner with local providers who understand the nuances of Malaysian payment practices. 3.2 Payslip Obligations: Transparency and Legal Mandates In Malaysia, issuing itemized payslips to employees every payroll cycle is not optional—it is a legal requirement. Payslips must detail all components of an employee’s compensation package, including: Basic salary and any allowances (transport, housing, etc.) Overtime, bonuses, or commissions earned Statutory deductions such as EPF, SOCSO, and EIS Monthly tax deductions (PCB) withheld Clear payslip issuance not only fulfills a legal mandate but also fosters transparency and trust between employer and employee. In disputes, payslips serve as critical documentation proving payment accuracy. Best practice among Malaysian employers is to automate payslip generation via integrated HR/payroll software systems, ensuring timely, consistent, and error-free payslip delivery. 3.3 Statutory Contributions: Key Deadlines and Compliance Requirements One of the most intricate aspects of Malaysian payroll is timely and accurate remittance of statutory contributions. Malaysia requires employers to manage several mandatory contributions monthly, each with its own deadlines and submission portals: Employees Provident Fund (EPF): Employers and employees both contribute to the EPF, Malaysia’s national retirement savings scheme. Contributions must be submitted monthly by the 15th of the following month through the EPF’s i-Akaun Employer portal. Failure to meet deadlines can result in financial penalties and increased scrutiny. Social Security Organisation (SOCSO) and Employment Insurance System (EIS): These social insurance programs cover workplace injury and retrenchment protection. Employers must remit contributions by the 15th of the following month using the SOCSO Assist Portal. Both employer and employee contributions apply, and rates vary depending on salary and employee demographics. Monthly Tax Deduction (PCB): Employers act as tax agents to withhold monthly income tax from employees’ salaries, submitting payments to the Inland Revenue Board of Malaysia (LHDN) also by the 15th of the following month. Accurate calculation using the official PCB tables is critical to avoid underpayment or penalties. Missing these deadlines or submitting incorrect amounts exposes companies to fines, interest charges, and potential audits by Malaysian authorities. 3.4 Annual Reporting and Documentation Requirements Beyond monthly submissions, Malaysian payroll compliance mandates comprehensive annual reporting: Form E: The employer’s declaration summarizing total remuneration paid to all employees during the tax year. This form must be submitted to LHDN by March 31 annually. Form EA: Issued to employees by employers to detail individual income and deductions for personal tax filing. The accuracy and timeliness of these reports directly impact your company’s tax standing and employee satisfaction. Non-compliance attracts financial penalties and can complicate corporate tax audits. 3.5 Record Keeping: A Compliance Pillar Per Section 60A of the Employment Act 1955, employers must retain all payroll records — including payslips, remittance receipts, tax filings, and salary calculations — for a minimum of six years. These records are subject to inspection during labour audits or tax investigations. Best practices for record-keeping include: Employing cloud-based payroll systems with automated data backups Implementing internal audit routines to verify record integrity Maintaining clear documentation of all payroll-related communications and approvals Robust record management not only mitigates legal risks but also facilitates swift resolution of employee queries and disputes. 3.6 Payroll for Foreign Employees: Key Differences Foreign workers constitute a significant portion of Malaysia’s workforce, especially in specialized sectors. Their payroll treatment includes some important distinctions: Taxation: Foreign employees who stay in Malaysia for less than 182 days in a calendar year are taxed at a flat 30% withholding rate on income earned in Malaysia, unlike residents who are taxed progressively. Employers must accurately track employee residency status to apply the correct tax rate. SOCSO and EIS Contributions: Generally, foreign employees are exempt from SOCSO and EIS contributions unless they are permanent residents or spouses of Malaysian citizens. Work Permit Compliance: Payroll must align with employment pass conditions, particularly in industries such as finance, education, or construction where salaries are subject to approval. Failing to apply these distinctions correctly can result in costly audits and penalties. 3.7 Common Payroll Mistakes and How to Avoid Them Even companies with dedicated HR and finance teams frequently stumble in Malaysian payroll compliance. Understanding common pitfalls can save you from costly repercussions: 1. Delayed or Incorrect Contributions Manual payroll processes and insufficient knowledge of contribution rates lead to late or incorrect EPF, SOCSO, EIS, or PCB payments. Avoidance: Automate payroll using locally compliant software and schedule early reminders. ‍ 2. Incomplete or Missing Payslips Employees must receive payslips every pay cycle with all deductions and allowances itemized. Failure to do so damages transparency and risks inspections. Avoidance: Standardize payslip issuance with automated generation tied to payroll systems. 3. Misclassification of Employee Types Mislabeling contractors or interns as full-time employees—or vice versa—results in incorrect statutory deductions and tax treatment. Avoidance: Define employment status clearly and consult local experts when uncertain. ‍ 4. Ignoring Non-Resident Tax Rules Applying resident tax rates to short-term foreign employees leads to compliance issues. Avoidance: Monitor residency days and adjust withholding accordingly. 5. Incorrect Final Payments on Termination Omitting payment for accrued leave, bonuses, or notice period compensation often causes disputes. Avoidance: Use detailed offboarding checklists and cross-check legal obligations. 6. Missing Annual Reporting Deadlines Late submission of Form E or failure to issue Form EA results in penalties. Avoidance: Set internal deadlines and assign clear responsibility. 7. Poor Payroll Record Maintenance Lack of comprehensive, easily accessible records complicates audits and dispute resolution. Avoidance: Maintain digital records for at least six years with regular internal audits. 3.8 Penalties for Payroll Non-Compliance Malaysia enforces strict penalties to uphold payroll integrity: EPF Delays: Fines up to RM10,000 or imprisonment for up to 3 years. Late or Incomplete Form E Submission: Penalties ranging from RM200 to RM20,000. Failure to Pay Wages or Issue Payslips: Subject to actions under the Employment Act. Proactively maintaining compliance minimizes risk and safeguards your company’s reputation. Why Payroll Compliance Matters for Your Business Accurate, timely, and transparent payroll builds trust with your workforce, ensuring high morale and retention. It also protects your business from regulatory penalties and audit risks. Given the complexity and evolving regulatory landscape, many companies entering Malaysia partner with Employer of Record (EOR) providers or local payroll experts. This partnership ensures payroll compliance is handled seamlessly, allowing you to focus on scaling your business with confidence. Section 4: Summary and Best Practices for Hiring and Payroll Compliance in Malaysia 4.1 The Importance of Understanding Malaysia’s Hiring and Payroll Landscape Expanding your business into Malaysia offers exciting growth potential but requires a comprehensive understanding of its employment and payroll regulations. Every phase—from recruitment to salary disbursement and statutory filings—is governed by rules designed to protect both employers and employees. Overlooking any detail can result in fines, legal disputes, and damage to your company’s reputation. A thoughtful approach to compliance is therefore essential. 4.2 Complying with Malaysia’s Labour Laws Malaysia’s Employment Act 1955 outlines minimum employment standards, covering contracts, working hours, leave entitlements, and termination procedures. Employers must ensure contracts comply with these regulations to avoid disputes and penalties. Clear communication of terms also helps build trust and employee satisfaction. 4.3 Managing Statutory Contributions and Payroll Compliance The backbone of payroll compliance in Malaysia lies in accurate and timely statutory contributions to agencies such as the Employees Provident Fund (EPF), Social Security Organisation (SOCSO), Employment Insurance System (EIS), and income tax (PCB). Employers must remit these payments by the 15th of the following month to avoid fines. Annual filings, including Form E (employer declaration) and Form EA (employee tax statement), are mandatory and require accuracy to maintain compliance. Many companies reduce complexity by using payroll software tailored for Malaysia or outsourcing to local payroll specialists. These solutions automate deductions, generate payslips, track deadlines, and securely store records. 4.4 Key Best Practices for Smooth Compliance To maintain a compliant and efficient hiring and payroll process, businesses should: Partner with local experts or EOR providers: Benefit from their regulatory knowledge and reduce risk. Invest in payroll automation: Use software that calculates statutory deductions and generates payslips automatically. Maintain a statutory compliance calendar: Track monthly and annual deadlines to prevent late payments. Conduct regular audits: Periodically review payroll processes and filings to catch errors early. Train HR and finance teams: Keep staff updated on regulatory changes and compliance best practices. Keep detailed records: Retain payroll documentation for at least six years, as required by law. 4.5 Learning from Real-World Challenges Real-life cases highlight the costs of non-compliance. For instance, one company incurred substantial fines and damaged employee morale due to delayed EPF payments caused by manual tracking. By adopting automated payroll systems and clear schedules, they eliminated these risks. Another business faced retrospective penalties after misclassifying contractors, demonstrating the need for clear hiring policies and expert guidance. 4.6 The Business Case for Prioritizing Compliance Compliant hiring and payroll processes do more than fulfill legal obligations—they build employee confidence and loyalty, improve retention, and protect your company from financial and reputational harm. Proactive compliance enables leadership to focus on strategic goals instead of firefighting regulatory issues. Getting It Right from the Start Hiring in Malaysia can unlock major growth—but only if companies stay compliant with complex local laws. Missteps in employment contracts, statutory contributions, or payroll filings can lead to penalties, legal challenges, and reputational damage. It’s why many expanding companies choose to outsource these risks from day one. Why EOR Is a Smart Alternative to Entity Setup Establishing a legal entity in Malaysia requires months of paperwork, capital investment, and long-term commitments—such as appointing local directors, opening corporate bank accounts, registering for tax and statutory contributions, and staying on top of corporate compliance. For companies testing the market, hiring a lean team, or aiming for speed, this route can slow growth before it even starts. That’s why more businesses are turning to Employer of Record (EOR) solutions. With an EOR provider like AYP, you can: Hire local employees without incorporating a company Stay compliant with Malaysia’s employment laws, tax codes, and contribution requirements Run payroll and manage benefits through one streamlined platform Scale up or down flexibly, without the burden of long-term commitments At AYP, we act as your legal employer on the ground—so you can focus on managing performance and building your business, while we handle the local complexities. Looking to expand into Malaysia without the cost, delay, or compliance risk of setting up an entity? Let’s talk about how AYP’s EOR service can get your team up and running in days—not months. Related Resource Compliance The Cost of Hiring a Full-Time Employee in Singapore Compliance The Cost of Hiring a Full-Time Employee in Australia Compliance The Cost of Hiring a Full-Time Employee in Malaysia Compliance The Cost of Hiring a Full-Time Employee in Vietnam Compliance The Cost of Hiring a Full-Time Employee in Thailand Compliance The Cost of Hiring a Full-Time Employee in Philippines Compliance The Cost of Hiring a Full-Time Employee in Indonesia Products Employer of Record Professional Employer Organisation Asia Payroll Employee Benefits Asia Mobility Hiring Guide All Countries Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam Payroll Guide All Countries Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam About AYP About Us Pricing Resources Blog Careers © 2025 AYP Group. All rights reserved Privacy Policy PDPA Terms of Use Terms of Service

Contribution Scheme

Employer Contribution

Employee Contribution

Purpose & Coverage

EPF (KWSP)

12%–13%*

11%

Retirement savings

SOCSO

1.25%–1.75%

0.5%

Employment injury and invalidity insurance

EIS

0.2%

PCB), which mandates employers to deduct monthly tax installments from employees’ gross pay. The Inland Revenue Board (LHDN) requires employers to submit these deductions and file monthly returns via electronic systems by the 15th day of the following month.

The PCB amount depends on multiple factors:

Employee’s gross monthly salary
Tax reliefs and rebates claimed by the employee (e.g., spouse, children)
EPF contributions, which are tax-deductible and reduce taxable income

Employers must utilize LHDN’s official PCB calculator or approved payroll software to ensure accurate deduction amounts. Failure to comply can lead to fines, interest on underpaid tax, or even prosecution for tax evasion.

Example: A regional marketing firm failed to deduct PCB on bonuses paid to foreign employees, resulting in a tax audit that imposed back taxes and penalties totaling over RM100,000.

2.4 Payroll Cycles, Payslip Requirements, and Recordkeeping

Most Malaysian companies operate a monthly payroll cycle, disbursing salaries on or before the last working day of the month. It’s mandatory to provide each employee with a detailed payslip outlining all components of pay and deductions. This promotes transparency and satisfies requirements under the Employment Act 1955.

Payslips must include:

Gross salary and any allowances
Statutory contributions (EPF, SOCSO, EIS) and PCB tax deductions
Net pay

Employers must retain payroll records, payslips, and statutory submission confirmations for at least six years to comply with tax and employment audits.

2.5 Penalties and Compliance Risks: The Cost of Negligence

Failing to meet payroll obligations can have severe consequences. EPF can impose interest penalties of 6% per annum on late payments, and SOCSO has the power to fine employers up to RM5,000 or imprison responsible persons for up to two years under the Employees’ Social Security Act 1969.

LHDN may issue penalties for late PCB remittance, ranging from 10% to 100% of the tax amount owed. In extreme cases, repeated offenses can lead to criminal charges.

2.6 Regional Comparison: How Malaysia’s Payroll System Stacks Up

Compared to regional neighbors, Malaysia offers a moderate employer burden. For example:

Singapore requires employers to contribute 17% of wages to the Central Provident Fund (CPF), a higher rate than Malaysia’s EPF.
Indonesia has multiple compulsory social security schemes (BPJS Kesehatan for healthcare, BPJS Ketenagakerjaan for employment), with combined employer rates exceeding 20%
Thailand requires social security contributions at roughly 5% from employers

Malaysia’s relatively lower contribution rates, combined with multiple specialized schemes (EIS, HRDF), provide flexibility but demand administrative rigor.

Section 3: Payroll Setup and Ongoing Compliance in Malaysia

Expanding your business into Malaysia introduces you to a complex and carefully regulated payroll ecosystem. More than simply transferring salaries, compliance with Malaysia’s payroll requirements involves a comprehensive understanding of statutory deductions, employer contributions, tax withholdings, and meticulous reporting obligations. Mismanaging payroll can expose your company to costly fines, legal risks, and damage employee trust. This section walks you through the full payroll landscape, ensuring you build a compliant, efficient, and transparent payroll process.

3.1 Understanding Malaysia’s Payroll Cycle and Salary Payment Regulations

Although Malaysian labour law does not explicitly prescribe a mandatory payroll cycle, monthly salary payments are the industry norm. According to Section 19 of the Employment Act 1955, employees must receive their wages no later than seven days after the end of the wage period. Practically, if the pay period closes on July 31, payment must be issued by August 7.

Delays in salary payment are not merely administrative slip-ups; they constitute violations that can trigger enforcement action from the Ministry of Human Resources. Beyond legal penalties, untimely salary disbursement damages workforce morale and may lead to costly disputes or employee turnover.

To ensure smooth payroll operations, companies often leverage payroll automation tools or partner with local providers who understand the nuances of Malaysian payment practices.

3.2 Payslip Obligations: Transparency and Legal Mandates

In Malaysia, issuing itemized payslips to employees every payroll cycle is not optional—it is a legal requirement. Payslips must detail all components of an employee’s compensation package, including:

Basic salary and any allowances (transport, housing, etc.)
Overtime, bonuses, or commissions earned
Statutory deductions such as EPF, SOCSO, and EIS
Monthly tax deductions (PCB) withheld

Clear payslip issuance not only fulfills a legal mandate but also fosters transparency and trust between employer and employee. In disputes, payslips serve as critical documentation proving payment accuracy.

Best practice among Malaysian employers is to automate payslip generation via integrated HR/payroll software systems, ensuring timely, consistent, and error-free payslip delivery.

3.3 Statutory Contributions: Key Deadlines and Compliance Requirements

One of the most intricate aspects of Malaysian payroll is timely and accurate remittance of statutory contributions. Malaysia requires employers to manage several mandatory contributions monthly, each with its own deadlines and submission portals:

Employees Provident Fund (EPF): Employers and employees both contribute to the EPF, Malaysia’s national retirement savings scheme. Contributions must be submitted monthly by the 15th of the following month through the EPF’s i-Akaun Employer portal. Failure to meet deadlines can result in financial penalties and increased scrutiny.
Social Security Organisation (SOCSO) and Employment Insurance System (EIS): These social insurance programs cover workplace injury and retrenchment protection. Employers must remit contributions by the 15th of the following month using the SOCSO Assist Portal. Both employer and employee contributions apply, and rates vary depending on salary and employee demographics.
Monthly Tax Deduction (PCB): Employers act as tax agents to withhold monthly income tax from employees’ salaries, submitting payments to the Inland Revenue Board of Malaysia (LHDN) also by the 15th of the following month. Accurate calculation using the official PCB tables is critical to avoid underpayment or penalties.

Missing these deadlines or submitting incorrect amounts exposes companies to fines, interest charges, and potential audits by Malaysian authorities.

3.4 Annual Reporting and Documentation Requirements

Beyond monthly submissions, Malaysian payroll compliance mandates comprehensive annual reporting:

Form E: The employer’s declaration summarizing total remuneration paid to all employees during the tax year. This form must be submitted to LHDN by March 31 annually.
Form EA: Issued to employees by employers to detail individual income and deductions for personal tax filing.

The accuracy and timeliness of these reports directly impact your company’s tax standing and employee satisfaction. Non-compliance attracts financial penalties and can complicate corporate tax audits.

3.5 Record Keeping: A Compliance Pillar

Per Section 60A of the Employment Act 1955, employers must retain all payroll records — including payslips, remittance receipts, tax filings, and salary calculations — for a minimum of six years. These records are subject to inspection during labour audits or tax investigations.

Best practices for record-keeping include:

Employing cloud-based payroll systems with automated data backups
Implementing internal audit routines to verify record integrity
Maintaining clear documentation of all payroll-related communications and approvals

Robust record management not only mitigates legal risks but also facilitates swift resolution of employee queries and disputes.

3.6 Payroll for Foreign Employees: Key Differences

Foreign workers constitute a significant portion of Malaysia’s workforce, especially in specialized sectors. Their payroll treatment includes some important distinctions:

Taxation: Foreign employees who stay in Malaysia for less than 182 days in a calendar year are taxed at a flat 30% withholding rate on income earned in Malaysia, unlike residents who are taxed progressively. Employers must accurately track employee residency status to apply the correct tax rate.
SOCSO and EIS Contributions: Generally, foreign employees are exempt from SOCSO and EIS contributions unless they are permanent residents or spouses of Malaysian citizens.
Work Permit Compliance: Payroll must align with employment pass conditions, particularly in industries such as finance, education, or construction where salaries are subject to approval.

Failing to apply these distinctions correctly can result in costly audits and penalties.

3.7 Common Payroll Mistakes and How to Avoid Them

Even companies with dedicated HR and finance teams frequently stumble in Malaysian payroll compliance. Understanding common pitfalls can save you from costly repercussions:

1. Delayed or Incorrect Contributions

Manual payroll processes and insufficient knowledge of contribution rates lead to late or incorrect EPF, SOCSO, EIS, or PCB payments.

Avoidance: Automate payroll using locally compliant software and schedule early reminders. ‍

2. Incomplete or Missing Payslips

Employees must receive payslips every pay cycle with all deductions and allowances itemized. Failure to do so damages transparency and risks inspections.

Avoidance: Standardize payslip issuance with automated generation tied to payroll systems.

3. Misclassification of Employee Types

Mislabeling contractors or interns as full-time employees—or vice versa—results in incorrect statutory deductions and tax treatment.

Avoidance: Define employment status clearly and consult local experts when uncertain. ‍

4. Ignoring Non-Resident Tax Rules

Applying resident tax rates to short-term foreign employees leads to compliance issues.

Avoidance: Monitor residency days and adjust withholding accordingly.

5. Incorrect Final Payments on Termination

Omitting payment for accrued leave, bonuses, or notice period compensation often causes disputes.

Avoidance: Use detailed offboarding checklists and cross-check legal obligations.

6. Missing Annual Reporting Deadlines

Late submission of Form E or failure to issue Form EA results in penalties.

Avoidance: Set internal deadlines and assign clear responsibility.

7. Poor Payroll Record Maintenance

Lack of comprehensive, easily accessible records complicates audits and dispute resolution.

Avoidance: Maintain digital records for at least six years with regular internal audits.

3.8 Penalties for Payroll Non-Compliance

Malaysia enforces strict penalties to uphold payroll integrity:

EPF Delays: Fines up to RM10,000 or imprisonment for up to 3 years.
Late or Incomplete Form E Submission: Penalties ranging from RM200 to RM20,000.
Failure to Pay Wages or Issue Payslips: Subject to actions under the Employment Act.

Proactively maintaining compliance minimizes risk and safeguards your company’s reputation.

Why Payroll Compliance Matters for Your Business

Accurate, timely, and transparent payroll builds trust with your workforce, ensuring high morale and retention. It also protects your business from regulatory penalties and audit risks.

Given the complexity and evolving regulatory landscape, many companies entering Malaysia partner with Employer of Record (EOR) providers or local payroll experts. This partnership ensures payroll compliance is handled seamlessly, allowing you to focus on scaling your business with confidence.

Section 4: Summary and Best Practices for Hiring and Payroll Compliance in Malaysia

4.1 The Importance of Understanding Malaysia’s Hiring and Payroll Landscape

Expanding your business into Malaysia offers exciting growth potential but requires a comprehensive understanding of its employment and payroll regulations. Every phase—from recruitment to salary disbursement and statutory filings—is governed by rules designed to protect both employers and employees. Overlooking any detail can result in fines, legal disputes, and damage to your company’s reputation. A thoughtful approach to compliance is therefore essential.

4.2 Complying with Malaysia’s Labour Laws

Malaysia’s Employment Act 1955 outlines minimum employment standards, covering contracts, working hours, leave entitlements, and termination procedures. Employers must ensure contracts comply with these regulations to avoid disputes and penalties. Clear communication of terms also helps build trust and employee satisfaction.

4.3 Managing Statutory Contributions and Payroll Compliance

The backbone of payroll compliance in Malaysia lies in accurate and timely statutory contributions to agencies such as the Employees Provident Fund (EPF), Social Security Organisation (SOCSO), Employment Insurance System (EIS), and income tax (PCB). Employers must remit these payments by the 15th of the following month to avoid fines.

Annual filings, including Form E (employer declaration) and Form EA (employee tax statement), are mandatory and require accuracy to maintain compliance.

Many companies reduce complexity by using payroll software tailored for Malaysia or outsourcing to local payroll specialists. These solutions automate deductions, generate payslips, track deadlines, and securely store records.

4.4 Key Best Practices for Smooth Compliance

To maintain a compliant and efficient hiring and payroll process, businesses should:

Partner with local experts or EOR providers: Benefit from their regulatory knowledge and reduce risk.
Invest in payroll automation: Use software that calculates statutory deductions and generates payslips automatically.
Maintain a statutory compliance calendar: Track monthly and annual deadlines to prevent late payments.
Conduct regular audits: Periodically review payroll processes and filings to catch errors early.
Train HR and finance teams: Keep staff updated on regulatory changes and compliance best practices.
Keep detailed records: Retain payroll documentation for at least six years, as required by law.

4.5 Learning from Real-World Challenges

Real-life cases highlight the costs of non-compliance. For instance, one company incurred substantial fines and damaged employee morale due to delayed EPF payments caused by manual tracking. By adopting automated payroll systems and clear schedules, they eliminated these risks. Another business faced retrospective penalties after misclassifying contractors, demonstrating the need for clear hiring policies and expert guidance.

4.6 The Business Case for Prioritizing Compliance

Compliant hiring and payroll processes do more than fulfill legal obligations—they build employee confidence and loyalty, improve retention, and protect your company from financial and reputational harm. Proactive compliance enables leadership to focus on strategic goals instead of firefighting regulatory issues.

Getting It Right from the Start Hiring in Malaysia can unlock major growth—but only if companies stay compliant with complex local laws. Missteps in employment contracts, statutory contributions, or payroll filings can lead to penalties, legal challenges, and reputational damage. It’s why many expanding companies choose to outsource these risks from day one.

Why EOR Is a Smart Alternative to Entity Setup

Establishing a legal entity in Malaysia requires months of paperwork, capital investment, and long-term commitments—such as appointing local directors, opening corporate bank accounts, registering for tax and statutory contributions, and staying on top of corporate compliance.

For companies testing the market, hiring a lean team, or aiming for speed, this route can slow growth before it even starts.

That’s why more businesses are turning to Employer of Record (EOR) solutions. With an EOR provider like AYP, you can:

Hire local employees without incorporating a company
Stay compliant with Malaysia’s employment laws, tax codes, and contribution requirements
Run payroll and manage benefits through one streamlined platform
Scale up or down flexibly, without the burden of long-term commitments

At AYP, we act as your legal employer on the ground—so you can focus on managing performance and building your business, while we handle the local complexities.

Looking to expand into Malaysia without the cost, delay, or compliance risk of setting up an entity?

Let’s talk about how AYP’s EOR service can get your team up and running in days—not months.

Related Resource

Compliance

Hiring in Malaysia: 2025 Guide to Payroll, Contributions & Compliance