Payroll for foreign employees in Malaysia: tax & salary guide

Managing payroll in Malaysia can be a complex process, especially when hiring foreign employees. Employers must comply with Malaysia’s payroll laws, tax regulations and statutory contributions while ensuring accurate and efficient salary processing.

Businesses must understand the Malaysia payroll process to avoid legal complications, ensure timely salary payments and maintain compliance with government authorities. Employers who operate internationally may also need to consider using a global business account to streamline payroll transactions and reduce foreign exchange risks.

This guide provides a comprehensive breakdown of payroll processes, tax regulations for foreign employees, employer obligations and best practices. 

Key Takeaways

• Non-residents are taxed at a flat 30% rate, while residents follow a progressive tax rate (0%–30%).
• Employers must register with LHDN, EPF, SOCSO and EIS to comply with tax and statutory requirements.
• Calculate salary by including base salary, allowances and bonuses, then deduct tax (MTD/PCB), EPF (if applicable) and social security contributions.
• Foreigners earning rental income in Malaysia must pay a 30% withholding tax on rental earnings.
• Ensure accurate payroll records, timely tax report submissions and automated payroll solutions to stay compliant with Malaysian regulations.

To better understand how these requirements apply in real scenarios, let’s consider the following example:

When James, an entrepreneur from Australia, expanded his tech startup to Malaysia, he saw exciting opportunities ahead. He quickly set up his business, hired a mix of local and foreign employees and started operations. However, managing payroll in Malaysia turned out to be more complex than he expected.

First, he had to understand Malaysia’s tax laws. He discovered that Malaysia classifies foreign employees based on residency status. Those staying 182 days or more qualify as residents and follow a progressive tax rate (0%–30%). Meanwhile, those staying for less than 182 days fall under the non-resident category and face a flat 30% tax rate.

Next, James registered his company with LHDN, EPF, SOCSO and EIS to comply with payroll regulations. He ensured that his company deducted taxes, social security contributions and retirement savings from employee salaries. By staying compliant, he avoided penalties and payroll issues.

As he expanded his investments, James also bought properties in Malaysia for the purpose of renting them out. He soon learned that Malaysia imposes a 30% withholding tax on rental income for foreigners. To manage his finances effectively, he planned his tax payments carefully.

To streamline payroll, James opened a global business account to handle international salary transfers efficiently. He also adopted an automated payroll solution to ensure timely tax submissions and accurate salary disbursements. With everything in place, James focused on growing his business while maintaining a smooth and compliant payroll system.

Payroll in Malaysia

Managing payroll in Malaysia involves more than just processing salaries—it requires strict compliance with government regulations, mandatory deductions, tax filings, employee benefits and statutory contributions. Employers must ensure that payroll is processed accurately and on time to avoid legal issues, fines or disputes with employees.

Key Payroll Regulations in Malaysia

Malaysia’s payroll system is governed by multiple laws and regulatory bodies, ensuring fair compensation, tax compliance and employee welfare. Employers must familiarise themselves with these regulations to prevent penalties and maintain a legally compliant payroll system.

1. Employment Act 1955

The Employment Act 1955 serves as the primary law governing employee rights and employer responsibilities. It applies to:

• Employees earning MYR 2,000 and below per month.
• Manual labourers, domestic workers and employees under specific employment contracts.

Key provisions include:

• Minimum wage compliance: As of 2024, the minimum wage in Malaysia is MYR 1,500 per month.
• Working hours: The standard workweek is 48 hours, with a daily limit of 8 hours and a maximum of 6 working days per week.
• Overtime pay: Employees working beyond regular hours are entitled to overtime compensation:
  • 1.5x hourly rate for overtime on normal working days.
  • 2x hourly rate for overtime on rest days.
  • 3x hourly rate for overtime on public holidays.
• Annual & sick leave entitlements: Employees are entitled to a minimum of 8 days of paid annual leave, which increases with tenure. They also receive paid sick leave and maternity leave. Employers must adhere to these laws to avoid disputes, fines and legal action from employees or authorities.

2. Inland Revenue Board of Malaysia (LHDN) – Income Tax Compliance

The Inland Revenue Board of Malaysia (LHDN) oversees income tax regulations, tax filings and Monthly Tax Deductions (MTD/PCB).

Employers are responsible for:

• Registering employees with LHDN to track taxable income.
• Deducting Monthly Tax Deduction (MTD/PCB) from salaries based on Malaysia’s tax brackets.
• Submitting income tax reports and tax filings to LHDN within stipulated deadlines.
• Issuing EA Forms to employees annually to help them file their personal income taxes.

Failure to comply with LHDN’s tax regulations can result in heavy penalties, audits or legal actions against the employer.

3. Employees Provident Fund (EPF) – Retirement Savings

The Employees Provident Fund (EPF) is a mandatory retirement savings scheme for Malaysian employees and permanent residents. It requires both employers and employees to contribute a portion of the employee’s salary every month.

EPF Contribution Rates (2024)

• Foreign employees are exempt from EPF contributions but may opt-in voluntarily.
• EPF funds are accessible after retirement, resignation or leaving Malaysia permanently.
• Employers must submit EPF contributions before the 15th of each month to avoid penalties.

4. Social Security Organisation (SOCSO) & Employment Insurance Scheme (EIS)

The Social Security Organisation (SOCSO) provides social security protection to Malaysian employees in case of work-related injuries, disabilities or death. Employers must register all eligible employees and make monthly contributions.

SOCSO Contribution Rates (2024)

• Foreign employees are exempt from SOCSO but may be covered under Foreign Workers Compensation Scheme (FWCS).
• Employers must contribute to the Employment Insurance Scheme (EIS), which provides financial aid to retrenched employees.

5. Labour Laws & Work Permits for Foreign Employees

Employers hiring foreign employees must comply with Malaysia’s immigration laws and obtain the necessary work permits.

• Types of work passes in Malaysia:
  • Employment Pass (EP) – For skilled foreign professionals earning MYR 5,000/month and above.
  • Temporary Employment Pass (TEP) – For low-skilled or semi-skilled workers in specific industries.
  • Professional Visit Pass (PVP) – For short-term foreign employees on temporary assignments.

Employers must sponsor work permits, ensure legal employment contracts and follow immigration regulations to avoid fines or deportation of foreign workers.

Penalties for Payroll Non-Compliance

Employers who fail to comply with Malaysia’s payroll regulations risk serious penalties, including:

• Fines up to MYR 50,000 per offence for failing to register employees under SOCSO, EPF or LHDN.
• Additional tax penalties for under-reporting salaries or failing to deduct the correct MTD/PCB amounts.
• Legal action or business restrictions for violating labour laws and foreign employment rules.

To ensure smooth payroll operations and compliance, employers can use automated payroll solutions and global business accounts to manage salaries efficiently.

Malaysia payroll process: step-by-step guide

Employers in Malaysia must process payroll accurately to comply with tax laws, statutory contributions and salary regulations. This includes calculating salaries, deducting taxes and submitting payroll reports while ensuring employees receive their wages on time. Any mistakes can lead to penalties, employee disputes or legal issues. 

To simplify payroll management, we break down the Malaysia payroll process into clear, actionable steps.

Step 1: Register Your Business with Government Authorities

Before hiring employees, businesses must register with the following authorities:

• LHDN (Inland Revenue Board of Malaysia) – For tax registration and Monthly Tax Deduction (MTD/PCB).
• EPF(Employees Provident Fund) – Required for Malaysian employees.
• SOCSO & EIS (Social Security Organisation) & EIS (Employment Insurance Scheme) – Required for social security and unemployment insurance.

Foreign employees may be exempt from EPF and SOCSO, depending on their visa type and employment contract.

Step 2: Determine Employee Classification

Employees must be classified as either local or foreign workers, as different tax rates apply.

• Residents (staying in Malaysia for 182 days or more in a calendar year) are taxed at progressive rates.
• Non-residents (staying for less than 182 days) are taxed at a flat 30% rate with no deductions or tax reliefs

Incorrect classification can lead to tax penalties and legal issues, so employers must ensure accurate reporting.

Step 3: Calculate Gross Salary and Deductions

Payroll calculations should include:

• Basic salary
• Allowances (e.g., housing, transport, meal)
• Bonuses and incentives
• Deductions (tax, EPF, SOCSO, EIS and other benefits)

Formula:
Gross Salary = Base Salary + Allowances + Bonuses – Deductions

To simplify international payroll, businesses can use payroll solutions for automated tax deductions and multi-currency payments.

Step 4: Process Salary Payments

Once payroll is calculated, salaries must be transferred to employees’ bank accounts. Businesses that hire foreign employees often face challenges with international salary payments, including:

• High currency exchange rates
• Delayed international transfers
• Bank transaction fees

Employers can use business money transfer services to handle cross-border salary payments quickly and cost-effectively.

Step 5: Submit Payroll Reports to Authorities

Employers must submit monthly payroll reports to ensure compliance. These include:

• MTD (PCB) tax submissions to LHDN.
• EPF contributions (if applicable).
• SOCSO & EIS payments (if applicable).

Late submissions may result in fines or legal action.

Malaysia income tax for foreigners

Malaysia’s income tax system differentiates between resident and non-resident taxpayers. Non-residents pay a flat tax of 30%, while residents follow a progressive tax structure.

Resident vs. Non-Resident Tax Rates

The table below outlines the income tax rates for foreigners in Malaysia:

For international payroll compliance, businesses can use money transfer for business to manage tax payments and salaries efficiently.

Non-resident rental income and taxation

Foreigners who own rental properties in Malaysia are subject to a 30% withholding tax on rental income.

How to Report Rental Income

Foreign property owners in Malaysia must report rental income to the Inland Revenue Board of Malaysia (LHDN) and comply with tax regulations. Failing to declare rental earnings can lead to penalties, tax audits or legal action. Follow these steps to properly report and pay rental income tax as a foreign landlord.

1. Declare Rental Earnings to LHDN

Foreign landlords must register with LHDN and declare all rental income earned in Malaysia. When filing an annual tax return, they must submit Form BE (for individuals) or Form B (for business owners).

To ensure accuracy, landlords should:

• Record all rental agreements and tenant payments.
• Maintain bank statements and receipts for rental deposits.
• Track maintenance and property-related expenses.

2. Pay 30% Tax on Total Rental Income

Malaysia imposes a 30% withholding tax on gross rental income for non-resident landlords. The government does not allow deductions for expenses, such as property maintenance, management fees or mortgage payments.

For example:

• A landlord earns MYR 5,000 per month, totaling MYR 60,000 per year in rental income.
• At a 30% tax rate, the landlord owes MYR 18,000 in rental tax annually.

Landlords must pay rental income tax on time to avoid penalties.

3. Submit Rental Tax Reports Annually

Foreign landlords must file an annual rental income tax report with LHDN before the deadline:

• April 30 for individuals.
• June 30 for businesses or landlords filing under business tax.

LHDN may request supporting documents, so landlords must keep rental agreements, tax receipts and financial records for at least seven years.

4. Simplify Rental Tax Payments

Foreign landlords can streamline rental income tax payments using invoice payment solutions. These solutions ensure secure and timely transactions, reducing administrative work. By declaring rental earnings, paying the correct tax and filing reports on time, landlords stay compliant with Malaysian tax laws and avoid penalties.

Compliance and best practices for employers

Employers in Malaysia must follow strict payroll regulations to avoid penalties, ensure employee satisfaction and maintain business credibility. Payroll compliance requires accurate record-keeping, timely tax submissions and adherence to regulatory changes. 

1. Maintain Accurate Payroll Records for Tax Audits

Employers must keep detailed payroll records to comply with Malaysia’s tax and employment laws. These records track salary payments, tax deductions and statutory contributions while serving as proof during LHDN audits or employee disputes.

To ensure compliance, employers should:

• Document salary breakdowns (basic pay, allowances, bonuses, overtime, deductions).
• Keep tax deduction reports (Monthly Tax Deduction (MTD/PCB) filings, EPF, SOCSO and EIS contributions).
• Store payslips and payment proof for at least seven years, as required by Malaysian tax laws.
• Record leave entitlements and benefits to comply with labour laws.

Employers who fail to maintain proper payroll records may face fines, tax audits or compliance issues with LHDN and other government agencies.

2. Submit Monthly Tax and Payroll Reports on Time

Employers must deduct and submit payroll-related taxes and contributions each month to remain compliant. Missing deadlines can lead to penalties, interest charges or legal consequences.

Key payroll submission deadlines:

• Monthly Tax Deduction (MTD/PCB) – Due by the 15th of each month.
• Employees Provident Fund (EPF) – Due by the 15th of each month.
• Social Security Organisation (SOCSO) & Employment Insurance Scheme (EIS) – Due by the 15th of each month.

Employers must ensure timely submissions by setting up automated reminders or using payroll management tools.

3. Stay Updated with Payroll Regulations and Tax Laws

Malaysia regularly updates payroll regulations, including minimum wage adjustments, tax rate changes and social security contribution revisions. Employers must stay informed to avoid unexpected liabilities.

To keep up with changes, employers should:

• Subscribe to official updates from LHDN, EPF and SOCSO.
• Consult with payroll professionals or tax advisors to ensure compliance with the latest tax rates.
• Attend payroll and HR compliance workshops to learn about regulatory updates.
• Use payroll software that updates automatically with new tax laws and rates.

Employers who fail to comply with updated payroll laws may face financial penalties and payroll disruptions.

4. Automate Multi-Currency Payroll Transactions Using Tech Payment Solutions

Employers who hire foreign employees or manage international transactions often struggle with manual payroll processing, exchange rate fluctuations and cross-border compliance. Automating payroll transactions ensures accuracy, compliance and timely salary payments in multiple currencies.

With Instarem’s tech payment solutions, businesses can:

• Process salary payments faster and more securely for local and foreign employees.
• Automate tax and social security contributions to prevent miscalculations.
• Manage multi-currency payroll seamlessly, reducing manual errors.
• Minimise administrative work through an integrated payroll system.

Employers who automate payroll transactions can eliminate errors, improve efficiency and comply with Malaysian payroll laws.

5. Implement a Secure and Efficient Payroll System for Business Process Outsourcing (BPO)

Employers in business process outsourcing (BPO) must prioritise payroll security and efficiency. Since BPO firms handle large-scale payroll processing, they must ensure accurate and timely salary payments while protecting sensitive payroll data.

To manage payroll effectively, BPO firms should:

• Use cloud-based payroll systems for easy access and real-time updates.
• Strengthen payroll data security with encryption and secure login credentials.
• Integrate automated tax filing solutions to prevent tax non-compliance.
• Adopt a global payroll platform to handle payments for remote and international employees.

Final thoughts

Managing payroll in Malaysia for foreign employees involves tax compliance, statutory contributions and efficient salary payments. Employers must stay informed of tax laws and payroll regulations to avoid legal issues.

To streamline international payroll, businesses can explore why they choose Instarem for secure and cost-effective payroll solutions. Instarem offers several advantages for businesses handling cross-border payroll transactions, including:

• Competitive exchange rates that reduce payroll costs.
• Fast and secure transfers for seamless salary payments.
• Multi-currency support to pay employees in their preferred currency.
• Seamless integration with your payroll system for easy processing.
• Regulatory compliance ensures adherence to global tax laws.
• Transparent pricing with no hidden fees or surprises.

Discover how Instarem can assist you with international payroll, paying overseas suppliers and managing intra-company transfers. Sign up today and simplify your salary payments worldwide.

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