What is payroll? A guide to payroll in Malaysia

Published Monday 26 October 2026

Table of contents

• What is payroll?
• Key payroll terms you should know
• How does payroll work?
• How to process payroll step by step
• Payroll taxes and statutory contributions in Malaysia
• EPF, SOCSO, EIS and PCB explained: Statutory payroll contributions in Malaysia
• Payroll deductions explained
• Payroll compliance and legal requirements in Malaysia
• Pay periods and payroll frequency
• Payroll processing methods
• How to choose payroll software
• Simplify your payroll with Xero
• FAQs on payroll in Malaysia

Key takeaways

• Payroll is the process of calculating and paying employee wages while managing statutory deductions for your team. In Malaysia, these include Potongan Cukai Bulanan (PCB) income tax and contributions to the Employees Provident Fund (EPF), Social Security Organisation (SOCSO), and Employment Insurance System (EIS).
• Malaysian employers must comply with the Employment Act 1955 (as amended in 2023), which now covers all employees regardless of salary level. Some protections, such as overtime pay, apply to employees earning up to RM4,000 a month. Strict deadlines also apply to tax and contribution filings.
• You can process payroll manually, use payroll software, or outsource to a provider. Cloud-based payroll software automates calculations and gives you real-time visibility over your obligations.
• Keeping accurate payroll records for at least six years is a legal requirement in Malaysia. Choosing the right payroll system helps you stay compliant as your business grows.

What is payroll?

Payroll is both the list of employees your business pays and the process of calculating wages, withholding statutory deductions, and paying your team. If you employ people in Malaysia, it’s one of the most important responsibilities to get right.

In Malaysia, payroll includes income tax through the Potongan Cukai Bulanan (PCB) system and retirement savings through the Employees Provident Fund (EPF, or KWSP). It also covers social security through the Social Security Organisation (SOCSO, or PERKESO) and job-loss cover through the Employment Insurance System (EIS).

For small business owners, payroll sits where HR and accounting meet. You need accurate employee data from your HR records and precise calculations to meet your financial and legal obligations. Getting payroll right means your employees are paid correctly and on time, and your business stays compliant with Malaysian law.

Key payroll terms you should know

Payroll uses a handful of core terms, and knowing them makes every later step easier to follow. Here are the ones you’ll come across most.

• Gross pay is the total amount an employee earns before any deductions. It includes base salary, overtime, allowances, and bonuses.
• Net pay is the amount an employee takes home after all deductions are subtracted from gross pay.
• Deductions are amounts withheld from an employee’s gross pay. In Malaysia, mandatory deductions include PCB, EPF (employee portion), SOCSO, and EIS.
• PCB or MTD (Monthly Tax Deduction) is how you withhold monthly income tax from employees’ wages for the Inland Revenue Board of Malaysia (LHDN).
• EPF or KWSP is Malaysia’s mandatory retirement savings scheme. Both employers and employees contribute a percentage of wages.
• SOCSO or PERKESO provides employment injury and invalidity protection for employees.
• EIS provides temporary financial help and re-employment support to employees who lose their jobs.

You’ll see most of these terms on every payslip you issue, so it’s worth getting comfortable with them early.

How does payroll work?

Payroll works as a cycle that repeats each pay period: you gather inputs, calculate pay, pay your team, and file contributions. Knowing this cycle helps you plan your time and meet every deadline.

The cycle starts with gathering inputs: employee details, hours worked, salary rates, and changes such as new hires, resignations, or pay adjustments. Tracking these changes matters more as teams grow, and CPA Australia's 2025–26 Asia-Pacific Small Business Survey found around two-thirds of Malaysian small businesses grew in 2025.

Next, you calculate gross pay for each employee, apply the correct deductions (PCB, EPF, SOCSO, EIS), and arrive at net pay. You then pay wages, generate payslips, and file your statutory contributions with the relevant authorities by their deadlines.

Each payroll cycle produces payslips for employees, remittance payments to LHDN, KWSP, and PERKESO (for SOCSO and EIS), and updated payroll records for your files.

How to process payroll step by step

Processing payroll in Malaysia follows eight steps. Working through them in order helps you prevent errors and stay compliant with Malaysian regulations.

1. Collect employee information

Start by collecting accurate records for every employee. Records include each employee’s full name, address, MyKad number (or passport number for foreign workers), and Tax Identification Number (TIN). You’ll also need their bank account details and employment terms, such as salary, start date, and work schedule.

Once your business is registered with the Companies Commission of Malaysia (SSM), you’ll need to register as an employer with LHDN, KWSP (EPF), and PERKESO. PERKESO handles both SOCSO and EIS. Since September 2024, you’ve had to submit new employee notifications electronically through LHDN’s e-CP22 system.

2. Track hours and attendance

Track hours worked for employees paid by the hour or eligible for overtime. For salaried employees, recording attendance helps you manage leave balances and calculate overtime accurately.

Under the Employment Act, the standard work week is 45 hours (reduced from 48 hours since the 2023 amendment). Any hours beyond this attract overtime rates.

3. Calculate gross pay

Gross pay is the total compensation before deductions. Start with the base salary, then add any overtime pay, allowances, commissions, or bonuses for the pay period.

The Department of Statistics Malaysia (DOSM) reports the median monthly wage for formal sector employees was RM3,027 in March 2026. Reviewing salary rates regularly helps you stay competitive and meet minimum wage requirements.

4. Determine deductions and withholdings

Deductions and withholdings are where Malaysian payroll gets specific. You need to calculate and withhold the correct amount for each statutory contribution.

• PCB/MTD: This is income tax based on the employee’s annual tax bracket, marital status, and relief claims.
• EPF/KWSP: The employer contributes 13% of wages for employees earning RM5,000 or below per month (12% for those above). The employee contributes 11%.
• SOCSO/PERKESO: Rates follow insurable wage brackets, and both employer and employee contribute.
• EIS: Both employer and employee contribute about 0.2% of the employee’s wages.

See the payroll taxes section below for full details on contribution rates and filing deadlines.

5. Calculate net pay

Net pay is gross pay minus all deductions, and it’s the amount deposited into your employee’s bank account. Double-check your calculations before processing payments, as errors are hard to correct afterwards.

6. Pay employees

Pay your employees by bank transfer or another agreed payment method. Under the Employment Act, you must pay wages no later than seven days after the wage period ends. Most Malaysian businesses pay monthly.

Generate and share payslips that clearly show gross pay, each deduction, and net pay. If you’re preparing them by hand, use a payslip template to keep the layout consistent and your records accurate.

7. File taxes and statutory contributions

After payday, remit all withheld amounts and employer contributions to the relevant authorities: LHDN (for PCB), KWSP (for EPF), and PERKESO (for SOCSO and EIS). The filing deadlines are set out in the payroll taxes section.

Paying on time keeps you clear of late-payment penalties, so set calendar reminders or use payroll apps that connect with Xero to help automate deductions and payments.

8. Keep payroll records

Malaysian employers must keep payroll records for at least six years from the date of the last entry. The Employment Act 1955 sets this rule, while the Personal Data Protection Act (PDPA) covers how you protect employee data. Your records should include:

• name, address, MyKad number (or passport number for foreign workers), and TIN
• employment contract details, including salary, allowances, and benefits
• monthly payslips showing gross pay, deductions, and net pay
• records of all statutory contributions remitted
• leave records and attendance data

Cloud-based accounting and bookkeeping software helps you store and organise these records securely, so you’re always prepared if audited.

Payroll taxes and statutory contributions in Malaysia

Payroll taxes and statutory contributions in Malaysia cover PCB income tax plus EPF, SOCSO, and EIS contributions, each with its own rules. Understanding these obligations is one of the most important parts of running payroll.

The PCB system requires you to calculate and deduct income tax from each employee’s monthly wages. You then remit it to LHDN by the 15th of the following month. The amount depends on the employee’s estimated annual income, tax reliefs, and rebates.

EPF (KWSP) contributions fund your employees’ retirement. Employers contribute 13% of wages for employees earning RM5,000 or below per month, and 12% for those earning above RM5,000. Employees contribute 11% of their wages, and you remit both portions to KWSP by the 15th of the following month.

SOCSO (PERKESO) covers two schemes: the Employment Injury Scheme and the Invalidity Scheme. Contribution rates follow insurable wage brackets, with both employer and employee contributing. EIS contributions are about 0.2% from both the employer and employee.

Some employers also need to contribute to the Human Resources Development Fund (HRDF) if they meet the qualifying criteria. Check your obligations based on your industry and number of employees; the next section explains who pays it.

Missing filing deadlines can lead to penalties, surcharges, and even prosecution. Set up automated reminders or use payroll software to keep every filing on time.

EPF, SOCSO, EIS and PCB explained: Statutory payroll contributions in Malaysia

The EPF employer contribution is 13% of monthly wages for employees earning RM5,000 or below, and 12% for employees earning above RM5,000. This section explains who pays each statutory contribution for payroll in Malaysia and how the amounts add up on a typical salary.

Accurate HR payroll records make this easier, because each employee’s salary decides which rate or wage bracket applies. When your HR and payroll data match, every contribution starts from the right figure.

EPF contribution rates

Each month, your employee’s EPF contribution is 11% of their wages, which you deduct from their pay. You add your employer share on top and remit both portions to KWSP by the 15th of the following month.

For example, if you pay an employee RM4,000 a month, you deduct RM440 from their pay and add RM520 of your own. KWSP receives RM960 in total for that employee.

SOCSO and EIS contributions

SOCSO (PERKESO) contributions fund the Employment Injury Scheme and the Invalidity Scheme. Instead of a flat percentage, you look up the employee’s wage bracket on the contribution table and pay the listed amounts.

EIS works the same way: it’s bracket-based, and you and your employee each pay about 0.2% of wages. PERKESO collects both SOCSO and EIS contributions.

PCB monthly tax deductions

PCB, also called MTD, is the monthly income tax you withhold from your employee’s pay for LHDN. You remit it by the 15th of the following month, and the amount depends on each employee’s income, reliefs, and rebates.

HRDF levy

The HRDF levy, collected by the Human Resources Development Corporation (HRD Corp), is an employer-only cost that funds employee training. Employers with 10 or more Malaysian employees pay 1% of monthly wages, with an optional 0.5% rate for employers with five to nine.

You can’t deduct the levy from your employees’ pay, so budget for it as part of your employment costs.

Example: contributions on a RM4,000 monthly salary

Here’s how the numbers work for an employee under 60 (First Category) earning RM4,000 gross pay a month. In the RM3,900.01–RM4,000 bracket, the employee’s SOCSO contribution is RM19.75 and their EIS contribution is RM7.90.

Your employee’s pay breaks down like this:

• Gross pay: RM4,000
• EPF (11%): RM440
• SOCSO: RM19.75
• EIS: RM7.90
• PCB (estimate, varies by individual): RM30
• Net pay: RM3,502.35

Since 1 June 2026, employees enrolled in PERKESO’s LINDUNG 24 Jam scheme (SKBBK) pay a further RM29.65 at this wage, which lowers net pay to RM3,472.70. The scheme is voluntary for Malaysian employees but mandatory for foreign workers.

On top of gross pay, you pay these employer contributions:

• EPF (13%): RM520
• SOCSO: RM69.15
• EIS: RM7.90

That brings your total monthly cost for this employee to RM4,597.05, before any HRDF levy.

Payroll deductions explained

Payroll deductions are amounts taken from an employee’s gross pay to arrive at their net (take-home) pay. In Malaysia, deductions fall into two categories: mandatory and voluntary.

Mandatory deductions are required by law. These include PCB (income tax), EPF (the employee’s 11% contribution), SOCSO (employee portion), and EIS (the employee’s share of about 0.2%). You must withhold these before paying your employee.

Voluntary or additional deductions can include loan repayments, union fees, or voluntary EPF top-ups. Loan repayments can cover National Higher Education Fund Corporation (PTPTN) study loans, and every voluntary deduction needs the employee’s written authorisation.

Here’s a simplified example of how deductions work for an employee earning RM4,000 gross pay per month. The SOCSO (RM19.75) and EIS (RM7.90) amounts follow the RM3,900.01–RM4,000 bracket and exclude LINDUNG 24 Jam (SKBBK).

• Gross pay: RM4,000
• EPF employee contribution (11%): RM440
• SOCSO employee contribution: RM19.75
• EIS employee contribution: RM7.90
• PCB (estimated, varies by individual): RM30
• Net pay: RM3,502.35

Your employee’s actual PCB amount depends on their individual tax circumstances. Use the latest PCB calculation tables from LHDN, or payroll software that updates automatically.

Payroll compliance and legal requirements in Malaysia

Payroll compliance in Malaysia means following the Employment Act 1955 on wages, hours, leave, and records. Staying compliant protects both your business and your employees.

The Employment Act 1955 is the main law governing employment in Malaysia. Since the 2023 amendments took effect on 1 January 2023, it covers all employees, replacing the previous RM2,000 monthly salary threshold. Every employer must now follow its rules on wages, working hours, leave, and termination.

The national minimum wage is RM1,700 per month for all employers since 1 August 2025 (it applied to employers with five or more staff from 1 February 2025).Budget 2027, tabled on 9 October 2026, announced a rise to RM2,000 a month from June 2027. Micro, small and medium enterprises (MSMEs) with annual revenues below RM50 million will be exempt from the increase.

Pay every employee at least the rate that applies to your business. Base pay decisions on each role’s duties and skills, so you support equal pay for work of equal value.

The standard work week is now 45 hours (reduced from 48 hours under the 2023 amendment). You must pay overtime at the rates the Act sets.

Employee classification matters. Misclassifying an employee as an independent contractor can lead to penalties, back-payment of statutory contributions, and legal action. If someone works under your direction, follows your schedule, and uses your tools, they’re likely an employee under Malaysian law.

Record-keeping requirements are strict. Keep all payroll records, including payslips, employment contracts, leave records, and contribution receipts, for at least six years under the Employment Act. Protect the personal data in these records in line with the PDPA.

Since 1 January 2026, businesses with annual turnover of RM1 million or more must issue e-invoices through LHDN’s MyInvois system. Businesses below RM1 million are exempt. If your business is in scope, your accounting software should support MyInvois integration to meet this obligation.

Pay periods and payroll frequency

A pay period is the recurring timeframe for which you calculate and pay employee wages. In Malaysia, monthly pay is the standard.

Most businesses pay employees once a month, typically at the end of the month or within the first few days of the next. Under Section 19 of the Employment Act, wages must be paid no later than seven days after the end of the wage period.

Some businesses use semi-monthly pay periods, paying twice a month. This is less common in Malaysia but can suit businesses with a mix of salaried and hourly employees.

Whichever frequency you choose, consistency matters. Your employees rely on predictable pay, and your statutory filing deadlines are tied to your pay periods. Set your payroll calendar at the start of the year and stick to it.

Payroll processing methods

You can handle payroll manually, with payroll software, or through an outsourced provider. The right choice depends on your business size, your budget, and how much time you can give to payroll admin.

Manual payroll using spreadsheets gives you full control at no cost beyond your time, but it’s error-prone and hard to scale. You’re responsible for tracking rate changes, filing deadlines, and calculation accuracy. For businesses with more than a few employees, the risk of mistakes often outweighs the savings.

Payroll software automates calculations, generates payslips, and can help you file statutory contributions. Cloud-based solutions let you run payroll from anywhere and keep your data secure. The upfront cost is offset by time savings and fewer errors, especially as your team grows.

Outsourcing to a payroll provider means handing the entire process to a specialist. This frees up your time and reduces compliance risk, but it costs more and gives you less direct control. It can be a good option if you lack in-house expertise or your payroll is complex.

How to choose payroll software

The right payroll software handles Malaysian statutory requirements automatically and connects with your accounting. Choosing well can save you hours each month and help you avoid costly mistakes.

Start by checking that the software handles Malaysian statutory requirements out of the box. It should calculate PCB automatically using the latest LHDN schedular tax deduction tables, and manage EPF, SOCSO, and EIS contributions without manual input.

Look for MyInvois compatibility. Malaysian businesses with annual turnover of RM1 million or more must now issue e-invoices through LHDN’s MyInvois system, so choose accounting software that supports this integration.

Cloud-based software gives you access from anywhere and backs up your data automatically, which helps if you travel or manage your business remotely. Xero’s cloud-based accounting software connects with payroll and HR tools to keep everything in one place.

Consider how well the software integrates with your existing tools. Payroll connects to your accounting, banking, and HR systems, so smooth integration reduces double entry and gives you a clearer picture of your finances.

Think about scalability, and choose software that grows with your business. What works for three employees may not suit 30, so check that pricing is transparent and adding employees is straightforward.

Finally, check what support is available to get you up and running quickly, such as onboarding help and local support channels. Xero experts offer one-on-one video or phone set-up calls so you can start using Xero with confidence.

Simplify your payroll with Xero

With the right tools, payroll becomes a routine task. You can automate calculations, meet your filing deadlines, and give your employees confidence they’re paid correctly.

Xero brings your accounting and business finances together in one cloud-based platform, and connects with payroll apps such as HReasily and Talenox. You can track employee costs, manage expenses, and stay on top of your statutory obligations without juggling spreadsheets or paperwork. Everything is accessible from your laptop or phone, so you can check your payroll costs wherever you are.

Spend less time on admin and more time on the work that matters to you. Sign up to get one month free and see how Xero helps you manage payroll with less effort.

FAQs on payroll in Malaysia

Here are quick answers to common questions about running payroll in Malaysia.

What is payroll?

The full cost of payroll includes gross wages plus your own employer EPF, SOCSO, and EIS shares and any HRDF levy. Budgeting for these amounts from the start helps you price roles accurately.

How is payroll calculated in Malaysia?

Start with gross pay, which is base salary plus any overtime, allowances, or bonuses. Deduct PCB, the employee’s 11% EPF share, SOCSO, and EIS, and the remaining amount is net pay.

What are the mandatory payroll deductions in Malaysia?

You must withhold four mandatory deductions from employee wages: PCB for income tax, EPF for retirement, SOCSO for social security, and EIS for employment insurance. You also pay your own share of EPF, SOCSO, and EIS on top of the employee’s wages.

What is the difference between payroll and salary?

Salary is the agreed amount you pay an employee for their work, and it’s one input into payroll. Payroll is the wider process of calculating that salary, applying deductions, paying staff, generating payslips, and filing statutory returns.

How often should I run payroll in Malaysia?

Most Malaysian businesses run payroll monthly, which aligns with the PCB, EPF, SOCSO, and EIS filing deadlines. Under the Employment Act, you must pay wages within seven days after the end of each wage period.

Can I outsource payroll in Malaysia?

Yes, many Malaysian businesses outsource payroll to specialist providers to save time and reduce compliance risk. You remain legally responsible for accurate, on-time statutory filings, so choose a reputable provider and review their work regularly.