What is Statutory Employment Income? Definition, Components, and FAQ

Statutory employment income includes all payments employees receive from their jobs, such as salaries, bonuses, and commissions.

Since these earnings are taxable, employers must handle deductions correctly to comply with Malaysian tax laws.

We’ll discuss what falls under statutory employment income, how it is taxed, and the employer’s role in managing payroll deductions like EPF, SOCSO, and PCB.

What is Statutory Employment Income?

Statutory employment income refers to all earnings employees receive for their work. This includes salaries, bonuses, commissions, and other job-related payments.

It is defined under Malaysia’s Income Tax Act 1967, which means it must be taxed and deducted based on government regulations.

Unlike non-statutory income, which comes from freelancing, business profits, or investments, statutory employment income is paid by an employer and comes with mandatory deductions such as:

EPF (Employees Provident Fund) for retirement savings
SOCSO (Social Security Organisation) for workplace injury and disability protection
EIS (Employment Insurance System) for financial support if an employee loses their job
PCB (Potongan Cukai Bulanan) for monthly tax deductions

Who is Considered a Statutory Employee?

A statutory employee is someone who works under an employment contract, receives a salary from an employer, and has their earnings reported to LHDN (Lembaga Hasil Dalam Negeri Malaysia) for tax purposes.

These employees are entitled to employment benefits and must have their statutory deductions handled by their employer.

Statutory Employees vs. Independent Contractors

Some workers are independent contractors rather than statutory employees. The difference?

Statutory employees work under company supervision, follow company rules, and receive salaries with deductions.

Independent contractors work for themselves, provide services to multiple businesses, and must handle their own taxes.

Employers must be careful when classifying workers. Mislabeling an employee as an independent contractor can lead to fines and legal issues.

Components of Statutory Employment Income

Statutory employment income consists of different types of earnings and benefits that employees receive. Here are the key components:

1. Basic Salary

The core income that employees receive every month, before any deductions.

2. Allowances

Employers may give extra payments for housing, transportation, meals, mobile usage, and other needs.

Some allowances are taxable, while others may be tax-free depending on LHDN’s guidelines.

3. Bonuses and Incentives

Annual bonuses, performance incentives, and the 13th-month salary are part of an employee’s taxable earnings.

These payments increase an employee’s tax deductions for that month.

4. Commissions and Overtime Pay

Sales commissions and overtime wages are also taxable and must be included when calculating EPF, SOCSO, EIS, and PCB deductions.

5. Perquisites and Benefits-in-Kind (BIK)

If a company provides a car, accommodation, medical benefits, or education sponsorship, these are considered benefits-in-kind (BIK) and are taxable.

This must be declared to LHDN.

6. Employer Contributions to EPF & SOCSO

Employers must contribute to their employees’ EPF and SOCSO funds every month.

This helps employees save for retirement and provides financial protection in case of workplace injuries.

How is Statutory Employment Income Taxed in Malaysia?

Statutory employment income is taxed based on government rules, and employers must deduct and report employee earnings correctly to avoid fines.

Taxes are deducted through the Monthly Tax Deduction (MTD/PCB) system, and a way to help employees pay their taxes in smaller amounts throughout the year, instead of a lump sum.

Some parts of an employee's income may be tax-free, depending on the type of allowance or benefit.

1. Monthly Tax Deduction (MTD/PCB) System

Employers must deduct PCB (Potongan Cukai Bulanan) from employees’ salaries each month and send it to LHDN.

This system spreads out income tax payments over the year, so employees don’t have to pay a large amount at the end of the year.

2. Tax Exemptions and Reliefs on Employment Income

Not all parts of an employee’s salary are taxable.

Certain allowances, medical reimbursements, and travel expenses can be tax-free.

Don’t forget to always refer to LHDN’s guidelines when setting up payroll.

3. Taxation of Benefits-in-Kind (BIK) and Perquisites

Some non-cash benefits, such as company-provided housing, cars, or childcare benefits, are considered taxable benefits. Calculate those values and report them to LHDN, too.

Employer Responsibilities for Statutory Employment Income

Handling statutory employment income correctly is essential for businesses to stay compliant with Malaysian laws. To do this, employers must fulfill these responsibilities:

1. Deduct and Submit PCB Every Month

Before paying salaries, deduct PCB tax and send it to LHDN. Missing payments can result in penalties, making it difficult for employees to handle the PCB tax.

2. Issue Form EA and Form E Every Year

Prepare Form EA (a summary of an employee’s income and deductions) and give it to employees by February 28.

Form E, which reports all employees' earnings, must be submitted to LHDN by March 31.

3. Report Employee Income to LHDN

Ensure to have an accurate report of employees' taxable earnings, including salary, allowances, bonuses, and benefits-in-kind (BIK), to LHDN.

4. Provide Payslips and Income Statements

Detailed payslips should be given to the employees every month, showing salary breakdowns and deductions, so employees understand their net take-home pay.

5. Avoid Penalties for Non-Compliance

Failure to deduct and submit EPF, SOCSO, EIS, or PCB on time can lead to fines, legal action, or audits from LHDN.

Keeping up with regulations is important to prevent these risks.

FAQ

What is statutory income from employment in Malaysia?

Statutory employment income includes all taxable earnings from an employer, such as basic salary, bonuses, commissions, overtime pay, and benefits-in-kind (BIK).

What is the statutory contribution in Malaysia?

Statutory contributions are mandatory deductions from an employee’s salary, including EPF (retirement savings), SOCSO (social security), EIS (job loss protection), and PCB (income tax deductions).

What is the minimum salary for income tax in Malaysia?

Employees earning RM34,000 per year (around RM2,833 per month) after EPF deductions are required to pay income tax.

How much is employee income tax in Malaysia?

Income tax rates range from 1% to 30%, depending on annual income. Employers must deduct PCB based on LHDN’s tax rates.

Need to hire employees in Malaysia?

Post your job ads on Maukerja, Ricebowl, LinkedIn, and Google with AJobThing to find the best talent today!