Top 10 Questions about Payroll Services in Indonesia

When managing a business, payroll services play a crucial role in ensuring employees are paid accurately and on time. From calculating wages and taxes to handling deductions and compliance with labor laws, payroll can be complex and time-consuming.

To help you navigate this aspect of business operations, we’ve compiled answers to the most frequently asked questions about payroll services. These FAQs will provide clarity on how payroll services work and how they can benefit your company.

What is payroll service?

A payroll service is a company or system that assists businesses in handling employee payments, such as wage calculations, tax deductions, allowances, and timely salary distribution. It also manages benefits, overtime, and tax reporting, helping businesses comply with labor laws in Indonesia and prevent expensive errors.

What is the difference between payroll processing service and outsourcing service in Indonesia?

Outsourcing is the transfer of the payroll responsibility completely to another entity (provider). Within the outsourcing package, InCorp provides all calculations including payroll service Indonesia (wages, bonuses, tax, health and social security) as well as last mile compliance (submitting all the tax reports to institutions). To make the service complete, we can also fully manage the payments (salaries and tax) as well as payslip distribution.

Payroll processing involves determining the actual wages, including bonuses and other forms of compensation, of an employee. The other activities stay within internal the HR department.

What are the mandatory deductions for Indonesian payroll?

There are at least three mandatory deductions:

• Social Security (BPJS Manpower): This program supports workforce in terms of social risks. It also deals with implementation of the specific economic mechanism of social insurance. The program covers work-related accident (JKK), life insurance (JKM), pension plan (JHT) and retirement contribution (JP).

• Work-related accident (JKK): The percentage depends on the level of risk of the working environment. It is the company’s contribution
  • Group I (very low risk): 0.24 percent from wages per month
  • Group II (low risk): 0.54 percent from wages per month
  • Group III (middle risk): 0.89 percent from wages per month
  • Group IV (high risk): 1.27 percent from wages per month
  • Group V (very high risk): 1.74 percent from wages per month

• Life insurance (JKM): This program is the company’s contribution: 0.30 percent from wages per month.

READ MORE:

• Guide to Tax Obligations and Payroll Compliance in Indonesia
• 8 Payroll Mistakes in Indonesia You May Have been Making over the Years
• Navigating Payroll Outsourcing Service in Indonesia for Small and Medium Enterprises

• Pension plan (JHT): Total percentage 5.7 percent from wages per month.
  • The company’s contribution: 3.7 percent
  • The employee contribution: 2 percent

• Retirement contribution (JP): Total percentage 3 percent from wages per month.
  • The company’s contribution: 2 percent
  • The employee contribution: 1 percent
  • The maximum wage limit as the basis for calculating the contribution of the Retirement program is Rp 8,094,000.

• BPJS Health (National Health Social Agency): The employer will cover a big portion of the BPJS health fees. However, a small portion is deducted directly from the employee wages.

• Withholding Tax: It is the tax withheld by the employer on behalf of the employee. The company pays it directly to the government and makes up a part or the entire income tax of the employee.

How is income tax (PPh 21) calculated for employees?

Calculating Indonesia’s Income Tax (PPh 21) for employees has been simplified with the introduction of the Average Effective Rate (TER) method, with a step-by-step guide as follows:

• Identify Your TER Category
  • Category A: Single with no dependents (TK/0), single with one dependent (TK/1), or married with no dependents (K/0).
  • Category B: Single with two or three dependents (TK/2 or TK/3), or married with one or two dependents (K/1 or K/2).
  • Category C: Married with three dependents (K/3).

• Determine Your Monthly Gross Income: This includes your basic salary and any additional allowances before deductions.

• Apply the Corresponding TER: Each category has a specific TER table that assigns a tax rate based on income bracket.

• Calculate Monthly PPh 21
  • Multiply your monthly gross income by the applicable TER.
  • Example: If you’re in Category A with a monthly gross income of IDR 8 million:
    • According to the TER table, an income of IDR 8 million falls into the 1.5% tax bracket.
    • PPh 21 = IDR 8,000,000 × 1.5% = IDR 120,000

• Annual Reconciliation in December
  • At the end of the year, calculate your total annual income and apply the standard progressive tax rates to determine your annual tax liability.
  • Subtract the total PPh 21 paid from January to November to find out the tax due for December.

Can foreign employees be included in Indonesia payroll service?

Yes, foreign employees can be included in payroll services in Indonesia, but there are specific rules to follow:

• Income Tax (PPh 21)
  • Foreigners staying more than 183 days: Subject to tax on their global income.
  • Foreigners staying less than 183 days: Only taxed on income earned in Indonesia (20% withholding tax applies unless covered by a tax treaty).
• BPJS (Social Security) for Foreign Employees
  • BPJS Ketenagakerjaan (Employment Insurance): Required after 6 months of work, covering accident, pension, and death benefits.
  • BPJS Kesehatan (Health Insurance): Optional, depending on company policy (some companies provide private insurance instead).
• Work Permit & Payroll Compliance
  • Foreign workers need a valid work permit (IMTA) and stay permit (KITAS).
  • Salaries should be paid in Indonesian Rupiah (IDR).
• Tax Treaties
  • If their home country has a tax treaty with Indonesia, they may avoid double taxation by providing a Certificate of Domicile (CoD)

How often should salaries be paid in Indonesia?

Salaries are typically paid monthly, as required by Indonesian labor laws, unless otherwise stated in the employment contract.

How to calculate overtime in Indonesia?

Overtime in Indonesia applies if employees work more than 7 hours a day (6-day workweek) or 8 hours a day (5-day workweek), including weekends and public holidays. The overtime pay rate is 1.5 times the hourly wage for the first hour and 2 times for each additional hour on weekdays, while on weekends and public holidays, it starts at 2 times the hourly wage and increases for longer hours.

To calculate overtime, the hourly wage is found by dividing the monthly salary by 173 hours, and employees can work a maximum of 4 overtime hours per day or 18 per week

Who will submit/pay employee salary tax?

The employee is still responsible for paying the taxes on salary. It is for this reason the employee still needs to file his or her own tax return. However, it is the employer that needs to withhold it through a deduction on the wages and pays it to the government.

What are the penalties for incorrect payroll tax reporting?

Businesses may face fines, interest charges, or legal consequences if they fail to correctly report and pay payroll taxes on time.

What are the things to consider before choosing your payroll service?

When selecting a payroll outsourcing service, consider the following key factors:

• User-Friendly Interface: Ensure the payroll software is intuitive and easy to navigate, reducing the learning curve for your team.
• Scalability: Choose a payroll outsourcing service that can grow with your business, accommodating an increasing number of employees and expanding operations.
• Automation Capabilities: Look for features that automate tasks like wage calculations and tax form generation to save time and minimize errors.
• Tax Compliance: Verify that the payroll outsourcing company stays updated with the latest tax regulations to avoid potential fines.
• Data Security: Opt for a provider that implements robust security measures to protect sensitive employee information.

Payroll Service in Indonesia from InCorp

Having a dedicated team of payroll specialists with extensive experience, InCorp offers quality payroll service to support your company growth in Indonesia.

Talk to us now, complete the form below.