Understanding Payroll System in Indonesia
Navigating the tax system in one’s own country is no walk in the park. Getting familiar with the payroll system in another country, however, presents tougher challenges as well as possible misunderstandings.
The payroll system in Indonesia is no exception: its rather complex tax system and ever changing laws make it tricky for foreign investors to keep up with the regulations and the amount of paperwork that needs to be submitted to the tax authorities.
- Employees Basic Rights
- The typical working hours for full-time employees are 40 hours per week -approximately 8 hours a day over 5 days.
- By law, employees must be paid a regional minimum wage, which varies according to province, district and industry
- Employees are entitled to social security and health insurance scheme.
- Employees are to receive a statutory payment in lieu of annual leave, maternity leave, sickness and personal leave based on their employment contract
- Employees are entitled to religious holiday allowance based on their employment contract
- Employees are entitled to overtime rates. Again, these may change according to the employer and type of industry.
An incentive is a financial reward that employees receive on top of their regular salary. Incentives can be provided in the form of individual or group incentives and usually consist of overtime benefits (an amount of money that employees receive when they work extra hours) or as rewards for having reached a certain target set by the company.
- Social Security
BPJS Ketenagakerjaan is a mandatory payment to ensure that employees are financially protected while working for their employer. These funds include work accident insurance, life insurance, provident fund benefit and pension fund. The BPJS Keternagakerjaan is calculated as follows:
- Occupational accident/work accident insurance is 0.24% – 1.74% of the monthly salary, which must be solely paid by the company.
- Death benefit/life insurance is 0.3% of the monthly salary, which must be solely paid by the company.
- Provident fund benefit, which is 5.7% of the monthly salary. This benefit must be paid by both the company (3.7%) and the employee (2%) and can be withdrawn when the employee reaches 55 years of age or leaves the company.
- Pension fund/old age insurance is 3% of the monthly salary and must be paid by both the company (2%) and the employee (1%).
- Health Insurance
In Indonesia, BPJS Kesehatan is another case of mandatory payment and is shared between the employee and the employer. The maximum amount of money to be paid by the employer is capped at 4% out of a maximum salary of IDR 8,000,000 and the minimum amount paid by the employee is 1% of the employee’s minimum regional wage.
- Tax Requirements
The company should pay and report the Employee Withholding Tax Article 21 (PPh 21) which is due by the 10th of the following month and must be submitted to the tax office by the 20th of the following month. Any late payments and reports will incur a fine that is payable to the tax office.
- Annual Leave, Maternity and Sickness Pay
Rules and conditions concerning employees’ paid leave vary from company to company and usually require employees to follow a standard procedure.
After one year of service, workers in Indonesia are entitled to minimum 12 days of leave. When and how employees are allowed to take their leave is up to the company itself, as Indonesian law does not provide specific guidelines on this topic. However, leave must always be paid in the form of regular salary and any unused days should be compensated in lieu to the employee.
In Indonesia, mothers are entitled to 3 months of paid maternity leave with no time-off paternal leave given to fathers. Generally, maternal leave is claimed 1.5 months before delivery and 1.5 months after giving birth, during which period the company must pay employees their salaries in full. Special arrangements, such as extending maternity leave, can be made following a doctor’s recommendation.
In case of employees’ leave due to sickness, the company should not treat it as annual leave, but follow this system instead:
- During the first 4 months of absence, the company should pay employees 100% of their wages.
- During the second 4 months of absence, the company should pay employees 75% of their wages.
- During the third 4 months of absence, the company should pay employees 50% of their wages.
- For any subsequent months, the company should pay employees 25% of their wages.
- In addition to menstrual leave (for female workers), employees are paid in full if they cannot perform their duties in the first and second day of their menstrual cycle.
In the payroll system in Indonesia, employees are entitled to paid personal leave in the following circumstances:
- Worker’s marriage (3 days),
- Worker’s child’s marriage (2 days),
- Worker’s son’s circumcision (2 days),
- Worker’s child’s baptism (2 days),
- Worker’s wife giving birth or having a miscarriage (2 days),
- Death of worker’s close family members (spouse, child, parents and in-laws) (2 days),
- Death of worker’s extended family (1 day)
- Salary Structure Submission
The salary structure and scale is made up of wages ranging from the lowest to the highest and vice versa, which include the range of nominal wages for each class/job position.
Companies must have a clear payroll structure in place with detailed information of role description, duration of employment, education and competence, appointed by the company management in the form of company decree.
Indonesian regulations stipulate that companies shall arrange and implement the Structure and Scale of the Salary according to the regulations of the Ministry of Manpower.