Indonesia Payroll Guide: Rules, Regulations, and Compliance

Indonesia is the fourth most populous country globally, with more than 50% of its population on the payroll. With the surge in economic growth after the pandemic, the job market is booming once again after a hiatus of 2 years.

With attractive incentives for foreign investors, Indonesia has become a hotspot for foreign businesses worldwide. Starting a business in Indonesia has become simpler over the years despite the paperwork, norms, and labor laws. 

Thus, it is best to be aware of the practices in employing Indonesians before starting your business. One such employment activity is processing payroll in Indonesia. This article helps you understand the nuances of payroll rules and regulations in Indonesia.

Three laws govern Indonesia’s payroll:

1. Manpower Law No 13/2003 
2. Law No 2/2004 on Industrial Relations Dispute Settlement and 
3. Law No 21/2000 on Employee/Labour Union.

Employers need to stay updated with the provisions of these laws to stay legally compliant with all the rules and regulations.

Minimum wages are paid to employees irrespective of the type of employment, being probationary, regular, or contract basis.

Although there is no minimum wage set for the employees, it can be calculated using the following formula:

New minimum wage = current minimum wage + [current minimum wage x (inflation + % GDP annual increase)]

Indonesian payroll has many fixed and variable components, apart from the basic pay.

Basic Pay

Basic pay consists of the employees’ minimum wages agreed to be paid for the hours worked per day.

Basic or minimum pay = per hour wage (as agreed) * number of hours worked.

Note: Basic or minimum salary differs according to province, district, and sector.

Allowances

Social Security

BPJS for health care and BPJS for social security, including work accident insurance, life insurance, and pension benefits.

Leave or allowance

Any paid leave unused by the employees is allotted as an allowance in the employee’s payslip. This applies to sick leave, maternity leave, annual leave, and personal leave.

THR allowance for religious festivals.

Overtime Pay

The normal working hours of an average employee in Indonesia is 

• 7 hours a day or 40 hours a week for the 6-day work week and 
• 8 hours a day and 40 hours a week for a 5-day workweek.

When an employee works more than the stipulated normal working hours in a week, then the work is accounted for as overtime and is calculated as follows.

The number of hours allowed as overtime is 3 hours per day, and 14 hours per week.

Overtime In a normal workweek

Overtime worked during holidays

Annual Paid Holiday

Every employee that completes one year with a company gets 12 days of paid leave at the end of the year. An employee who has not completed a year with the current company is allowed paid leave on a pro-rata basis.

Tunjangan Hari Raya / Religious Holiday Allowance‍

Every employee who completes a month of employment is entitled to the 13th-month pay which is otherwise counted as THR  religious allowance. The Indonesian Government has mandated every company to pay its employees financial assistance for the longest religious festivities observed by them. So the employees receive this allowance during festival time.

For instance, every person is paid their THR allowance during their respective festivals as follows:

The other paid holidays given to employees may include: 

• Sick Leave 
• Maternity leave of up to 3 months [1.5 months before the childbirth and 1.5 months after]
• Paternity leave of up to 2 days
• Marriage leave of 3 days for self and 2 days for son/daughter’s marriage
• Bereavement Leave of up to 2 days 

Deductions

Certain reliefs and deductions are allowed for individual residents to exclude their total pay from their taxable income. 

For non-resident individuals, their gross income is subject to a 20% withholding tax applied on their gross income from Indonesia unless otherwise stated by the double taxation treaty.

PPh 21 is the Income Tax to be determined from the taxable Income of the employee. 

After calculating allowances, cost of employment,  BPJS Ketenagakerjaan + BPJS Kesehatan [social security components], Income tax [PPh 21] is calculated.

To calculate Taxable Income‍

Gross Income – Costs = Net Income

Net Income – PTKP [Non-Taxable components] = Taxable Income

Non-Taxable Income (Penghasilan Tidak Kena Pajak/PTKP)

The tax obligations of a married person are different from those of a non-married person. PTKP is a deduction from the Net Income of an individual taxpayer based on their marital and parental status.

A citizen having not more than 3 children and is married, can make use of this non-taxable component to be deducted from their net income.

Individual taxpayers get a limit of up to IDR 54,000,000 while, married taxpayers get IDR 4,500,000 additional to IDR 54,000,000

If the taxpayer has a working spouse, the wife’s income is clubbed with the husband’s income as indicated in Article 8 of the Income Tax Law.

For each child up to a maximum of 3 children, an additional IDR 4,500,000 can be deducted. 

Occupational Cost

The occupational or office cost is the deduction made at 5% of the gross income of the individual taxpayer to a maximum of IDR 6,000,000. The 5% occupational cost is the cost of hiring, maintaining the employee, etc. 

Pension Cost

Pension annuity is deducted from the gross income at 1% of the gross income up to a maximum of IDR 90,776/month.

Social Security

The employee contribution to social security is deducted at 2% of Gross Income. This is the contribution towards BPJS Ketenagakerjaan – the old age security savings for the employee.

When a company employs a person in Indonesia, the employee is filed with the Social Security Registration organization. Then the employee’s work record is monitored and used for accounting for the work done every month by the employers.

Pre-payroll Activities

To get to the actual payroll processing from the ground up, pre-processing activities must be done. This is the most crucial stage as you gather your data and set the base for the entire payroll management. The process needs pre-planning and set-up for the whole processing to happen. 

Pre-planning goes in two stages.

Understanding laws, regulations and policies‍

The payroll consists of Basic Salary, Taxable Benefits, Non-Taxable Benefits and Allowances. Benefits in kind and monetary benefits are given as part of the salary Package.

Establishing payroll policies like pay policy, overtime policy, leave policy, bonus policy, mandatory benefits, Social Security Funds, etc.

Inputs for the Payroll Processing‍

After learning about the policies that govern the payroll, the data to process the payroll must be gathered.

There are various types of data that you must gather during the pre-processing phase.

• Employee Data
• Data pertaining to the position of the employee
• Number of hours worked
• Overtime data
• Bonus
• One-time payments
• Arrears of Salary

Tax and Deductions Data‍

Gathering data about income-tax and the deductions and other computational data is important for payroll processing. This includes,

• Income tax brackets
• Pension Fund Contribution
• Old Age Security Contribution
• Non-taxable income components of the salary package
• Occupational costs levied on the employee

Data Validation and Security‍

Accumulating data is not efficient if the data is not validated for accuracy. Once the data is validated and has passed as error-free, then the payroll pre-processing activities come to an end.

The actual payroll processing begins with computational activities with the acquired and consolidated data. 

The attendance, leave data and deductions and taxes are computed and fed into the payroll systems for the timely payment of the employee salaries.

Statutory Compliance

All the data accumulated in the pre-processing stage dealing with compliance is used here. The actual payroll processing is filled with computations that are directed by the statutory regulations. This leads to payroll management following all the compliance regulations associated with the Manpower Law.

Payroll Accounting‍

Once the computation is done, the accounting of the salary and the various fixed and variable components are made. This accounting is then forwarded to the accounting department of the company.

Payout and Payslip‍

The employees are paid at the end of every month their minimum wages along with the mandatory benefits and the variable benefits. 

The salary paid to the employees is the last leg of the payroll processing and one regulation that the salary in Indonesia should be paid in Indonesian Rupiah should be adhered to. The salary paid and the tax information is reported to the company which will help the company to analyze the cost incurred on the employee vs the economical benefit reaped by the company.

Once the payroll processing is complete, the company can analyze the reports with the cost of an employee and the department to see what needs to be carried on as per profitability to the company.

Upon hiring an employee in Indonesia, an employment contract is signed, and it has clear instructions in Indonesian Language and English about the various provisions on the minimum wage or the basic pay and the details of the allowance allotted for the employee.

This contract also outlines the overtime pay and the leave available for employees.

The allowances given by the company to its employees are of two types.

1. Mandatory Benefits
2. Variable or Optional or Fringe Benefits

Mandatory Benefits

Apart from THR Allowance and Paid Annual Holidays, some other mandatory benefits as enlisted in the Indonesian Law are:

Social security benefit – Badan Penyelenggara Jaminan Sosial (BPJS)

Badan Penyelenggara Jaminan Sosial (BPJS) has two components. 

1. BPJS Kesehatan [Health insurance] and 
2. BPJS Ketenagakerjaan [Social Security Program]

Health Insurance Covers the healthcare for the employees and their family not exceeding five members [Employee, spouse and up to three children]

The Social Security funds protect the employees from 

• Work-Related accidents, 
• Death
• Retirement Benefits

Contribution by the employer and the employee:

The Employer contributes 100% to the:

1. Work-related injury insurance [at 0.24% – 1.74% varies based on the nature and quantum of risk involved in the work]
2. Non-work related accidental death insurance (JMT) [at 0.3%]

BPJS Kesehatan [health insurance]

BPJS Ketenagakerjaan [Pension and retirement]

Taxes Payable

Income tax is structured in a progressive fashion in Indonesia.

The Income Tax rates are as follows:

• Gross Income [Indonesian Rupiah] Tax Rate [in %]
• 0 to 60 Million IDR 5%
• IDR 60 Million to IDR 250 Million 15%
• IDR 250 Million to IDR 500 Million 25%
• IDR 500 Million to IDR 5 Billion 25%
• Above IDR 5 Billion 30%

For non-resident individuals, the general withholding tax is 20% for all their Indonesian-sources income.

Income Tax is retained on a monthly basis, and the annual tax return is to be filed by the employee on 31st March every year.

Corporate Tax is levied at 20% and VAT is levied at 10%.

The payroll cycle in Indonesia is monthly and is usually paid on the last working day or any other date as agreed in the employment contract.

13th Salary

The 13th-Salary is a mandatory bonus paid to every employer. 

In Indonesia, there is a mandatory religious holiday bonus in Indonesia called Tunjangan Hari Raya (THR) payment. If the employee has not completed one year of service, then THR payment is paid on a prorated basis.

THR allowance is allotted at 100% of base salary and fixed monthly allowance.

Every company can have its own in-person team to handle HR and payroll in Indonesia. 

Companies can also outsource payrolling.

If a company is looking for a global employment solution to handle their payroll, compliance, and onboarding, they must opt for an Employer of Record.

If the company only needs HR functions like payroll, benefits, and compliance management, the company must opt for a PEO [Professional Employer Organization].

How to Set Up a Payroll in Indonesia

When you want to set up payroll for your company, you first need to start by registering the company in Indonesia.

The steps involve:

• Registering your company
• Bank Clearance
• Notarising your deeds and documents
• Getting approval of the deeds and documents with the Ministry of Manpower and Human Rights
• Getting a domicile certificate for the company
• Payment of legal service fees
• Getting a company registration certificate and business trading license
• Registering with the Ministry of Manpower
• Applying for Insurance, Taxes [corporate income tax, VAT and Excise duties] and Social Security Organization for your employees

Once this paperwork is over, you can proceed with hiring your employees.

It is recommended that a legal team advises you on the updates on Manpower Law and other related laws.

Entitlement and Termination Terms

An employee cannot be dismissed or terminated at the drop of a hat in Indonesia.

Even in the case of underperforming employees, the company is mandated to:

1. Provide proper training to improve the employee’s performance.  
2. If the underperformance persists, the employers have to give a series of warnings and proper guidance over six months. 
3. Two additional warnings are issued before terminating such employees.

Article 153 of the Labor Law prohibits companies from terminating employees who are unable to work:

• Due to illness for more than 12 months, 
• Due to performing state duties according to laws and regulations,
• Due to performing religious rights,
• Due to pregnancy, maternity leave, miscarriage or nursing a baby

The law also offers protection for employees who:

• Are members of the labor union and conduct activities of the union outside working hours
• Report the employer regarding a criminal offense
• Come from a particular religious or political belief, or has a certain ideology, or a certain race, ethnic group, skin color, gender, physical condition or marital status;
• Is permanently disabled or injured in a work accident or is injured due to an employment relationship where, based on a doctor’s statement, the recovery period required cannot be predicted.

Managing payroll in Indonesia is a long process filled with many compliance requirements. Employers need to be acutely aware of deductions and employer contributions to ensure employees receive their salaries accurately and in a timely manner.

‍Multiplier can help you manage payroll in Indonesia with a single click. Our SaaS-based global employment solution helps businesses of all sizes handle mass payouts without an entity in the country. Using our global payroll solution, employers can ensure 100% payroll accuracy and overcome compliance and payroll hassles with ease.