Foreign companies employing staff in Indonesia must build payroll around Indonesian rules on wages, overtime, income tax, social security, and the Religious Holiday Allowance (THR). These requirements affect both how employees are paid each month and the additional payments or deductions that arise during the employment relationship.
Which Wage Rules Must Be Built into Payroll?
Indonesia’s minimum wage generally applies to employees with less than one year of service at the company. For employees with at least one year of service, wages should be determined with reference to the company’s wage structure and scale.
Minimum wages are set annually and can differ between provinces and regencies or cities. Employers operating in several locations cannot assume that one minimum wage applies across the entire Indonesian workforce.
Setting up payroll in Indonesia? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Payroll also needs to distinguish between components of remuneration. Basic salary, fixed allowances, variable allowances, bonuses, commissions, and other payments can receive different treatment when calculating legally required employee payments.
How each payment is classified matters because different wage components can affect overtime, THR, termination payments, and other payroll calculations differently.
How Must Overtime Be Calculated?
Overtime rules apply where eligible employees work beyond normal working hours or work on weekly rest days or public holidays.
Overtime cannot simply be calculated using the employee’s normal hourly pay. Indonesian rules prescribe how the hourly wage and overtime multiplier are calculated, with the amount depending on when and how long the employee works overtime.
Not every employee is necessarily entitled to overtime pay. Certain employees in roles that meet the applicable criteria can be excluded, but this should be properly reflected in the company’s employment arrangements rather than assumed from a job title alone.
How Should BPJS Contributions Be Handled?
BPJS Ketenagakerjaan should not be treated as a single contribution rate. It consists of separate programs, including Old-Age Security (JHT), Work Accident Security (JKK), Death Security (JKM), Pension Security (JP), and Job Loss Security (JKP), with different contribution and participation rules for each program.
For example, JHT contributions for salaried employees are generally 5.7% of wages, comprising 3.7% paid by the employer and 2% by the employee. JKK is paid by the employer at a rate linked to occupational risk, while JKM is also employer-funded.
Foreign workers require separate treatment. Foreign nationals who work in Indonesia for at least six months are required to participate in applicable BPJS Ketenagakerjaan programs, but they cannot participate in JP or JKP.
This is why payroll cannot use one BPJS percentage across the workforce. The contribution calculation must reflect both the program and the employee’s status.
How Is PPh 21 Applied Through Payroll?
Employers are responsible for withholding PPh 21 employee income tax from taxable employment income.
For permanent employees, monthly withholding during most of the year uses Indonesia’s effective monthly rates, known as Tarif Efektif Rata-Rata (TER). In the final tax period, the employer calculates the employee’s PPh 21 based on the annual calculation and reconciles this against the amounts already withheld.
This means payroll should not simply apply Indonesia’s annual progressive personal income tax brackets directly to each month’s salary.
Bonuses, allowances, and other taxable remuneration also need to enter the PPh 21 calculation according to their tax treatment. For foreign employees, compensation for work performed in Indonesia may also need to be included even when part of it is paid outside Indonesia.
How Must THR Be Included in Payroll?
The Religious Holiday Allowance (THR) is a separate payment that employers must incorporate into their annual payroll schedule.
Employees with at least 12 months of continuous service are generally entitled to THR equal to one month’s wages. Employees with at least one month but less than 12 months of continuous service generally receive a proportional amount based on their length of service.
THR must generally be paid no later than seven days before the employee’s relevant religious holiday.
THR must also be included in the employee’s PPh 21 calculation for the relevant payment period.
What Payroll Rules Apply When Employment Ends?
The final payroll for a departing employee can include more than salary up to the employee’s last working day.
Depending on the circumstances, the employer may need to calculate outstanding wages, unused annual leave where payable, unpaid overtime or other remuneration, and legally required termination payments.
Need to correct BPJS treatment in your payroll? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
The amount due on termination cannot be determined from length of service alone. Indonesia’s termination framework distinguishes between different reasons for ending employment, which can change the severance pay, long-service pay, compensation of rights, or other amounts owed.
Termination payments should therefore be calculated according to the reason the employment ends rather than through a single standard severance formula.
What Payroll Records and Policies Should the Employer Maintain?
Salary, fixed allowances, variable remuneration, overtime eligibility, bonuses, deductions, and other contractual payments should be reflected consistently between employment terms and payroll records.
An employer with at least 10 workers must generally establish company regulations unless the company is already covered by a collective labor agreement. Those regulations can cover employment terms that directly affect payroll.
Payroll Compliance with MAP Resources Indonesia
MAP Resources Indonesia helps foreign-owned companies manage Indonesian payroll requirements, including wages, PPh 21, BPJS, THR, overtime, and final employee payments. Contact us at info@mapresourcesindonesia.com.
