Incorporation vs Employer of Record (EoR) in Indonesia: The Smartest Approach to Enter the Market

Income Tax in Indonesia

Income tax withholding is another critical component of payroll in Indonesia. Employers are responsible for withholding taxes from employees’ salaries and reporting these amounts to the tax authorities. Understanding the tax brackets and rates is essential to ensure compliance.

Tax Rates and Brackets

Indonesia follows a progressive income tax system, with tax rates ranging from 5% to 30% depending on the employee’s income level. The tax brackets are as follows:

• 5% for annual income up to IDR 60 million
• 15% for income between IDR 60 million and IDR 250 million
• 25% for income between IDR 250 million and IDR 500 million
• 30% for income above IDR 500 million

Employers must calculate the appropriate tax for each employee based on their income and deduct the tax from their salary. Accurate tax reporting is crucial, as errors in tax calculations or delays in submissions can lead to penalties from the Indonesian tax authorities.

Employer Withholding Responsibilities

Employers are responsible for submitting monthly tax returns on behalf of their employees. These returns must include details of the employee’s income, tax withheld, and any other relevant information. Additionally, employers must issue annual tax slips (Form 1721-A1) to employees, summarizing their income and tax withholdings for the year.

Non-compliance with tax withholding obligations can lead to significant fines and interest charges. Employers should implement a robust payroll system that handles tax calculations and reporting accurately to avoid these risks.

Leave and Benefits

Indonesian labor laws also mandate specific employee benefits, including paid leave and health insurance. Employers must ensure they comply with these regulations to avoid legal challenges from employees.

Mandatory Leave Policies

Employees in Indonesia are entitled to various types of leave, including annual leave, sick leave, and maternity leave. The minimum statutory leave entitlement is 12 days of paid leave per year, which employees can take after completing one year of service. Employers must ensure that employees receive their full leave entitlements and are compensated accordingly.

Maternity leave is another important benefit, with female employees entitled to three months of paid maternity leave—1.5 months before and 1.5 months after childbirth. Employers are required to cover the employee’s full salary during this period.

Social Security and Health Insurance Obligations

In addition to BPJS contributions, employers may offer supplementary benefits, such as private health insurance or additional pension schemes. While these are not mandatory, they can help attract and retain top talent. Employers should clearly communicate these benefits to employees and ensure that they are integrated into the payroll system.

When Non-Compliance May Occur

Failing to comply with Indonesia’s payroll regulations can result in significant penalties, legal disputes, and damage to the company’s reputation. Below are common areas where non-compliance may occur and how to avoid them.

Delayed Salary Payments

Employers must ensure that salaries are paid on time according to the terms outlined in the employment contract. Delayed salary payments can lead to employee disputes and fines imposed by the authorities. To avoid this, businesses should implement automated payroll systems that ensure timely payments.

Missed BPJS Contributions

Employers who fail to meet BPJS contribution deadlines may face financial penalties and a loss of insurance benefits for employees. It is essential to establish a payroll system that calculates BPJS contributions accurately and ensures that payments are submitted on time.

Incorrect Tax Withholding

Failing to withhold the correct amount of tax or delaying tax submissions can lead to penalties from Indonesian tax authorities. Employers must ensure that tax calculations are accurate and that taxes are reported and submitted by the required deadlines.

Non-Compliance with Leave Policies

Employers who fail to provide employees with their statutory leave entitlements may face legal challenges and claims for compensation. Businesses should familiarize themselves with the leave entitlements mandated by Indonesian labor laws and ensure that employees are granted the appropriate amount of paid leave.

How AYP Can Help

Managing payroll in Indonesia can be challenging, especially when it comes to staying compliant with labor laws, social security contributions, and tax regulations. AYP offers a comprehensive range of services to help businesses manage payroll efficiently while ensuring full compliance with Indonesian regulations.

Professional Employer Organisation (PEO) Services

AYP’s PEO services allow businesses to outsource payroll management, including salary payments, tax withholding, and BPJS contributions. We take care of all employer responsibilities, ensuring that your company stays compliant with local labor laws and regulations.

Employer of Record (EOR) Services

As an Employer of Record, AYP serves as the legal employer for your workforce in Indonesia. We handle all payroll and administrative tasks, allowing businesses to focus on their core operations without worrying about compliance issues.

Payroll Outsourcing Management (POM) Services

AYP’s Payroll Outsourcing Management (POM) services provide end-to-end payroll solutions, including salary calculations, BPJS contributions, tax reporting, and employee benefits management. By outsourcing your payroll to AYP, you can ensure that your payroll processes are accurate, compliant, and efficient.