Effective Payroll Management in Indonesia with EOR

Managing payroll for a country where you don’t understand the regulations can be a very tough challenge, but effective payroll management is essential for ensuring compliance and employee satisfaction.

Companies that want to be successful in international markets must ensure that they comply with local regulations and provide the best experience for their employees. This article will explain why effective payroll management in Indonesia is so important for your business and how to service it Employer of Record (EOR) can help.

Misalnya di Indonesia, The government issued Regulation Number 16 of 2022, which governs the Religious Festivity Allowance (THR) and the 13th Month Salary Bonus for State Civil Apparatus, Pensioners, and Allowance Beneficiaries. This regulation aims to boost the purchasing power of the populace through the expenditure of state apparatus. For more detailed information, you can visit the official announcement on the Cabinet Secretariat website​ (Republic of Indonesia Cabinet Secretariat)​.

 

That’s just one thing from the regulations that must be provided, of course, this will be confusing for you. Because maybe your country doesn’t have a “Holiday Allowance (THR)”

 

Abhitech has made an article about THR here.

Why do we need Effective Payroll Management?

Effective Payroll management involves the processes through which employers pay wages and salaries to their employees. It encompasses a variety of tasks, including:

  • Establishing payroll policies
  • Defining remuneration components and packages
  • Onboarding new hires and removing leavers from the payroll system
  • Gathering inputs, such as hours worked, and deductions, like pension contributions
  • Calculating and verifying employee payments and tax obligations
  • Running payroll software
  • Distributing payslips
  • Handling accounting tasks
  • Conducting reporting activities

These tasks ensure that employees are paid accurately and on time and that the company complies with legal and tax obligations.

Ensuring International Payroll Compliance with EOR Services

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If elaborated at least there are 5 reasons why effective Payroll Management with EOR helps your company to develop in Indonesia.

1. Compliance with Local Regulations

Effective payroll management ensures that companies adhere to local regulations such as tax income and social security contributions. Indonesia has a number of employment and tax regulations that are different from your country. Non-compliance with these rules can result in large fines and reputational damage.

For example, companies must understand the relevant regulations

  1. Tax income

    On January 1, 2024, the government introduced significant changes to the calculation of Income Tax (PPh 21) by adopting the latest Average Effective Rate (TER), as stipulated in Government Regulation Number 58 of 2023.

    Yes, the regulations were only updated on January 1 this year.

    You can read more about it here.

    Matter This makes the tax calculation process slightly different from the previous one.

  2. Social security

    For example, old age insurance (JHT)Old Age Security is regulated in PP No. 46 of 2015 concerning the Implementation of Old Age Programs. Based on the PP, Old Age Security is a sum of money that is paid at once when a worker reaches retirement age, experiences permanent total disability, and dies.

    The monthly JHT contribution is 5.7%, of which 3.7% will be paid by the company and the remaining 2% will be paid by the employee.

    Therefore, the 2% salary deduction for JHT payments must be included on the pay slip so that it can be known by the employee concerned.

    For more details about Old Age insurance, you can read here.

  3. Other mandatory benefits.

    Such as transportation allowances, meals, and holiday allowances. and this can be different if your employees are contract or full-time.

    Indonesia’s labor regulations encompass various aspects such as minimum wages, working hours, leave entitlements, and severance payments. Ensuring compliance with these regulations is crucial not only to avoid penalties but also to maintain good relationships with employees and local authorities. For more detailed information, you can refer to the Ministry of Manpower’s website.

Corporate Payroll Services to Manage Global Workforce in Indonesia

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Errors in payroll management can result in significant financial penalties and legal disputes. Effective payroll management helps minimize these risks by ensuring accuracy and compliance. According to BusinessDIT Mistakes in payroll management can result in significant financial penalties and legal disputes. For example, according to one study, payroll errors cost US businesses an estimated $13.7 billion annually. Such errors, which can include underpayments, overpayments, and late payments, often lead to employee dissatisfaction and potential legal issues​.

Personal Today As a result, 80% of companies spent 12 hours or more per month on payroll error correction. Half of the respondents told researchers that they believed updating their payroll systems would improve matters. More than half (53%) reported that investigating and correcting payroll errors accounted for the most time-consuming element of their work.

Payroll errors not only consume valuable time but also highlight the critical need for updated payroll systems to enhance accuracy and efficiency in payroll management.

Paycom According to research by Ernst & Young (EY) and reported by Paycom, the average cost for a company to fix a single payroll mistake is $291. These errors not only incur direct financial costs but also risk fines and penalties due to noncompliance with regulations. Additionally, payroll mistakes can have serious mental and financial consequences for employees. EY’s study involved U.S. businesses with 250 to 10,000 workers and included interviews with over 500 individuals who interact with the payroll process.

By entrusting payroll management to Employer of Record (EOR) services, companies can minimize this risk. EORs have in-depth knowledge of local regulations and can help reduce costly errors.

Inaccurate payroll management can cause problems such as underpayment or overpayment to employees, which in turn can affect employee morale and overall company performance. By using EOR services, companies can ensure that all payments are made correctly and on time, thereby avoiding conflicts with employees and legal problems.

3. Increase Operational Efficiency

Effective payroll management can reduce the company’s administrative burden. By using EOR services, companies can save time and resources that can be allocated to core business activities.

The HR Magazine article further adds that UK businesses are losing up to £150,000 a year through payroll errors, with 91% of businesses admitting to making payroll errors monthly. This often leads to negative publicity and high employee turnover, further increasing costs due to recruitment and training.

A messy payroll can cause high employee turnover. This is caused by dissatisfaction overpayment errors, the company’s operational costs increase due to the need to continue recruiting and training new employees. This emphasizes the importance of an accurate and efficient payroll system to reduce the risk of errors and additional costs.

Outsourcing Payroll in Indonesia for International Companies

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4. Attract and Retain Global Talent

Good payroll management shows the company’s commitment to employee welfare. This can help attract and retain quality global talent. Employees who feel appreciated and paid appropriately are more likely to be loyal and productive.

Frederick Herzberg theorized that employee satisfaction has two dimensions: “hygiene” and motivation. Based on this theory, the factor that motivates employees to take responsibility is compensation.

A report by the Brandon Hall Group found companies that prioritize recognizing their employees multiple times per month are 41% more likely to see increased employee retention and 34% more likely to see increased employee engagement.

Global employees have high expectations for their work experience, including how they are paid. Transparent and efficient payroll management can increase employee satisfaction, which ultimately has a positive impact on employee retention and overall productivity.

5. Flexibility and Scalability

With efficient payroll management, companies can more easily adapt to changes in workforce size or expansion into new regions. EOR services provide the flexibility to manage employee payroll in multiple locations without the need to establish complex payroll infrastructure.

In addition to this flexibility, EOR solutions offer significant cost savings. Whether you are currently using a payroll company or managing payroll in-house, an EOR can help by consolidating various functions. This allows you to save on major expenses related to payroll and allocate those funds to other areas of your business.

Furthermore, EOR solutions handle your employees’ tax responsibilities and ensure proper tax compliance, saving you from long-term hassles associated with tax issues and regulations.

According to Oced.org In addition to flexibility, EOR solutions offer significant cost savings. Whether you currently use a payroll company or manage payroll in-house, an EOR can help by consolidating various functions. This allows you to save on major expenses related to payroll and allocate those funds to other areas of your business. For instance, EOR services can save businesses up to 75% by minimizing recruitment expenses and overhead costs associated with international hiring

Conclusion Effective Payroll Management with EOR

EOR services provide not only flexibility in managing payroll across multiple locations but also significant cost savings. By consolidating payroll functions and ensuring tax compliance, EOR solutions help businesses reduce administrative burdens and reallocate resources to core business activities. This results in improved efficiency and reduced risks associated with payroll management and compliance issues.

To learn more about effective payroll management or how EOR services can benefit your business, whether it’s for comprehensive EOR support or formalities, consider partnering with EOR Abhitech or exploring our formalities services. Contact us today to discuss how we can help streamline your payroll and HR processes. Visit our website or reach out directly to our team for more information here.

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