When it comes to payroll tax regulations, understanding the rules and obligations can be a daunting task for both individuals and companies.
For individuals, whether they are classified as permanent employees or non-permanent employees, knowing the tax regulations is crucial. It is important for them to understand their rights and responsibilities as taxpayers, including filing their tax returns correctly and on time.
On the other hand, companies also have a significant role in ensuring compliance with payroll tax regulations. They are responsible for withholding the appropriate amount of taxes from their employees' salaries and reporting these deductions accurately in their tax reports. Understanding the guidelines for calculating payroll tax is essential to avoid penalties or legal issues.
In this article, we will explore the various aspects of payroll tax in Indonesian, and how it applies to different types of employees and organizations.
Definition of Payroll Tax
Pajak Penghasilan, also known as PPh, is a term used to refer to payroll tax in Indonesia. It is a tax imposed on individuals or entities based on their income. The concept of Pajak Penghasilan covers various types of income, including but not limited to salaries, wages, business profits, prizes, and honorariums. The tax applies to both Indonesian residents and non-residents who earn income within the country.
In Indonesia, the regulations surrounding this tax are governed by Law Number 7 of 1983 concerning Payroll Tax. This law has undergone several amendments over the years to accommodate changes in taxation policies. The latest provisions on Payroll Tax have also been refined and regulated in Law Number 11 of 2020 concerning Job Creation (Cipta Kerja), as well as Law Number 7 of 2021 concerning the Harmonization of Tax Regulation (UU HPP).
Provisions of Payroll Tax
The provisions of payroll tax based on Article 9 Chapter V of the Director General of Taxation Regulation Number PER-16/PJ/2016 stipulate the basis for the imposition and deduction of Article 21 Payroll Tax (PPh 21) as follows:
- Taxable income recipients are as follows:
- Permanent employees
- Recipients of periodic pensions
- Non-permanent employees with monthly income exceeding Rp4,500,000
- Non-employees as referred to in PER-16/PJ/2016 Article 3(c) receiving continuous remuneration.
- Individuals receiving income exceeding Rp450,000 per day, applicable to non-permanent employees or freelancers receiving daily wages, weekly wages, unit wages, or lump sum wages, as long as the cumulative income received in one month does not exceed Rp4,500,000.
- 50% of gross income, applicable to non-employees as referred to in PER-16/PJ/2016 Article 3(c) receiving non-continuous remuneration.
In addition, the calculation of PPh 21 is also based on Non-Taxable Income. This means that the imposition of PPh will be reduced by non-taxable income first before applying the payroll tax rate.
Payroll Tax Tariff (Updated)
It is important to note that the calculation of payroll tax will always be adjusted to the Non-Taxable Income rates determined by the Directorate General of Taxes. The current underlying law for non-taxable income is the Harmonization of Tax Laws No. 7 of 2021, Chapter III, Article 7, with the following provisions:
- For individual taxpayers, the non-taxable income is set at Rp54,000,000.
- For married taxpayers, there is an additional non-taxable income of Rp4,500,000.
- The non-taxable income for a wife whose income is combined with her husband's is set at Rp54,000,000.
- If there are additional dependents, a maximum of 3 individuals for blood-related family dependents in a direct line of descent, adopted children, or stepchildren, there is an additional non-taxable income of Rp4,500,000.
Blood-related family refers to biological parents, siblings, and children. Meanwhile, stepfamily includes in-laws, stepchildren, and siblings-in-law.
In addition to adjusting the non-taxable income rates, there are also changes in the progressive tax rates in calculating taxable income. The current progressive tax rates are as follows:
- A 5% rate is applied to taxable income up to Rp60 million.
- A 15% rate is applied to taxable income from Rp60 million to Rp250 million.
- A 25% rate is applied to taxable income from Rp250 million to Rp500 million.
- A 30% rate is applied to taxable income from Rp500 million to Rp5 billion.
- A 35% rate is applied to taxable income above Rp5 billion.
Payroll Tax Objects
Payroll tax objects are grouped into three categories, as follows:
1. Income as Tax Objects
Income that falls under the payroll tax objects is regulated by the Payroll Tax Law and detailed as follows:
- Substitute or compensation: Related to work or services received, including salary, wages, allowances, honorarium, commissions, bonuses, gratuities, industrial money, or other rewards.
- Gifts: In the form of lotteries, work, activities, and awards.
- Business profits.
- Gains from sales or price transfers.
- Reimbursement: Payment of taxes incurred as costs and additional tax refund payments.
- Interest: Including premiums, discounts, and compensation for debt repayment guarantees.
- Dividends: In any name and form, including dividends from insurance companies to policyholders and the distribution of cooperative business profits.
- Royalties: Compensation for the use of rights.
- Rent and other income related to the use of assets.
- Receipts or periodic payment acquisitions.
- Gains from debt relief, except up to a certain amount set by the Government Regulation.
- Gains from foreign exchange rate differences.
- Excess difference due to revaluation of assets.
- Insurance premiums.
- Contributions received or obtained by organizations/associations from their members consisting of taxpayers engaged in business or freelance work.
- Additional net wealth arising from income not subject to tax.
- Income from industry-based businesses.
- Interest rewards (according to applicable tax regulations).
- Surplus from Bank Indonesia (BI).
2. Income Subject to Final Payroll Tax (PPh Final)
Income that is of a final nature and can be subject to final payroll tax includes:
- Deposit interest or other interest such as bond interest up to government debt securities.
- Gifts received for free or from lotteries.
- Stock transactions and similar securities, including derivative transactions traded on the stock exchange.
- Transfer of assets on land/buildings, construction services, real estate, and leasing.
- All other income (according to applicable tax regulations).
There are also types of income that are exempted from payroll tax objects, as follows:
- Donations or assistance, including zakat given to religious institutions officially recognized by the government.
- Inheritance or assets donated to direct lineal descendants or social entities (religious, educational, foundations, cooperatives, and so on) based on a grant without any business, commercial, or work/contractual requirements.
- Assets up to cash contributions as explained in Article 2 paragraph (1) letter b, serving as a substitute for shares or capital participation.
- Compensation or replacement in the context of work or services obtained by taxpayers or the government in the form of goods or pleasures.
- Health, employment, life insurance, and scholarships provided by companies.
- Profits or dividends obtained by limited liability companies (PT) as domestic taxpayers, cooperatives, regional government-owned enterprises/state-owned enterprises, and businesses established or located in regions that provide capital participation, provided that the dividends are derived from retained earnings.
- Pension funds (according to applicable tax regulations).
- Profits obtained by members of PT, partnerships, and joint ventures whose capital is not divided into shares.
- Venture capital (according to applicable tax regulations).
- Scholarships (according to applicable tax regulations).
- Excess obtained by non-profit entities engaged in education, research, and development officially recognized by the relevant authority (according to applicable tax regulations).
- Assistance in the form of benefits given to certain taxpayers by social security organizers, as regulated in the Minister of Finance Regulation (PMK).
How to Calculate Payroll Tax
To help you understand how to calculate payroll tax, consider the following simulation:
Rudi is an employee with a monthly income of Rp5,000,000, making his total annual income Rp60,000,000. Rudi's current status is single, placing him in the first PTKP category, which is Rp54,000,000.
First, let's calculate Rudi's net income using the formula:
Gross income - PTKP = Net income
Rp60,000,000 - Rp54,000,000 = Rp6,000,000. Therefore, Rudi's net income is Rp6,000,000.
Once we know Rudi's net income, we can calculate the amount of tax he needs to pay. To calculate payroll tax with a net income of Rp6,000,000, we will follow the second tariff point, which is 15%.
The formula for calculating payroll tax is:
15% x Rp6,000,000 = Rp900,000.
So, the annual payroll tax that Rudi must pay to the government is Rp900,000 or Rp75,000 per month.
Understanding Indonesia's payroll tax rules is crucial for both people and businesses. Knowing Indonesian Payroll Tax is vital to follow the rules and avoid legal issues. The updates in these rules show that payroll taxes can change, emphasizing the need to stay up-to-date.
For companies with Indonesian employees, getting the payroll tax right is really important. This article has shown, using an example, that figuring out payroll tax involves looking at things like total income, non-taxable income, and tax rates. By keeping in the loop and keeping good records, companies can handle the ins and outs of payroll tax in Indonesia and help create a tax-friendly system.