Payroll in Indonesia (Part 1): Understanding Payroll Components

Managing payroll in Indonesia is not just about salaries—it is about full compliance. Companies must understand the legal framework, required contributions, and tax deductions that define payroll systems in Indonesia. 

What Is Basic Salary in Indonesian Payroll?

The basic salary is the backbone of any compensation package. By law, it must be at least 75% of the total of basic salary and fixed allowances. 

The basic salary must be at least minimum wage, to understand the minimum wage requirements in Bali, read our blog Minimum Wage in Bali 2025.

What Are Fixed and Non-Fixed Allowances?

Fixed allowance is an allowance given regularly every month, and the amount does not change as long as the working conditions or employment agreement remains the same. This allowance is considered part of the employee’s fixed income, in addition to the basic salary. 

The characteristics of a fixed allowance are: 

• It is given regularly (usually monthly), 

• The amount is fixed (not affected by attendance, performance, or targets), and 

• It is still paid even if the employee does not come to work (such as during leave or sick days, in accordance with company policy). 

Non-fixed allowance is an allowance that is given irregularly or in varying amounts, and its provision depends on certain conditions, such as attendance, performance, or achievement of targets. 

BPJS – Indonesia’s Mandatory Social Security Program

Every employer in Indonesia must register employees for BPJS, which stands for Badan Penyelenggara Jaminan Sosial. It covers two types: 

1. BPJS Kesehatan: Health insurance 

2. BPJS Ketenagakerjaan: Employment insurance 

BPJS Contribution Breakdown: 

• BPJS Kesehatan: Employers contribute 4%, employees contribute 1% of salary (capped at IDR 12 million/month). 

• BPJS Ketenagakerjaan includes: 

•  Work Accident Insurance (Jaminan Kecelakaan Kerja—JKK): Rate of 0.24%-1.74%, paid by the employer 

• Covers medical expenses and compensation if an employee is injured or dies due to a work-related accident or illness caused by the job. The rate depends on the level of risk associated with the company’s business activities. 

• Life Insurance (Jaminan Kematian—JKM): Rate of 0.3%, paid by the employer 

• Provides financial compensation to the family if the employee passes away (not necessarily due to a work-related cause). Benefits include lump-sum payment, funeral expenses, and education support for children. 

• Old Age Security (Jaminan Hari Tua – JHT): Rate of 5.7% (3.7% paid by employer, 2% paid by employee) 

• A savings programme for retirement. Employees can withdraw their JHT savings upon retirement, termination of employment, or after a certain period of unemployment. 

• Pension Plan (Jaminan Pensiun—JP): Rate of 3% (2% paid by employer, 1% paid by employee) 

• To be eligible for monthly pension benefits, participants must have a minimum contribution period of 15 years (180 months). If the contribution period is less than 15 years, BPJS pays the Pension Benefit (JP) as a lump sum rather than a monthly payment.

• BPJS Kentenagakerjaan is gradually increasing the retirement age in accordance with Government Regulation No. 45 of 2015. As of 2025, the normal retirement age is 58 years, and it will gradually increase until it reaches 65 years. 

FAQ:

Is BPJS Mandatory? Yes, employers must enroll even foreign workers who stay over six months. Failure to comply risks penalties. 

BPJS Affects Payroll in Indonesia How? BPJS significantly affects payroll in Indonesia, as employer contributions are taxable and employee contributions reduce take-home pay. 

PPh 21 – Payroll Tax Responsibilities

What is PPh 21? PPh 21 (Pajak Penghasilan Pasal 21) is an Indonesian income tax regulation that governs the tax on income earned by individuals from employment, services, or activities. In simpler terms, it is the income tax deducted at source from employees’ salaries or payments to individuals. 

Employers must: 

• Calculate and deduct tax monthly 

• Remit payment to tax authorities 

• Provide the Withholding Tax Slip 1721-A1 to employees at the end of the year. Employees use this slip to file their annual Personal Income Tax returns.

There are two income tax calculation systems in Indonesia: 

Effective Tax Rate (Tarif Efektif Rata-Rata—TER)

The Effective Tax Rate applies from January to November. The employer calculates the tax rate based on the employee’s gross salary, using rates that depend on the employee’s marital status and total gross income. The goal of the Effective Tax Rate is to smooth out the monthly tax deductions, so employee’s do not experience a big jump in withholding.  

Normal Tax Rate (5%-35%)

This applies exclusively in December. During this month, employers recalculate the total annual income from January to December. If the total gross annual income does not exceed IDR 54 million, they apply no tax.

Tax Rates:  

Allowable Deductions:

Allowable deductions include: 

• Non-taxable income (PTKP), 

• Pension Plan Security (Jaminan Pensiun) at 1%, 

• Old Age Security (Jaminan Hari Tua) at 2%, and 

• Factional Cost – maximum of 6 million per year. 

Conclusion

Understanding Indonesia’s payroll structure is essential for staying compliant and building trust with your employees. From basic salary calculations to mandatory BPJS contributions and income tax deductions, every detail matters. As your trusted partner, SAS is here to help you navigate these complexities with confidence.

Keep an eye out for Part 2 of this blog series, where we’ll break down employee entitlements and termination benefits—another crucial area for any employer in Indonesia.

Need help with payroll setup or compliance? Contact us today to ensure your business is on the right track.