Key Components Of Payroll Compliance For The Businesses

Payroll compliance in Vietnam is a serious matter that requires constant attention and a thorough understanding of the country’s frequently changing laws. In a country where the legal system is as dynamic as its growing economy, companies must stay alert and well-prepared to handle the various challenges of managing payroll. To minimize risks and ensure smooth operations, businesses need to deeply understand the different aspects of payroll compliance from registering employees to calculating taxes correctly.

What is payroll compliance?

Payroll compliance refers to the process of adhering to all legal regulations surrounding the processing of payroll and the filing of payroll-related taxes/statutory payments. This includes ensuring that employees are paid accurately and on time, withholding the correct amount of taxes, statutory payments, and reporting payroll information to government agencies.

Non-compliance can lead to serious consequences, such as:

• Monetary penalties imposed by government agencies for late filings or underpayments.
• The administrative burden of dealing with audits, notices, and correcting errors.
• Loss of trust from employees, clients, and the public, which can affect business operations and growth.

Key components of payroll compliance in Vietnam

Payroll compliance is a multifaceted task that requires attention to various aspects of employee management and legal obligations. The following sub-sections will delve into the essential elements of payroll compliance in Vietnam.

Employee onboarding

Proper employee onboarding is the foundation of payroll compliance. Companies must register new hires with the competent labor/social insurance authority within 30 days of their start date. This involves submitting a New Employee Registration Form along with supporting documents such as the employment contract, ID card/passport copy, and educational certificates. 

Accurate reporting of employee details, including their unique 10-digit tax identification number and 13-digit social insurance number, is critical for tax and insurance purposes.

Wage regulations

Vietnam’s minimum wage rates are determined by region, with Region I (urban areas like Hanoi and Ho Chi Minh City) having the highest rate at VND 4,680,000 per month as from 1st July 2023. Employers must pay at least this amount, plus wage allowance. The minimum wage rates may vary from time to time. 

Standard working hours are 8 hours per day, not exceeding 48 hours per week. Overtime is capped at 40 hours per month and 200 hours per year. For a few industries, trades and jobs, it allows to organize the OT 300 hours per year. The overtime rates of 150% for regular overtime, 200% for rest day overtime, and 300% for holiday overtime are accurate.

Companies must maintain detailed time records and compensate employees accordingly.

 Tax compliance

Accurate PIT calculation and withholding is crucial for compliance. Vietnam’s progressive tax rates range from 5% to 35% on monthly accessible income. To calculate PIT, employers must first determine an employee’s taxable income, then subtract eligible deductions such as mandatory insurance contributions, tax relief (personal and dependent deduction), and charitable donations.

The remaining accessible income is subject to the applicable PIT rate. Employers must file PIT declarations (monthly/quarterly) and remit withheld taxes to the State Treasury.

Statutory Insurance 

Vietnam’s statutory insurance system includes three main components: social insurance (SI), health insurance (HI), and unemployment insurance (UI). The contribution rates are:

• SI: 17.5% (employer) + 8% (employee)
• HI: 3% (employer) + 1.5% (employee)
• UI: 1% (employer) + 1% (Vietnamese employee)

These percentages are applied to an employee’s gross salary capped at 20 times the minimum wage for SI and HI contributions, and 20 times the common minimum wage for UI. Failure to comply with social insurance regulations can result in penalties and legal action. The current common minimum wage is VND1.800.000 while the regional minimum wage is VND 4.680.000. This wage may vary from time to time. 

Trade Union 

Union fee (Employer Portion) 

The Employer is required to contribution the Union Fees (Employer portion) with the rate is equal to 2% of the salary fund as a basis for paying social insurance for employees. The contribution of Employer Portion is regardless when the Company establish the grassroot trade union or not.  

Union fee (Employee Portion) 

This is required when the Employer set up the grassroot trade union association.  The establishment of the grassroot trade union is not compulsory in Vietnam.  

The trade union member shall contribute union fee with the rate equal to 1% of the salary as a basis for paying social insurance according to the law on social insurance, but the maximum monthly union fee is only 10% of the base wage. The company must ensure that they calculate and instruct employees on how to pay union fees, if applicable. 

Labor reporting

Preparing and submitting periodic labor reports is another essential aspect of payroll compliance. Employers must submit monthly, quarterly, and annual labor reports to the relevant government bodies, such as Labour and the Social Insurance Authority. These reports include information on employee headcount, salaries, social insurance contributions, and other relevant data.

Termination and severance

When terminating employment contracts, businesses must follow the legal procedures outlined in the Labor Code. This includes providing the appropriate notice period and making severance payments (if applicable) based on the employee’s length of service/period subject to UI contribution. Failure to comply with these regulations can lead to legal disputes and potential compensation claims from former employees.

Compliance with employment law

Staying updated and complying with various labor laws and regulations is an ongoing responsibility for businesses in Vietnam. The Labor Code, which was recently amended in 2021, is the primary legislation governing employment relationships. Companies must also adhere to other relevant laws, including but not limit to the Law on Social Insurance and the Law on Occupational Safety and Health.

Special considerations for foreign employees

Hiring foreign employees entails additional compliance steps. Work permit applications must be submitted to local Labor authority’s approval, including the foreigner’s criminal record check, health certificate, and proof of expertise/university degrees. 

Tax for foreign employees is in a flat rate of 20% on their Vietnam sourced income unless they qualify as tax residents, in which case progressive rates (from 5 to 35%) on their worldwide income apply. They are also required to contribute to SI and HI if employed under a Vietnamese contract and having work permit. Employers must ensure proper visa sponsorship and work permit renewals to maintain compliance.

Frequently asked payroll compliance questions

What are the penalties for non-compliance?

Non-compliance with payroll regulations can result in hefty fines, lawsuits from employees, and even criminal charges in some cases. Employers may face penalties for failing to meet submission deadlines, not paying the correct amount of tax/statutory insurance, or submitting incorrect information.

What should I do if I discover a payroll compliance issue?

Upon discovering a payroll compliance issue, promptly assess and rectify the error, consult with experts for guidance, report to authorities if necessary, inform affected employees, review your payroll processes to prevent recurrence, and implement new safeguards to ensure ongoing compliance.

How can I stay updated on payroll compliance laws?

Regularly consult the Ministry of Labor, Invalids and Social Affairs (MOLISA) and the General Department of Taxation/Insurance authority websites, subscribe to updates from HR advisory firms, join local HR networks, attend legal seminars, and use updated payroll software. Engaging with a local payroll expert can also provide personalized guidance.

What are common mistakes with payroll compliance?

In Vietnam, common payroll compliance mistakes include exceeding probation limits, discrepancies between payroll and accounting records, not including taxes on benefits, confusion over net versus gross salaries, employing foreign staff without work permits, misunderstandings about the ‘insurance’ salary, using outdated tax or insurance rates, and omitting compensation details in contracts. Regularly reviewing and updating payroll processes according to Vietnamese labor laws can help avoid these issues.

Can outsourcing payroll ensure compliance?

Outsourcing payroll to a reputable provider can help ensure compliance as these companies specialize in staying up-to-date with payroll regulations and can manage the computation of wages, tax obligations, and adherence to labor laws on your behalf. However, it’s important to choose a reliable payroll service provider and understand that ultimate responsibility for compliance still lies with the employer.

Managing payroll compliance in Vietnam is a complex and ongoing process that requires careful attention to detail, a deep understanding of the country’s laws, and a proactive approach to keep up with regulatory changes. To minimize risks and ensure a smooth path forward, it’s essential for companies to get guidance and support from experienced local HR and payroll professionals, like those at Talentnet, a leading HR solutions provider in Vietnam. By using their expertise in compliance services or payroll services, businesses can confidently navigate the complexities of payroll compliance and focus on succeeding in Vietnam’s dynamic and opportunity-filled market.