Payroll in Indonesia is no longer just about paying salaries on time.
With new incentive rules and tighter tax monitoring, payroll has become one of the most sensitive compliance areas for employers. What used to be a back-office routine is now a function that directly affects risk exposure, employee trust, and even group-level reporting.
Recent regulatory signals, including PMK 105/2025 on PPh 21 incentives and PMK 111/2025 on risk-based tax oversight, indicate a tighter linkage between incentives, data consistency, and supervisory follow-ups by the Directorate General of Taxes (DGT). In practice, this means employers must ensure that payroll configuration, documentation, and reporting quality are aligned before applying any tax benefit.
This article outlines practical steps for 2026 readiness, common mistakes to avoid, and how LMI Consultancy supports businesses operating in Indonesia.
Executive Summary (2026 Focus)
- PPh 21 must be calculated monthly using the Effective Tax Rate (ETR) system, with annual reconciliation under progressive rates.
- Employee tax incentives under PMK 105/2025 require strict eligibility control and payroll configuration.
- Risk-based oversight under PMK 111/2025 increases scrutiny on inconsistencies across payroll, VAT, corporate income tax, and third-party data.
- BPJS participation remains mandatory for eligible local and foreign employees.
- Reconciliation discipline and documentation readiness are now critical compliance tools.
Income Tax Withholding (PPh 21): What Employers Must Control
Employers in Indonesia are responsible for calculating, withholding, and remitting PPh 21 (employee income tax) on salaries, allowances, bonuses, overtime, and certain benefits.
Since January 2024, monthly withholding uses the Effective Tax Rate (ETR) system based on gross income and employee category. However, annual reconciliation still applies progressive rates:
- 5% for annual income up to IDR 60 million
- 15% for IDR 60–250 million
- 25% for IDR 250–500 million
- 30% for IDR 500 million–5 billion
- 35% above IDR 5 billion
Employers must issue Form 1721-A1 annually to employees.
Practical Risk in 2026
Under PMK 105/2025, certain employees may qualify for government-borne PPh 21 incentives. While often described as an “employee benefit,” the operational responsibility lies entirely with the employer.
If applied incorrectly, consequences may include:
- Under-withholding exposure
- Administrative penalties
- Retroactive payroll corrections
- Employee dissatisfaction when net pay is adjusted
Key principle: Treat incentives as controlled payroll features, not manual adjustments.
PMK 105/2025: Understanding PPh 21 Incentives in Practice
The employee tax incentive mechanism can reduce employee tax burden and improve take-home pay optics, but only when implemented correctly. Employers should implement:
Defined Eligibility Rules
- Income thresholds
- Employment status
- Registered NPWP/NIK linkage
- Sector qualification (if applicable)
Payroll Configuration & Testing
- Map eligible income components
- Conduct parallel payroll simulations
- Test retroactive correction scenarios
- Ensure tax filing outputs match payroll registers
Monthly Evidence Pack
Maintain:
- Employee eligibility list
- Payroll register highlighting incentive impact
- Tax filing and payment proof
- Reconciliation to GL postings
Common mistake: Applying incentives manually in spreadsheets while payroll software generates statutory filings. This creates reconciliation gaps detectable under risk-based monitoring.
PMK 111/2025: Risk-Based Tax Oversight
PMK 111/2025 reflects Indonesia’s shift toward data-driven tax supervision. Oversight increasingly relies on pattern detection rather than traditional audits.
Companies may receive pengawasan non-audit pajak requests, clarifications that require structured responses without a formal audit.
What triggers attention?
While internal risk models are confidential, common market triggers include:
- Sharp fluctuations in PPh 21 remittances
- Headcount growth without payroll tax movement
- Large year-end adjustments
- Frequently amended tax returns
- Inconsistencies between staff cost expenses and withholding filings
- VAT expansion without payroll scaling
The shift means compliance is no longer only about paying on time, it is about explainable consistency across datasets.
Social Security Compliance (BPJS)
Employers must register employees with:
BPJS Ketenagakerjaan (Employment Security)
- JKK (Work Accident): 0.24%–1.74% (employer)
- JKM (Death Benefit): 0.30% (employer)
- JHT (Old Age): 3.7% employer + 2% employee
- JP (Pension): 2% employer + 1% employee (capped salary basis)
BPJS Kesehatan (Healthcare)
- 4% employer
- 1% employee
- Maximum base: IDR 12 million/month (at time of writing)
Foreign employees working more than six months must participate.
2026 focus: Ensure BPJS contributions reconcile with payroll registers and employee master data. Mismatched reporting can trigger data queries.
Monthly Deadlines Employers Cannot Miss
| Obligation | Deadline |
| PPh 21 Payment | 15th of the following month |
| PPh 21 Reporting | 20th of the following month |
| BPJS Kesehatan Payment | 10th of the following month |
| BPJS Ketenagakerjaan Payment | 15th of the following month |
Late or inaccurate filings result in fines and sanctions.
Accounting & Corporate Tax Ripple Effects
Payroll incentives and withholding adjustments affect more than employee payslips.
Impact Areas:
- Staff cost analysis (gross vs net shifts)
- Payroll accruals
- Year-end corporate tax reconciliation
- Intercompany recharges (for regional groups)
- Audit readiness
Best practice for 2026:
- Monthly payroll-to-GL reconciliation
- Quarterly payroll-to-withholding reconciliation
- Year-end reconciliation pack ready before audit
Risk-based oversight often begins where payroll records do not reconcile with financial statements.
Common Payroll Compliance Mistakes in Indonesia
Most issues arise from process gaps, not aggressive tax positions.
Typical failures include:
- Treating payroll as an HR-only responsibility
- Inconsistent NPWP/NIK data
- Delayed employee status updates
- Misclassified allowances
- Weak documentation for bonuses
- Manual spreadsheet overrides
- Poor coordination between the payroll provider and the finance
Under PMK 111/2025, these inconsistencies are easier to detect.
2026 Payroll Readiness Checklist
Payroll & PPh 21
- Confirm incentive applicability
- Audit employee master data
- Document tax treatment of recurring & one-off payments
- Implement quarterly reconciliations
Accounting
- Align the chart of accounts for staff costs
- Support accrual schedules
- Prepare annual payroll reconciliation pack
Governance
- Define payroll change approval workflow
- Maintain document retention policy
- Conduct mock DGT query drill (5-day response test)
Cross-Border Considerations
- Align intercompany recharge methodology
- Review expat and short-term assignment treatment
- Clarify payroll ownership between HQ and Indonesia entity
Foreign Investors & Growing Groups
For businesses expanding into Indonesia:
- Entity structure affects payroll governance
- Employment model impacts tax residency handling
- Delegation of authority affects filing accountability
- Bank signatories influence remittance workflow
Payroll compliance is easier when corporate governance is clean and documentation is current.
How LMI Consultancy Supports Payroll Compliance
LMI Consultancy provides structured payroll and tax support tailored to businesses operating in Indonesia.
Our services include:
- Payroll system review and configuration
- PPh 21 incentive implementation assessment
- Monthly payroll processing and reconciliation
- BPJS registration and compliance management
- Tax reporting and documentation support
LMI Consultancy helps businesses review incentive eligibility, improve payroll documentation standards, and build risk-response frameworks aligned with Indonesia’s evolving tax landscape.
Contact LMI Consultancy to ensure your payroll, tax, and compliance systems are ready for 2026.
