Outlining Indonesian’s Income Tax Law (PPh 21) & the Calculation Methods

In Indonesia, all residents with income are subject to income tax, or known by Indonesians as PPh (Pajak Penghasilan). There are several kinds of PPh, including PPh 21.

To be able to pay tax, each taxpayer must first require a Tax Identification Number or Nomor Pokok Wajib Pajak (Wajib Pajak) from the Indonesian Tax Office (Direktorat Jenderal Pajak).

To be able to pay tax, each taxpayer must first require a Tax Identification Number or Nomor Pokok Wajib Pajak (Wajib Pajak) from the Indonesian Tax Office (Direktorat Jenderal Pajak).

Rate of PPh 21 Based on Taxpayer’s Salary

To be able to pay tax, each taxpayer must first require a Tax Identification Number or Nomor Pokok Wajib Pajak (Wajib Pajak) from the Indonesian Tax Office (Direktorat Jenderal Pajak).

Annual IncomeTax Rate
0 to IDR 60,000,0005%
Over IDR 60,000,000 up to IDR 250,000,00015%
Over IDR 250,000,000 up to IDR 500,000,00025%
Over IDR 500,000,000 up to IDR 5,000,000,00030%
Over IDR 5,000,000,00035%

However, there are three other components that must be taken into account before calculating PPh 21. These components are non-taxable income, employee healthcare, and functional cost deduction.

1. Non-taxable Income

Income that is not subject to taxes. The amount differs depending on the taxpayers marital status and the amount of dependents the person has.

Non-taxable Income for Single Individuals.
CategoryNon-taxable Income Amount
TK/0IDR 54,000,000
TK/1IDR 58,500,000
TK/2IDR 63,000,000
TK/3IDR 67,500,000

TK stands for Tidak Kawin or not married. TK/0 is applied to single individuals with zero (0) dependent, TK/1 is applied to single individuals with one (1) dependent, and so on with the maximum of three (3) dependents.

Non-taxable Income for Married Individuals
CategoryNon-taxable Income Amount
K/0IDR 58,500,000
K/1IDR 63,000,000
K/2IDR 67,500,000
K/3IDR 72,000,000

K stands for Kawin or married. K/0 is applied to married individuals with zero (0) dependent, K/1 is applied to married individuals with one (1) dependent, and so on with the maximum of three (3) dependents.

2. Healthcare and Employee Social Security Program

Each company has to cover their employee’s healthcare. One of them is the Employee Social Security Program or Badan Penyelenggara Jaminan Sosial Kesehatan (BPJS), a health insurance program authorized by the Indonesian government. 

These components are subtracted from the gross income.

Functional Deduction Cost

Functional deduction cost is a cost that employers collect to maintain company income. The maximum amount is 5% of the employee’s annual gross income or a maximum of IDR 500,000 per month.

How to Calculate PPh 21?

There are three methods to calculate income tax that could affect employee’s salary and company expenses. Those methods are nett, gross, and gross up.

  1. Nett – The company bears the taxes of their employee.
  2. Gross – The employee bears their own income tax.
  3. Gross up – The company provides tax benefits in the same amount of tax borne by the employee.

Each employee can choose and negotiate how they prefer to pay their income tax because it will affect their payroll and the company expenses.

Let’s go on details with the formula and the calculation here:

Nett Method

If this method is applied, employees will receive a net salary because the income taxes will be paid by the company.

Example:
Angela is a single woman (TK/0) with a monthly salary of IDR10,000,000 or an annual salary of IDR120,000,000. Therefore, her taxable income would be:
Taxable Income = Annual Salary – Non-taxable Income
= IDR120,000,000 – IDR54,000,000
= IDR66,000,000     

and her income tax calculation would be:
Income Tax (PPh 21) = Taxable Income x PPh 21 Rate
= IDR66,000,000 x 15% (Tier 2)
= IDR9,900,000 per year or IDR825,000 per month

So, the amount of tax that Angela’s employer has to pay each month is IDR825,000,000 and Angela’s monthly salary is still IDR10,000,000 because there is no further deduction.

Gross Method

In this method, employees will receive a gross income because the company hasn’t reduced their salary with taxes and other deductions. Therefore, the employees must pay their own taxes.

Example
Alan is a single man (TK/0) with a monthly salary of IDR10,000,000 or an annual salary of IDR120,000,000. Therefore, his taxable income would be:
Taxable Income = Annual Salary – Non-taxable Income
= IDR120,000,000 – IDR54,000,000
= IDR66,000,000    

So, his income tax calculation would be:
Income Tax (PPh 21) = Taxable Income x PPh 21 Rate
= IDR9,900,000 per year or IDR825,000 per month
Consequently, Alan’s nett monthly income would be IDR9,175,000

Gross Up Method

Using this method means the company will give their employee a tax allowance the same amount of their tax income (PPh 21) in addition to their monthly salary.

Example:
Dian is a single woman (TK/0) with a monthly salary of IDR10,000,000 or an annual salary of IDR120,000,000. Therefore, her taxable income would be:
Taxable Income = Annual Salary – Non-taxable Income
= IDR120,000,000 – IDR54,000,000
= IDR66,000,000    

and her income tax calculation would be:
Income Tax (PPh 21) = Taxable Income x PPh 21 Rate
= IDR66,000,000 x 15% (Tier 2)
= IDR9,900,000 per year or IDR825,000 per month

So, in total, Dian’s income would be IDR10,825,000. But, Angela’s net income would be IDR10,000,000 after deduction.

Note:
These calculations are simplified examples.
There are other components that might contribute to the calculations.

Conclusion

Calculating employees’ income tax and salary can be time intense. With software, like SunFish Workplaze’s Payroll, the whole process and reporting becomes a lot easier, with compliance to regulations built-in.   

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Source: online-pajak.com

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