A strategic guide to Outsourcing Payroll in Hong Kong

Companies, wherever they are based, are required to process employee salaries accurately and on time. They must also ensure their income tax and social security compliance in terms of withholding, calculations and reporting. Every country’s employment and tax system is different.

Payroll is more than a routine task – it’s a strategic function that impacts compliance, employee satisfaction and business reputation. This Guide explores why outsourcing payroll is a smart move for businesses operating in Hong Kong.

Regulatory complexity: the case for professional support

Hong Kong’s payroll regulations are governed by the Hong Kong Employment Ordinance (Cap. 57), Inland Revenue Ordinance and the Mandatory Provident Fund Schemes Ordinance (MPFSO).

The Employment Ordinance is the primary legislation governing employment practices in Hong Kong. It sets out the rights and obligations of both employers and employees, covering key aspects such as wage payment, rest days, statutory holidays, paid annual leave, sickness allowance, maternity and paternity protections, and end of year payments. It also covers employment contracts, termination procedures, severance and long service payments, and protections against anti-union discrimination.

The Inland Revenue Ordinance is Hong Kong’s main tax law, governing taxes like salaries tax, profits tax and property tax. The salary tax system in Hong Kong employs a progressive tax rate structure that is applied to net chargeable income, calculated by subtracting deductions and allowances from total income.

Every employer in Hong Kong must submit a Form BIR56A return annually for the company, as well as individual annual returns (Form IR56B) for all employees, reporting all income regardless of whether they work in Hong Kong or overseas. Employers must submit also submit an IR56E form to the IRD within three months of a new employee’s start date to officially report their commencement of employment.

The Mandatory Provident Fund (MPF) is Hong Kong’s compulsory retirement savings scheme, which requires employers, employees and self-employed individuals to make regular contributions.

Employees who earn below HKD7,100 per month are exempt from contributions, but the employer must contribute 5% of the monthly income. For employees earning between HKD7,100 and HKD30,000 per month, both employer and employee must contribute 5%. For employees earning HKD30,000 or above per month, contributions are capped at HKD1,500 each for both employer and employee.

Employers must enrol employees in an MPF compliant scheme within 60 days of employment and make timely contributions. Adherence to the MPF regulations is critical for payroll compliance and also shows commitment to investing in your employees’ long-term financial future.

In addition to complying with tax reporting by filing employer’s and employee’s returns annually (Forms BIR56A and IR56B), and notifying the IRD of new hires, terminations or departures, employers must maintain accurate payroll records for at least seven years, including wage details, leave records, and MPF contributions.

Setting up and managing payroll in Hong Kong

The first stage will involve registering the employer and its employees with the local tax office and the government employment department, recording employment notices and contracts, obtaining bank details of the employer and employee and, finally, inserting all that information in the payroll system.

The payroll team must process the monthly payroll for salaried employees. It is responsible for creating, maintaining and updating all payroll data, which can include overtime, commissions, expenses, statutory sickness, maternity and other employee benefits.

Regular payroll tasks include calculating wages, deductions, and bonuses, updating records, managing timesheets and ensuring compliance with tax and employment laws. The payroll team will also assist employees with any payroll queries and liaise with tax authorities.

There is no legal requirement under the Employment Ordinance for employers in Hong Kong to provide payslips to employees, but it is a recommended practice. Payslips provide employees with a detailed breakdown of wages, including basic salary, overtime, allowances and deductions, allowing them to verify that they are being compensated correctly.

Accuracy comes from double-checking calculations, reconciling records regularly, understanding tax rules and keeping up to date with legislation changes. Payroll professionals must stay informed and apply updated labour, income tax, social security, pension and any other statutory rules at the right time. Failure to comply can lead to incorrect payments for employees, regulatory fines and penalties, and reputational damage.

Payroll also involves highly sensitive employee data, including employment records, salaries, tax and bank details. Confidentiality is crucial; access should be restricted and data should be handled in line with company policies and regulations under the Personal Data (Privacy) Ordinance, Cap 486 of the Laws of Hong Kong (PDPO).

If your Hong Kong company has an establishment in the European Union or European Economic Area (EEA) where personal data is processed, you must also comply with the EU’s General Data Protection Regulation (GDPR), which has extra-territorial application and imposes greater data protection obligations, as well as substantial penalties for violations.

Best practices: the value of Outsourcing

Staying on top of these payroll requirements can be challenging, especially for companies without dedicated HR or finance teams. Experienced payroll managers are well remunerated and will also require investment in systems.

Outsourcing your payroll, particularly when setting up business or expanding into a new market, can free up valuable time and resources, while also ensuring that all your obligations and responsibilities are met in a timely and efficient manner in every jurisdiction of operation.

Sovereign Trust (Hong Kong) provides a comprehensive but flexible outsourced payroll service that can be scaled and structured to a client’s specific requirements. You will able to submit data and access real-time payroll information via an online portal, and we will provide the payroll professionals and specialised software to process this information, including calculating wages, handling tax deductions and contributions, issuing payslips, making mandatory reports and managing pension schemes.

Outsourcing payroll to a trusted provider in Hong Kong offers several advantages:

• Expertise in local regulations – ensures full compliance and reduces risk.
• Timely, accurate payroll processing – enhances employee trust and satisfaction.
• Efficient management of MPF scheme ¬– MPF scheme set-up and trustee services, employee enrolment and monthly contribution submissions.
• Comprehensive record-keeping – supports Hong Kong audits and reporting.
• Scalable solutions – we can adapt and scale up our payroll solutions as your business grows.

Sovereign’s Accounting and Payroll Services are tailored to the unique needs of businesses in Hong Kong. Let us handle your payroll complexities so you can focus on what matters most – growing your business. Contact Sovereign Trust (Hong Kong) today for a customised payroll solution.