Hong Kong Payroll Guide

Local entity

This means the company establishes a legal entity (such as a subsidiary or branch) in Hong Kong. The business is responsible for managing payroll, complying with local labor laws, handling tax and benefits, and maintaining proper records. This option gives full control but requires more administrative work and compliance with local regulations.

Employer of record

This is a third-party service that acts as the legal employer on behalf of a company. The EOR handles payroll, tax compliance, and employee benefits while the business directs the employee’s work. This is a faster and less complicated option for companies that don’t want to set up a local entity but still need to hire employees in Hong Kong while ensuring compliance.

Read next: Global Employer of Record Guide: Hong Kong

Employment Ordinance

The Hong Kong Employment Ordinance, enacted in 1968, serves as the primary legislation governing employment practices in Hong Kong. It outlines the rights and obligations of both employers and employees, covering key aspects such as wage payment, rest days, statutory holidays, paid annual leave, and maternity and paternity protections. Furthermore, the ordinance covers employment contracts, firing procedures, and protections against anti-union discrimination, providing a complete framework for fair labor practices.

Mandatory Provident Fund (MPF)

As part of the payroll HK regulations, employers are required to make mandatory contributions to the employee’s MPF account. This helps them save for retirement. The contribution goes towards a savings fund, which the employee can withdraw from when they reach 65. Employees who earn less than HK$7,100 per month are exempt from contributing, but the employer must still contribute 5%.

For employees earning between HK$7,100 and HK$30,000 per month, both employer and employee must contribute 5% of the monthly income. While for employees earning HK$30,000 or more per month, contributions are capped at HK$1,500 each for both employer and employee.

Relevant reading: Understanding Hong Kong's 2025 MPF Offset Changes

Inland Revenue Ordinance (IRO)

The Inland Revenue Ordinance is Hong Kong's main tax law, governing taxes like salaries tax, profits tax, and property tax. For payroll HK, employers must take out salaries tax from their workers' pay. The tax is calculated using a standard flat rate of 15% or a range of rates that go from 2% to 17%.

Employers are also required to file annual returns (Form IR56B) and provide new employees with a Form IR56E. Employees can claim allowances and deductions like MPF contributions and donations to reduce taxable income. 

The salary tax system in Hong Kong employs a progressive tax rate structure that is applied to net chargeable income, which is calculated by subtracting deductions and allowances from total income. The table below offers a clear and organized framework for determining the tax obligations of individuals based on their net chargeable income.

Minimum wage ordinance

According to the Minimum Wage Ordinance, Cap. 608, employers are required to pay employees no less than the statutory minimum wage (SMW) per hour. As of 1 May 2023, the SMW rate in Hong Kong is HK$40 per hour. 

However, it’s worth noting that the Chief Executive (CE) in Council has adopted the recommendation of the Minimum Wage Commission on raising the SMW rate to HK$42.1 per hour. Subject to the approval of the Legislative Council, the revised SMW rate will come into force on 1 May 2025.

Employers must ensure that the total wages paid, when averaged over the total hours worked in a wage period, meet or exceed this rate.

Certain employees are exempt from the SMW, including live-in domestic workers, student interns, and work experience students under specific conditions. Additionally, if an employee's monthly wages exceed HK$16,300, employers are not required to record their working hours.

Initial setup 

Employer registration

First, register your company as a legal entity under the Business Registration Ordinance to get a business number and open a local bank account for payroll and MPF contributions. Your employees will need an employer tax file number, which you can get by registering with the Inland Revenue Department (IRD). Furthermore, it is necessary to register for Employee Compensation Insurance (ECI) in accordance with the Employees’ Compensation Ordinance. Within 60 days of hiring an employee, you must also register for the MPF scheme.

Establishing payroll procedures

Determine your payroll frequency—monthly payments are common in Hong Kong. Next, choose a payroll system, whether manual, outsourced, or payroll software, to streamline the process. 

Learn more: Understanding The Payroll System Hong Kong Runs On

Set up employee records

To set up employee records, you need to collect detailed information such as names, dates of birth, addresses, bank account information, and HKID numbers. Record employees' salaries and sign them up for the MPF plan to make sure they make the right amount of contributions.

Calculating wages

Understand different wage types 

Wages can include basic salary, overtime pay, commissions, bonuses, allowances, and deductions such as MPF contributions or tax withholdings. Employers must correctly classify and calculate these components to prevent errors, disputes, or legal penalties.

Calculate overtime

There might be cases where you need to compensate employees for working beyond their regular hours. In Hong Kong, overtime pay is not mandated by law, meaning employers are not legally required to provide additional pay unless stated in the employment contract or company policy.

Deducting authorized deductions

When an employee works in Hong Kong, authorized deductions are taken out of their gross salary to find their net chargeable income. This is what is used to figure out their salary tax. The Inland Revenue Ordinance (IRO) lets you deduct things like contributions to an MPF, donations to charity, funds for self-education, home loan interest, and allowances for dependents. 

By reducing taxable income, they lower the employee’s tax liability. Employers must accurately apply these deductions, withhold the correct tax amount, and remit it to the IRD.

MPF contributions

Calculate employer and employee contributions

MPF contributions are compulsory, so when calculating payroll HK, you must include both employer and employee MPF contributions. Both parties must contribute 5% from the employee’s relevant income to the MPF scheme. 

Remitting contributions to trustees

Employers must submit MPF contributions to an approved trustee by the 10th of each month to ensure compliance.

Handling MPF contribution surcharges and penalties for late payments

Late payments incur a surcharge of 5% of the contribution amount. Employers should ensure timely payments to avoid penalties.

Tax reporting

Hong Kong follows a territorial tax system, meaning only income earned there is subject to taxation. Both employers and employees have tax-related responsibilities.

Employer’s reporting obligations

At the end of the year, employers in Hong Kong are required to file an annual employer's return with the IRD. This return provides details of all employees, their remuneration, and other relevant information.

The employer's return must be submitted to the IRD within one month of the end of the tax year.

To ensure accuracy during this process, employers must ensure that the information provided in the return is accurate and complete, as it is used by the IRD to assess employees' salaries and tax liabilities.

Employee’s tax obligations (self-assessment) 

Employees are also required to file an individual tax return with the IRD if they receive a notice from the IRD to do so. This typically includes declaring their income, deductions and allowances.

Understanding tax-related allowances and deductions

Employees can claim personal allowances (e.g., married person’s allowance) and deductions for MPF contributions, self-education, home loan interest, and charitable donations.

Leave management

Leave tracking is important for setting up payroll HK because it helps calculate how much money employees should get for their time off. This includes things like annual leave, sick leave, and holidays.

Track statutory holidays, annual leave, sick leave, maternity/paternity leave

Employees are entitled to 13 statutory holidays, 7 to 14 days of paid annual leave, paid sick leave, and maternity (14 weeks)/paternity (5 days) leave if they meet eligibility criteria.

Calculate leave pay accordingly

Employees' average daily wages over the past year must be used to calculate leave payments to ensure fairness.

Final payments

When an employee leaves the company, the employer must calculate and process final wages and any applicable termination payments.

Calculating final wages for departing employees

Employers must pay all outstanding salaries, accrued leave, and bonuses owed to the employee upon termination or resignation.

Handling severance pay and long service payments

If employees are entitled to severance pay or long service payments in Hong Kong, employers must comply with the conditions highlighted in the Employment Ordinance. Severance pay is required when an employee is terminated without cause, while long-service payments apply to employees who have completed five or more years of continuous service. 

However, it’s important to note the recent changes to the MPF offsetting scheme introduced, which now limits the use of MPF contributions to offset these payments. Read more about this update here. 

Issuing final payslips and tax forms

Employers must provide a final payslip and complete an IR56F or IR56G tax form for the Inland Revenue Department.

Learn more: HK Income Tax Manual for Employers Preparing for 2025's Hong Kong Tax Return

Generation of payslips

In Hong Kong, while there is no explicit legal requirement under the Employment Ordinance for employers to provide payslips to employees, it is a common and recommended practice. 

Payslips provide a detailed breakdown of wages, including basic salary, overtime, allowances, and deductions. This transparency allows employees to verify that they are being compensated correctly for their work. 

Get your free payslip template! 

Maintaining accurate payroll records

Managing payroll HK requires businesses to ensure accuracy and efficiency in record-keeping. 

Record-keeping is important for legal compliance in Hong Kong, as employers must maintain wage and employment records for at least 12 months to meet Employment Ordinance and tax regulations. 

Keeping accurate records ensures businesses follow labor laws, preventing penalties and legal issues. It also helps during audits and tax filings with the Inland Revenue Department by providing clear documentation of payroll transactions.

Implementing internal controls

Adding internal controls to Hong Kong's payroll makes sure that it is accurate, follows the rules, and works efficiently. Some important steps are to divide up tasks, use payroll software, do regular audits, and keep sensitive data safe. These measures reduce risks, ensure employees are paid correctly, and keep businesses compliant with local laws.

Utilize payroll software

Payroll software is an efficient way for companies to handle payroll HK. It automates calculations, tax withholdings, and MPF contributions, reducing the risk of errors and saving time.  

Outsourcing payroll

If you don't like the option of handling payroll in-house, you can outsource to an external provider. The external provider will handle the majority of payroll HK responsibilities such as managing taxes, direct deposits, and salary calculations, compliance with labor laws, MPF contributions, payslip generation, and record-keeping.