Read on to learn how to manage HR and payroll compliance in Saudi Arabia. The following checklist is essential for employers and HR leaders to help them stay on top of the payroll structure setup process and key compliance areas.
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Setting Up Payroll in Saudi Arabia: What Does the Process Look Like?
Before a business can process payroll, it must set up a legal entity in Saudi Arabia and register with the relevant authorities.
Company Payroll and Management Registration in Saudi Arabia
Firstly, businesses must be officially registered with several key government agencies:
- Ministry of Investment (MISA): MISA issues investment licenses that allow non-Saudi companies to operate in the Kingdom.
- Ministry of Commerce (CoC): Securing a commercial registration certificate authorizes a business to start commercial activities in Saudi Arabia.
- Ministry of Human Resources and Social Development (MHRSD): This online service allows businesses to issue and renew work visas, create and document contracts, among other services.
Bank Account & Payment Structure
Additionally, businesses must ensure they have an active bank account to complete the payroll structure setup.
Employers must:
- Open a corporate bank account with a local bank.
- Process all employee salaries through this account to comply with the Wage Protection System (WPS).
- Submit monthly payroll data to WPS and confirm that employees are paid correctly and on time.
Employee Registration
Lastly, businesses have to ensure that employees are registered in government portals to certify proper documentation and record-keeping. This step is essential for smooth payroll management and avoiding legal issues.
These portals include:
- QIWA: Digitally authenticates employment contracts and ensures compliance with labor laws.
- Muqeem: Manages work permits (Iqama) and residency renewals for expatriates.
- GOSI: Handles social insurance contributions and employee benefits.
Related Read: Business Setup In Saudi Arabia for Foreigners: Understanding the 20-Step Roadmap
Muqeem, Qiwa, Mudad, GOSI, Absher: Overview of Key Government Portals and Their Functions
Government portals are designed to ensure employees receive proper wages/benefits and help businesses streamline payroll processing.
QIWA: Documenting Employment Contracts & Saudization Quota
The QIWA portal plays a crucial role in helping employers manage employment contracts and workforce mobility, such as transfers.
Employers must:
- Register all employment contracts on QIWA for them to be legally binding under Saudi labor laws.
- Ensure compliance with Saudization (Nitaqat) requirements, which mandate hiring a percentage of Saudi nationals to the total workforce.
- Use QIWA for employee mobility, allowing contract renewals, transfers, or terminations within the legal framework.
Mudad: Managing Wage Protection System (WPS)
The Mudad system ensures payroll transparency through the Wage Protection System (WPS).
Employers must:
- Upload monthly payroll data to prove salaries align with employment contracts.
- Process payments through registered Saudi bank accounts.
- Maintain compliance to avoid penalties.
Muqeem & Absher: Completing Residency Procedures
These platforms handle residency and payroll-related approvals for expatriates:
- Muqeem: Manages Iqama issuance, renewals, and status updates.
- Absher: Allows expatriates to view and manage visa status
NOTE: It is mandatory to adhere to the requirements mandated by these portals, which are extremely intertwined.
This means noncompliance with one portal can render the business ineligible to perform essential processes across other portals.
Noncompliance eventually leads to serious interruptions to the business’s operating status, affecting its growth potential in the local market.
Payroll Taxation & End-of-Service Benefits: What Should Global Businesses Be Aware of?
Foreign businesses must comply with payroll tax regulations set out by the Zakat, Tax, and Customs Authority (ZATCA) to ensure proper financial reporting and taxation.
Furthermore, they are required to make mandatory contributions to the General Organization for Social Insurance (GOSI).
Payroll Tax Compliance
- GOSI contributions:
- Saudi employees: Employers contribute 12%, and employees contribute 10%, totaling 22% toward social security and pension funds.
- Expatriates: Employers pay a 2% contribution for work injury insurance, but expats are exempt from pension contributions.
- Income reporting: Employers must ensure salary payments are accurately recorded to meet ZATCA’s financial reporting and taxation rules.
End-of-Service Benefits (EOSB)
Employers are required to set aside the EOSB provisions to avoid financial liabilities when employees leave.
The Saudi Labor Law mandates severance pay for employees based on their tenure:
- Less than 5 years: Half a month’s salary per year of service.
- More than 5 years: Full month’s salary per year beyond the first five years.
Avoiding Non-Compliance with Payroll Regulations: Tips and Best Practices
Understanding the most common pitfalls and how to prevent them helps businesses adhere to key compliance requirements, build trust among their partners and consumers, and boost their growth trajectory.
Common Cases of Non-Compliance
- Missing Wage Protection System (WPS) submissions: Employers must upload monthly payroll data to Mudad. Late or missing reports can result in penalties of up to SAR 5,000 per employee and potential restrictions on business operations.
- Delays in GOSI registration: Employers must register employees with GOSI as soon as they start working. Delays can lead to backdated payments, penalties, and compliance risks.
- Employee misclassification: Hiring an employee under the wrong classification, such as treating a permanent employee as a contractor, can create legal disputes and financial penalties.
Best Practices for Compliance
- Regular compliance audits: Conduct frequent checks on government portals and internal payroll audits to remain aligned with Saudi labor laws.
Proficient in company formation and post-setup processes, AstroLabs’ on-the-ground team can help conduct these checks on behalf of its clients using the power of attorney granted to them.
FAQs About Payroll Compliance in Saudi Arabia
- What is the new salary system in Saudi Arabia?
Saudi Arabia’s Wage Protection System (WPS) is the latest salary regulation, requiring employers to submit monthly payroll data to the Mudad portal. This, as a result, ensures that salaries are paid on time and align with employee contracts. Non-compliance with payroll management in Saudi Arabia, however, can result in significant financial and non-financial consequences, such as restrictions.
- What are the payroll rules in Saudi Arabia?
Saudi Arabia has strict payroll regulations to ensure fair wages and labor rights compliance. Employers must:
- Pay salaries through a registered Saudi bank account as part of the Wage Protection System (WPS).
- Register all employees in QIWA, GOSI, and Muqeem for legal employment, social insurance, and Iqama status tracking.
- Follow labor laws regarding minimum wages, overtime pay, and end-of-service benefits (EOSB).
- Maintain payroll records for at least five years for auditing and legal purposes.
- What is the payroll cycle in Saudi Arabia?
The standard payroll cycle in Saudi Arabia is monthly, with salaries due on the last working day of the month. Any delays can lead to fines or restrictions under WPS regulations. Certainly, some businesses may offer biweekly or weekly payments, but this must be agreed upon in employment contracts.
- How are salaries paid in Saudi Arabia?
Salaries must be paid via a registered Saudi bank account to comply with WPS requirements. Employers must submit monthly payroll data to Mudad, ensuring salaries match employment contracts. But cash payments are not allowed except in rare cases, which require documentation and approval.