Employers need to be aware of their Central Provident Fund (CPF) contribution obligations across various components of employee remuneration.
As a general rule, CPF contributions are mandatory for all cash-based compensation directly related to work performance. This encompasses base salaries and any additional monetary payments that augment an employee’s overall earnings.
What are wages?
The CPF Act stipulates that wages encompass monetary compensation, inclusive of any bonuses payable or awarded to an individual in relation to their employment. Some examples of wages include:
Basic wage – Payable salary to an employee for the work performed over a period
Overtime pay – Payable salary to an employee for the work performed beyond normal working hours
Bonus – Additional salary payment to reward performance or targets
Allowance – Expenses incurred in the course of performing the work that is claimable from the company
Commission – Sales commission, sharing of earnings
Cash Incentive – Productivity incentive
Non-Wage Payments: Exemptions from CPF Contributions
The following types of payments are exempt from CPF contributions as they are not classified as wages:
Severance packages: Compensation provided upon termination of employment, unrelated to services rendered. This includes retrenchment benefits.
Expense reimbursements: Refunds for work-related expenditures incurred on the company’s behalf, not exceeding the actual amount spent. Example: Reimbursement for office supplies purchased.
Non-monetary benefits: Goods or services provided to employees as perks or gifts. For instance, a commemorative timepiece was awarded for service.
Wage Classification and CPF Contribution Calculations
Total Wages (TW) comprise Ordinary Wages (OW) and Additional Wages (AW). CPF contributions are calculated based on TW paid monthly, with distinct limits applied to OW and AW.
Ordinary Wages (OW) Definition: OW must meet two criteria:
- Earned exclusively for employment in the given month
- Payable by the 14th of the subsequent month
Example: Monthly salary
OW Ceiling:
- Caps the amount of OW eligible for CPF contributions monthly
- Gradual increase to $8,000 by 2026
- Historical data available in CPF contribution rate tables
Application: If the OW ceiling is $6,800 and the employee’s OW is $7,000, CPF contributions are calculated on $6,800 only.
Additional Wages (AW) Definition: Any wages not classified as OW
Example: Annual performance bonus
AW Ceiling:
- Limits AW eligible for CPF contributions
- Calculated per employer, per calendar year
- Formula: $102,000 – Total OW subject to CPF for the year (Note: $102,000 equals 17 months x $6,000 OW ceiling)
- To compute the Additional Wage ceiling for your employees, click here