China is attracting more foreign investment, which is increasing the number of companies establishing themselves in the country. As a result, hiring employees in China and understanding local labor law is an important aspect to consider as a foreigner doing business in China.
Due to the extensive and complex nature of Chinese laws, policies, and regulations, this could pose a potential challenge. Failure to comply with these local regulations may cost any company time, money, and, most importantly, the noncompliance penalties. This article explains the most important factors to consider when calculating an employee’s salary in China, which foreign firms must understand and learn in order to ensure payroll compliance in China.
Structure of Employee Payroll in China
When it comes to employee salaries in China, there are a few terms that we must understand.
- Gross salary: The amount of money earned before deducting individual income tax and the employee’s contribution to statutory benefits is referred to as gross salary. The monthly gross salary of an employee is divided into two parts: fixed salary and flexible salary.
- Fixed salary: A fixed salary is one that is stated in the employment contract.
- Flexible salary: this usually refers to a commission, bonus, allowance, overtime payment, or any other variable amount that is not fixed and can change from month to month.
How much should my employee receive as the monthly net salary?
Net salary refers to the amount of money that comes after the deduction of taxes and other deductibles such as insurance or benefits. In short, it is the total amount of money that an employee takes home at the end of the day.
In China, each employee is required to contribute towards their mandatory benefits, while also paying the individual income tax, both will be taking from their monthly gross salary.
During each payroll cycle, the employer shall calculate each employee’s mandatory benefits contribution base, which will also depend on each individual city’s contribution base and rate policy. In China, it is the employer’s responsibility to calculate and contribute the employee’s mandatory benefits and individual income tax.
What is my total monthly payroll cost for hiring an employee in China?
Employer contributions to mandatory benefits must be included in the monthly payroll calculation. The structure of your monthly employee hiring cost should be clear and concise.
Social Insurance and Housing Fund are obligatory benefits
Hiring an employee in China can cost up to 35-40% more than the employee’s monthly gross salary due to mandatory benefits contributions.
What are the mandatory benefits in China?
In China, mandatory benefits must be paid by both employers and employees and must be consistent with the five social insurances and one housing fund.
They are: pension insurance, medical insurance, unemployment insurace, work-injury insurance, maternity insurace, and housing fund.
The Chinese mandatory benefit contribution system is extremely complicated. Each province and city in China has its own contribution policies and bases. Compliance with PRC laws is critical for a foreign company operating in China. Foreign companies should be well-versed in the local policies of the country in which they operate, and they should be wary of policy updates and changes.
So, how is the calculation of mandatory benefits done on a monthly basis?
First, you must learn and comprehend the meanings of the terms contribution base, contribution rate, and calculation formula. Understanding these definitions is critical when it comes to paying your employee’s mandatory benefits.
What is the contribution base for mandatory benefits?
When you hire a new employee in China, you must declare your employee’s mandatory benefits contribution base through the local government system during the first month. Each year, the contribution base will be adjusted in each individual city.
For new employees, their contribution base will be the first month’s salary.
For regular employees in their second year of contribution, the previous year’s monthly average salary will serve as the employee’s contribution base.
Both are constrained by: Maximum and minimum base values
Because the maximum and minimum contribution bases differ from city to city, the local government will announce the base annually. As an example, consider the Shanghai 2021 Contribution Base:
CNY 31,014 is the maximum contribution base.
CNY 5,975 is the minimum contribution base.
What are the contribution rates for mandatory benefits?
Contribution rates differ from one city to the next. The Shanghai contribution rates for both employers and employees in 2021 are shown below as an example.
| Employer rates | Employee rates | |
| Pension Insurance | 16% | 8% |
| Medical insurance | 9.5% | 2% |
| Unemployment insurace | 0.5% | 0.5% |
| Work-injury insurance | 0.16%-1.52% | N/A |
| Maternity insurace | 1% | N/A |
| Housing fund | 7% | 7% |
Individual Income Tax
What is the latest individual income tax rate in China?
According to the hinese Individual Income Tax policy, the taxable amount and tax rate are calculated on a monthly to annual basis. The current tax rate is as follows:
| Grade | Annual Taxable Income | Tax rate | Annual quick deduction |
| 1 | 0 – 36,000 | 3% | 0 |
| 2 | 36,001 – 144,000 | 10% | 2,520 |
| 3 | 144,001 – 300,000 | 20% | 16,920 |
| 4 | 300,001 – 420,000 | 25% | 31,920 |
| 5 | 420,001 – 660,000 | 30% | 52,920 |
| 6 | 660,001 – 960,000 | 35% | 85,920 |
| 7 | Above 960,000 | 45% | 181,920 |
Specific additional deductions that assist employees in reducing their tax contribution
According to the newly enacted tax laws, an employee is entitled not only to the RMB 5,000 tax exemption each month, but also to additional deductions under the following requirements, which reduce their contribution to the individual income tax. The specific additional deductions are as follows:
- Expenses for children’s education
- Expenses for further self-education
- Healthcare costs for serious illness
- Housing loan interest
- Housing rent
- Elderly care expense
It is the employees’ responsibility to declare their specific additional deduction in a timely manner through the government’s official tax system, website, or app. Once the employee has submitted the declarations, the employer can access the information through the system and apply the deductions towards the individual income tax when calculating the monthly salary and.
Due to the complexity and changing policies in China, foreign companies must fully understand these policies when handling employee payroll and salary, or outsource payroll to a professional agency to ensure legal compliance and focus on their core business.
China Payroll Calculation
We are your reliable payroll partner in China.
We assist foreign companies in meeting their local payroll, tax, and mandatory benefits requirements while relieving them of all administrative and human resource operations. Our services assist any foreign company that has a legal entity in China.
Contact us for more information about how to pay your employees in China.
