China Payroll
Salary Package Structure in China

Salary Package Structure in China

Foreign businesses with mainland locations inevitably experience challenges when putting their human resources strategy into practice in China’s labor market. particularly while determining their compensation policies.

While complying with Chinese labor laws can be difficult, other issues like balancing the pay between international and local employees, defining benefits and allowances, or incorporating cultural differences into effective management become clear.

Being profitable while still being able to fully adhere to all labor laws and standards should be your priority as an employer. Full-time employees and employers must issue and sign a written employment contract. If the employer violates the law or fails to pay its employees’ dues, this shields them from corresponding fines or penalties.

Depending on the job, there are many different forms of contracts in China, and many terms must be included as required by law. An employee handbook is also necessary since it plays a critical role in resolving disputes when disputes between employers and employees occur.

Employee Salary Requirements from The Government

The laws in China are strict. Laws are therefore typically harsher, clearer, and more specific in their phrasing and technicality. China’s labor rules aim to ensure that all workers are treated equally and fairly. As employment and payroll laws in China differ from one Chinese city to the next, it is important to understand the most fundamental and common demands made by the Chinese government on employers.

The government expects companies to take note of the following requirements for employment compensation:

  • Wholly Foreign-Owned Enterprises (WFOE) and other limited companies may have employment agreements with Chinese nationals directly;
  •  Representative Offices, and other companies that are not limited, would need to acquire the services of third-party local entities;
  •  Any prospective employee in China is required to present proof of residence;
  •  Social insurance is required of employers for each employee;
  •  Permits and other documentation such as VISAs.

Employees’ Salary Package Breakdown

Workers are guaranteed their rights and entitlements, which at most refer to their entire wage package. So, in accordance with Chinese law, businesses must be open about how salaries are divided. Several elements of the Chinese employee compensation package are listed below:

Gross Salary and Bonus

While a fixed gross salary must be specified in the labor agreement and should be carefully considered when negotiating with a new hire, it may greatly depend on factors like the employee’s prior compensation package, the position being offered, the industry, whether the employee is a Chinese national or a foreigner, the work location, and the employee’s prior employment history.

The variable portion of the compensation is typically paid based on the employee’s accomplishments and/or satisfactory work attitude. The labor contract must also specify whether bonuses will be given to employees on a monthly, quarterly, or annual basis.

Each function and employee will require a different framework for their compensation plan. For instance, some workers should receive part of their pay based on how well they do at work, but others need a fixed income. Employers must carefully assess how much income tax will be withheld from gross salaries as well as the tax implications of adding a bonus structure for both the employer and the employee.

In general, if the employee is a foreign national, the pay must be high enough to enable him to maintain a level of living comparable to that found in his country of origin. While it is advised to provide a full package, including a basic wage that is slightly above average, if the employee is a Chinese national to increase employee retention. Employers also have the option of providing “red packet” money or gift cards around Chinese New Year, which is customary in China, as well as a 13th-month wage.

Allowances & Benefits

These days, stipends are a straightforward yet essential method of enhancing the appeal of work offers. Employers are only obligated to provide a detailed explanation of the allowance system in the employment contract; it is the employee’s responsibility to demonstrate (through a “fapiaos,” an official government invoicing certificate) that the allowances were utilized for what they were intended.

Allowances can be used to pay living costs, daily meals, tuition costs, moving expenses, and/or an annual round-trip ticket in whole or in part. Yet, there are restrictions on how they can be used. The Chinese labor legislation merely states that the allowance scheme should be “fair” in comparison to the gross income; no specific dollar number is given. In reality, the majority of businesses use a cap of 30% of an employee’s gross pay. A major risk of dealing with the Chinese tax authorities exists if this proportion is exceeded.

Please remember that Social Security benefits are available to all Chinese workers (as detailed below). Chinese citizens may also ask for supplementary medical coverage. Overseas ex-pats may decide to sign up for private medical insurance in addition to Social Security. In both situations, the business will be responsible for paying these expenses.

Additional Medical Coverage for Chinese Workers

Here is a quick comparison of Chinese Social Security and PICC commercial insurance to help you grasp the Chinese statutory benefits.

  • Chinese Social Security entails five categories of insurance, which are: basic old-age insurance, basic medical insurance, work injury insurance, unemployment insurance, and maternity insurance.
  •  As for medical insurance, Chinese Social Security doesn’t cover an employee’s family members. If an employee is ill and needs to go to the hospital, the employee should use their Social Security card and go to certain approved hospitals (which allow the use of the Social Security card). The savings from your previous social security payments (under the medical category) will be deducted, if there’s not enough balance, then you have to pay the bill first and then apply for reimbursements later.
  •  Here’s where the commercial insurance becomes helpful: you can be reimbursed for up to 90% of clinical payments (up to a daily maximum amount of 550RMB), which rate is higher than most conditions under China’s Social Security policy, which renders between 65% and 90% reimbursement rate (differentiated by age and work status in the working location).

Individual Income Tax and Employer Contributions

A key component of establishing a long-term local presence is adhering to Chinese legislation. As a result, foreign companies must be aware of the tax laws governing the hiring of Chinese or foreign workers. Both the employee and the employer pay the following contributions to the Chinese Social Security system:

  • Social Insurance: Regulated by the Ministry of Human Resources and Social Security (MOHRSS). It entails five categories which are: basic old-age insurance, basic medical insurance, work injury insurance, unemployment insurance, and maternity insurance.
  •  Housing Fund: This is a type of social insurance that allows Chinese workers to save money to buy their own houses.

The employee’s compensation package (gross salary plus allowances), which includes income tax and Chinese social security, is withdrawn each month throughout the majority of China. However, Shanghai does not require foreign employees or their companies to pay into the Chinese Social Security. The following two factors have the greatest impact on how these contributions are determined:

  • The company’s registered address 
  •  What is the highest base wage allowed by the local Chinese government there for contributions to the housing fund and social insurance?

Salaries are never a trivial calculation. Various parties have different issues that don’t always line up. When these issues collide, questions about the validity of the compensation package and employment policies start to surface. The best course of action is to have professionals who specialize in these issues walk you through the procedure and periodically advise you on any changes to the legislation, the accuracy of payroll calculations, and any other details related to paying salaries.

China Payroll services include handling employee payroll and ensuring that your business complies with legal, tax, and administrative requirements. To take advantage of our unique services, contact us now.

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