Adhering to local labor laws while operating a foreign business in China is a real challenge and one that shouldn’t be taken likely. Chinese labor and business laws can be complex and filled with regulatory requirements. It can be a potential minefield to understand these laws without help or research beforehand. If you don’t comply with local business regulations in China, it can cost your company lots of money, and time and you will have to deal with the scary consequences of non-compliance.
Calculating employee salaries is one of the most important issues you will encounter as an employer in China. Accurately calculating employee salaries and understanding how salaries are calculated regarding payroll and tax compliance is vital to ensure issues with the authorities are avoided.
China Labor Costs and Employee Salary Structure
This category will cover information pertaining to employee salary issues. It is all about the salary structures and the costs involved when hiring staff in China. You will find out how to calculate the salaries and what that means for you as a company. But the first port of call is to understand employee salaries in China and the terms surrounding them.
What is the definition of Gross Salary per month?
The amount of money that is paid to an employee before individual income tax, contributions, and statutory benefits is called Gross Salary. An employee’s gross salary every month is usually derived from either a fixed salary or a flexible salary basis. Here is a rundown of the two.
Fixed Salary Basis
This one is based on a fixed monthly salary payment as agreed to in the employment contract.
Flexible Salary Basis
This type of salary usually includes some form of commission payments, overtime, allowances, bonus payments, or any other amount that is not a fixed payment and can change each month.
How much monthly net salary should my employee in China get?
In reference to Net Salary, this is the amount of money that is left in the employee’s salary after taxes and other deductions like benefits or insurance payments. It’s essentially the amount of money that the employee takes home after all the deductions.
Every employee that works in China is expected to pay towards the mandatory benefits while at the same time paying off their individual income tax. Both of these will get deducted from the gross salary every month.
In the middle of a monthly payroll cycle, it’s common for the employer to work out the benefits and contributions of the employee for them. But this will depend on the individual cities and their contribution base and rate policies. This can differ from city to city and region to region. It’s the job of the employer in China to calculate this figure and work it out and then contribute the individual income tax and other mandatory benefits for the employee.
How much does hiring an employee in China cost on the monthly payroll?
You can add up the employer’s contributions and mandatory benefits to the calculations on the monthly payroll. Please see a picture below that shows you the structure of employee hiring costs on a monthly basis to get a clear and honest idea of the costs involved.
Mandatory Benefits such as Housing Funds and Social Insurance
Hiring employees in China can be complicated if you don’t understand local labor laws. The cost of employing someone in China can increase to 35-40% more than the employee’s gross salary per month because of the extra costs via mandatory benefits contributions.
What is the definition of Social Security benefits in China?
Both the employer and employee need to contribute to the mandatory benefits in China. There are five social insurances in China and also a single housing fund that you need to know about. Please check out the chart below to see the five social insurances and to understand what portions of the benefits that the employer and employee must contribute towards.
The complexities of the mandatory benefit contributions in China are well known. As each city, and even each province, has its own individual contribution base figures, policies, and procedures, it can be a potential minefield to decipher. It’s essential to comply with PRC laws if you are operating out of China as a foreign business. You need to become familiar with the local benefit contribution rules in the area your company is located. So always be mindful to fully understand these local policies and any changes or updates to the process.
So that all begs the question of how you can calculate the monthly benefits contributions in your area? Firstly, you need to ensure you know the definition of your local contribution base, and also the contribution rates so you can use the calculation formula. This is one of the most important things to know if you are paying the mandatory benefits for your employee(s).
What is the Contribution Mandatory Benefits Base?
You need to declare lots of things about your employee’s mandatory contribution base in the first month if you are hiring a new person. This has to be completed via the local government system in your location. You will then need to ensure that the contribution base gets properly adjusted each year in each individual city. Here are some things you need to consider:
If hiring a new employee, the first month’s wages is considered as the contribution base. When dealing with standard employees (for the second year of contribution), the average monthly wage of the year before is used as the contribution base.
These two examples are both limited by Minimum and Maximum base figures.
From city to city, the minimum and maximum bases will be different. They are announced on an annual basis by the local authorities in each area. Here is an example of the Contribution Base in 2019 Shanghai so you can get an idea of the figures involved:
- Max Base Contribution = CNY 21,396
- Min Base Contribution = CNY 4,279
What are the Contribution Rate mandatory benefits?
The contribution rate is similar to the base in respect to it differing from city to city. Here is another example table below of the 2019 Shanghai contribution rates for employees and employers.
What is the Calculation Formula for mandatory benefits?
Here is the exact formula that you can use:
Contribution Amount= Contribution Base X Contribution rate
Please check out this example below in Shanghai of the contribution amount of a single employee’s gross salary of RMB 10,000.
Individual Income Tax
What is the Calculation Formula for basic individual income tax?
Here is the exact Calculation Formula to work out basic individual income tax:
Monthly Taxable Income= Gross Income – IIT Exemption Threshold
Individual Income Tax Payable= Monthly Taxable Income & Applicable Tax Rate = Quick Deduction
Please take note of the below info:
Gross Income: This is the total after the deductions of the employee mandatory benefit for the housing fund and social insurance.
IIT Exemption Threshold: 5,000 p/month, and 60,000 per annum.
What are the current China rates for individual income tax?
This is a difficult question to answer because the taxable amount and tax rate are constantly changing each month. The modifications of the Chinese Individual Tax policy are also a main reason for the constant state of flux. Here is the 2019 tax rate in RMB for you to consider:
What is a good individual income tax calculation example?
It’s also important to have solid examples at your fingertips so you have a rough ballpark idea of IIT income tax calculations. Here is an example of the IIT tax calculations of an employee. It’s based on this employee’s taxable income in January, February, and March which is around RMB 30,000 per month. Bear in mind this has already been deducted from IIT exemption and the mandatory benefits. Please see the example below in regards to the calculations that determine how much IIT is calculated during those three months:
The Annual Taxable Income is RMB 30,000
The Applicable Tax Rate is 3%
IIT in Jan= 30,000*3%-0=900
The Annual Taxable Income is Accumulated to 60,000
The Applicable Tax Rate is 10%
The Accumulated Annual IIT is 60,000*10%-2520=3480
IIT for Feb= Accumulated Annually IIT-IIT for Jan=3480-900=2580
The Annual Taxable Income is Accumulated to 90,000
The Applicable Tax rate is 10%
The Accumulated Annual IIT is 90,000*10%-2,520=6,480
IIT for March= Accumulated Annually IIT-IIT for Jan-IIT For Feb=6480-900-2580=-3,000
Are there specific additional deductions to assist employees to save their tax payments?
Yes, there most definitely is. Recent tax laws that are already in use state that an employee should be eligible for other benefits and not just the monthly tax exemption of RMB 5,000. They might also be able to receive further deductions that will reduce their overall contributions that are used for individual income tax. Here are the deductions that an employee might be able to receive:
- Your children’s education expenses.
- Self-education expenses
- Healthcare, related to serious illnesses
- Housing loan interest
- Housing rent
- Care expenses for the elderly
- Care expenses for children under the age of 3
As an employee, it is their responsibility to declare the additional deductions that the government offers via the taxation system. This is not the responsibility of the employer. You can declare those specifics via the government tax system by using the app or website. But once you have made those declarations, the employer can get access to that info via the system and can then make sure those deductions are used in tandem with the monthly individual income tax and salary calculations.
How do I calculate my employee’s individual income tax or the request for certain deductions?
You can calculate your employee’s individual tax income by understanding the calculations and the point of perspective that created them. Please see below to understand the background of the calculation.
Throughout 2019, a single employee’s gross salary per month is RMB 30,000;
The IIT deduction exemption is RMB 5,000 per month;
The mandatory benefit deductions of the employee are RMB 4,500 per month;
There are other employee-specific deductions that are additional and add up to around RMB 2,000 per month and that is for one child?s education and one elderly person’s support.
Here is the first three months of the individual income tax payable calculate below in RMB for you to digest:
Jan – (30,000-5,000-4,500-2,000) *3% = RMB 555;
Feb – (30,000 *2-5,000 *2-4,500 *2-2,000 *2) *10% -2,520-555 = RMB 625;
March – (30,000 *3-5,000 *3-4,500 *3-2,000 *3) *10% -2,520-555-625 = RMB 1,850
Largest Changes After the 2019 China Tax Reform
Foreign companies operating in China must understand that the new tax policy in 2019 means that the tax rate and the taxable income are now calculated on a monthly to an annual basis. The calculations of the tax amount per month are based on the taxable amount over the year until the current month that is minus the tax from the month before.
If you use that calculation method, as the time passes throughout the year, the annual income will accumulate, and the tax rate will then increase to reflect that. That means the gross salary per month will stay the same, but you’ll see the monthly tax increase but you’ll also see decreases in the net salary per month. It can seem confusing, but the way you calculate this doesn’t change the taxable amount over the year or the yearly amount of tax.
These changes do make the tax policies in China extremely complex. Especially if you are a foreign company operating in China because you will need to understand these policies fully to handle your employee’s salary and payroll. The alternative is to outsource these issues to a professional company that is an expert on Chinese legal compliance.
Paying the Individual Income Tax for Employees
If you hire Chinese employees, their tax is based on balancing their income on a monthly basis and three different items that are subtracted from their pay. Those items are the social benefits contribution of the employee, a normal RMB 5,000 deduction, and also any other special deductions that are requested under Chinese taxation laws.
There is also a seven-level progressive rate that is applied depending on the tax brackets you are in. Check out this example table of the tax brackets and the income in annual terms.
The job of the employer is to withhold the tax amounts in full so they can submit them on behalf of the employee to the relevant Chinese authorities.
For sure, the entire process of dealing with the legal aspects and having to contact numerous Chinese authorities and bureaus in several districts does complicate matters. The paperwork alone can be lots of hassle. And if this sound too much for your foreign company, you might opt to outsource this headache of a task to local HR service providers to eliminate the tiresome process.