Due to the complexity of the China local employment, payroll, and tax regulations, it is not easy for foreign employers to understand how to calculate employee salary in China and handling payroll. This article explains the most important factors to consider when hire employee in China and calculate employee salary in China, which foreign employer must understand and learn in order to ensure payroll and tax compliance in China.
Understanding Basic Knowledge of Calculate Employee Salary in China
Payroll cycle in China
In China, employees’ salary is paid on the monthly basis. Employer shall pay salary at least once a month. The specific date for the salary release date shall be prescribed by the employer and employee. In the event of a public holidays or rest day, salary shall not be delayed and shall be paid in advance.
With respect to employees who are subject to the annual salary package or whose salary are paid in accordance with the assessment period, employer shall pay salary in advance at the standard of no less than the minimum wage every month and settle accounts at the end of the year or at the expiration of the assessment period.
In case of full-time employment, employee salary shall be paid at least once a month;
In case of part-time employment, the longest settlement and payment cycle or part-time labor shall not exceed 15 days.
Employee Monthly Gross Salary
Employee monthly gross salary point to the total monthly salary before paying individual income tax and mandatory benefits contribution. Employee monthly gross salary is consisting of two parts, fixed salary, and variable Salary when calculate employee salary in China.
- Fixed Salary is usually employee’s base salary which is a fixed amount mentioned in the employment contract, but will adjusted base on sick leaves, personal leaves.
- Variable salary refers to the salary amount that shall be changed monthly including but not limited to bonus, commission, allowances, overtime payment.
- Employee monthly net salary refers to the salary amount employee can receive in cash or in their bank account.
- Employee monthly gross salary point to the total monthly salary before paying individual income tax and mandatory benefits contribution. Employee monthly gross salary is consisting of two parts, fixed salary, and variable Salary.
Employer monthly payroll and hiring cost in China
Mandatory benefits/Social Security in China
According to current law, social security is a legal obligation of the employer in China. When employer and employee enter an employment contract in China, the employer is required by law to pay the employee’s social security which is 5 social insurances and 1 housing fund base on the contribution policy in the city where employee placed. Such contribution shall all be considered when calculate employee salary in China.
If employer fails to pay employees’ social security and housing accumulation fund, employee may file a complaint with the social security bureau of the employer’s seat and the housing accumulation fund management center. For more details regarding China social security, please check Social Security in China.
What is 5 Social Insurances and 1 Housing Fund?
★ Pension Insurance: when employees reach the official retirement age in China, they can receive the pension on the monthly basis as their living expenses, and it provides life respect in exchange for care. Before employee can receive pension benefits after retirement, employee must first accumulate pension insurance for 15 years.
★ Unemployment Insurance: this covers employees’ living expenses, medical expenses, and job-transfer training, as well as production self-help and job introduction and other security measures during their unemployment period.
★ Medical Insurance: Specifically, employee is in medical treatment, which is a safeguard measure of nursing respect during illness. Medical insurance is a type of social security system that provides medical services or economic compensation to employee who are sick or injured, and it is a type of material assistance provided by the government or society. Employee can use their credit in their medical card when they take the treatment and medicines in the hospital.
★ Work-related injury insurance: when employee get injured at work, temporary or permanent loss of ability to work, employee can apply the wage income compensation from local government. It is the medical care and life care measures for employees injured at work.
★ Maternity Insurance: income subsidies and security measures for female employees during their pregnancy period.
★Housing Fund: a fund that contributed by both employee and employer. Such fund contribution all went into employees’ personal housing fund account, and can be used as their housing mortgage
What is the contribution frequency?
Social insurance and housing fund shall be contributed monthly in China. It is employer’s obligation to register employees in the company social security account when they onboard, calculate, contribute both employee and employer’s contribution on the monthly basis when calculate employee salary in China.
Who shall be responsible for the social security contribution in China?
In China, it is employer’s obligation to ensure all the employees hired are fully registered under the social security system.
Employer shall contribute all 5 social insurance and 1 housing fund, while employee shall contribute 3 social insurance and 1 housing fund. Employees’ contribution shall be deducted from their monthly gross salary and contributed under employer’s social security account.
What is the social security Contribution Base?
Employees’ insurance treatment is affected by the contribution base. The longer the contribution period and the higher the contribution base, the better the employee’s treatment and the larger the pension after retirement.
Taking Shanghai as an example, the latest 2021 social security contribution base is maximum RMB 28,017, minimum RMB 4,927.
What is the social security Contribution Rate?
The contribution rate varies from city to city as well. The latest Shanghai and Shenzhen contribution rate for both employer and employee is shown below.ontribution, or making the contribution on the incorrect basis, will all have an impact on the company’s credit with the government.
What is the social security Calculation Formula?
Monthly Contribution Amount= Contribution Base x Contribution Rate
Individual Income Tax/personal tax
Employees who worked in China shall contribute their income tax on the monthly and yearly basis of their income from the below category. Individual income tax shall also be computed when calculate employee salary in China.
(1) income from wages and salaries.
(2) income from remuneration for personal services.
(3) income from author’s remuneration.
(4) income from royalties.
(5) income from business operations.
(6) income from interest, dividends, and bonuses.
(7) income from the lease of property.
(8) income from the transfer of property.
(9) accidental income.
Monthly and Yearly declaration
Employer shall calculate and declare each of their employees’ individual income tax on the monthly basis, while employee shall declare their annual tax return by themselves through government tax APP.
Individual income tax Calculation Formula
Monthly Taxable Income= Gross Income – 5,000 (Tax Free Amount)-Social Securities Deduction- Special Deduction-other deductions
Individual Income Tax Rate
There are three type of individual income tax rate form in China which are category by the type of income.
(1) For comprehensive income, progressive tax rates ranging from 3% to 45% in excess shall apply (see below detailed tax rate form).
(2) Income from operations in excess of the specified amount shall be taxed at progressive rates ranging from 5% to 35%.
(3) Income from interest, dividends and bonuses, income from the lease of property, income from the transfer of property and accidental income shall be taxed at a proportional rate of 2%.
Example of an individual income tax calculation?
Due to the modification of Chinese Individual Income Tax policy, according to the new policy, the taxable amount and tax rate is calculated annually. The monthly tax amount is calculated based on the annual taxable amount until the current month minus the tax of previous months. Using this calculating method, as time passes and the annual income accumulates, the tax rate level will go up, Therefore, even if the monthly gross salary remains the same, the monthly tax amount will increase while the monthly net salary will decrease. This calculating method does not change the overall annual taxable amount nor the annual tax amount.
Specific additional deductions that help employees to save the tax contribution.
Special additional deduction for individual income tax (full name: special additional deduction for individual income tax) refers to the six special additional deduction stipulated in the Individual Income Tax Law. This is one of the supporting measures to implement the newly revised Individual Income Tax Law from 2019 to deduce the tax burden for employees. Below are the details of the 6 deductions.
1. Children’s education. If your child is enrolled in preschool education or full-time academic education, you can apply for individual income tax deduction at the rate of 1,000 yuan per month for each child. If you have more than one child, you can enjoy a deduction of 1,000 yuan for each child. The specific deduction person can be selected by the parents and determined by one of the parents to deduct, or the parents can deduct 500 yuan respectively.
2. Continuing education. Taxpayers can apply for individual income tax deduction if they are engaged in educational background, degree education, or continuing education for professional qualification of skilled personnel and professional technical personnel. Taxpayers who receive degree education can enjoy a deduction of 400 yuan per month. Taxpayers of vocational qualification continuing education can deduct 3,600 yuan at a time in the year of obtaining relevant certificates.
3. Housing Mortgage. If the taxpayer or his or her spouse buys the house with a loan separately or jointly, it is the first house in China and the loan is being paid, the deduction can be made according to the standard of 1,000 yuan per month, and the maximum deduction period is 20 years.
4. Housing rent. Taxpayers and their spouses who do not own their own houses in the major cities where they work and have monthly housing rent payments can apply for individual income tax deduction for housing rent. The deduction amount can be divided into three standards, 1500 yuan, 1100 yuan and 800 yuan, according to different working areas. Note that housing rent and housing mortgage cannot enjoy at the same time.
5. Medical treatment for serious diseases. After the reimbursement of medical insurance, if the financial part of an individual’s self-payment exceeds 15,000 yuan, he/she can apply for the income tax deduction for serious disease medical treatment according to the actual amount, with the maximum deduction amount of 80,000 yuan.
6. Support the elderly parent. As long as there is a supported person is 60 years old, you can declare the income tax deduction, the supported person refers to parents, and their children are lost grandparents, maternal grandparents, the monthly deduction standard is 2000 yuan, the only child can enjoy 2000 yuan, if not the only child, need to apportion 2000 yuan quota.
Employee can base on their personal institution to declare their deductions in the government tax APP. After their declaration, the company HR can find the record in the tax system and adding the deductions in the monthly salary and tax deductions.
China Average Salary Reference 2021
Zhaopin.com released a report on the demand of Chinese employers and the supply of white-collar talents in spring 2021, providing information about workplace competition and average salary for enterprises and job seekers. Below are the latest information for your reference.
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