Individual Income Tax in China
For foreign companies, hiring Chinese nationals can be a good decision business-wise as these employees bring the potential for strong added value in several job functions, for instance in business development, branding, and project management. In addition, many people believe that local employees tend to require less in terms of labor costs in comparison to the foreign staff. However, it is necessary to understand that while this can be true in some cases, taxation on revenue has a much larger part in the total labor cost. That is why, in order to successfully hire and manage these local employees, capitalizing on the understanding of the salary structure of an employee in China becomes essential.
Key Payroll Components and Their Definition
Individual Income Tax (IIT)
This is calculated from the employee’s gross salary. It not only taken into account the employee’s income, but also other salary benefits such as bonuses, allowances, stock options, etc. Rates vary from 3% to 45% depending on the monthly taxable income. The contributions must be submitted by the employer to the area’s corresponding tax bureau.
Every individually calculated income tax payment from a payroll can benefit from fixed and variable tax reductions. The variable deduction is calculated from the gross salary while the fixed standard deduction is 3500 RMB for Chinese employees.
In practice, this tax can be entirely considered as a governmental requirement, as it does not represent any sort of benefit for the employee or company.
Social Security System
China’s Social Security System is complex and irregular, as it is managed on a provincial level. Each province´s legislation specifies the amounts to be paid by the employee and employer.
The employee’s contribution to the social security fund is deducted from its gross salary. The employer’s contribution is calculated separately and added to the gross salary which provides the total employment cost of the employee.
Unlike the IIT, all social security contributions can be considered as indirect benefits to employees, as they are complementary to the direct salary benefits.
When a company pays its corresponding taxes to the tax bureau, contributions are transferred into two different accounts. Employees´ contributions are deposited in each employee´s Social Security account whereas, the employers´ contributions are sent to a public Social Security account. Both types of accounts are managed by the Social Security Bureau.
According to the Chinese Social Security System, employees must first use the balance available in their individual accounts to cover the costs included in the Social Security fund. Once the employees’ account balance is finished, they will then use the public social fund account.
The Chinese Social Security system is composed of five different types of social insurance and one mandatory housing fund, the rates of which are updated each year in April (social insurance) and July (housing fund).
Social Insurance types (Pension, Unemployment, Medical, Injury, Maternity)
As a general standard, the employer’s contribution is higher, usually between 10 and 22% of the monthly salary; while 8% for the employee. Chinese citizens cannot benefit from the social pension unless contributions have been made during 15 consecutive years. An individual can receive a pension based on the accumulated amount in his/her individual fund.
If funds in the personal account end before passing away, the individual can then benefit from the social insurance account.
If an individual loses their job, it will be necessary to continue contributing to avoid losing the pension and having to start over.
In China, the law stipulates that the retirement age be 60 for men, 55 for white collar females workers, and 50 for blue collar female workers.
Those individuals who become unemployed for any reason, except for their own will to resign, can benefit from the unemployment insurance. A fixed amount will be sent on a monthly basis to the unemployed during a maximum period of 24 months.
Furthermore, the calculation of the monthly amount provided to the employee does not depend on previous contributions to the fund.
Each Chinese worker is given a medical insurance card where a small amount of money is added every month. Cardholders may use the card to make purchases in pharmacies or cover the treatment of some injuries/diseases which are specified by the authorities.
Rates tend to differ from city to city, but normally companies pay between 5 and 12% of the monthly salary, while employees’ rates stand at 2%, approximately.
If an employee gets injured while at work, the employer must first provide evidence of the accident to the insurance company, so the injured employee may have the treatment cost covered by the social insurance. Injury insurance contributionsare made uniquely by the employer with a rate standing between 0.5 and 3% of the employee’s monthly salary.
Generally, this is only paid by the employer to the Social Security Bureau where a pregnant employee is registered. The calculation of the monthly amount to be paid during the maternity period is based on the average salary of all the company’s employees.
However, in some cities such as Shanghai, for example, the calculation method is different as the company must pay the difference between the company’s average salary and the actual wage of the pregnant employee.
This supports Chinese citizens in paying for a house or to pay back their mortgage. In some cities, it may even be used to rent or renew homes.
While the various forms of Social Security Insurance are managed by the Social Security Bureau, the housing fund is managed by the local Housing Fund Bureau. This latter organisation follows a different tax scheme where there is no social pool, and, therefore, all the funds are directly transferred to the individual’s balance.
4 Additional Payroll Items to Consider
Please note that four other items are often added to the employment package total cost breakdown:
► Employer liability insurance: Covers the monthly salary to be paid while an employee is out of duty due to an injury.
Ex: A professional gets injured and is unable to work for three months. Although the Chinese Labor Law mandates the employer to pay his/her salary, the total cost is covered by the insurance. Meanwhile, it allows the company to look for a replacement during this time.
► Public liability insurance: Covers the employee for personal injury or property damages accidentally caused while the employee was indirectly on duty.
Ex: A professional accidentally breaks a taxi window when getting out of the car while on a business trip. The taxi driver is reimbursed by the public liability insurance.
► Professional liability insurance: Covers allegations of inadequate advice, services or designs that cause their client to lose money.
Ex: A container is not delivered on time to a client company in China, causing a loss of business and money. The damages are calculated and reimbursed by the professional liability insurance.
► Commercial/supplemental health insurance: Covers additional medical care which is not totally covered by the Social Security fund.
Ex: A professional selling alcoholic beverages is identified to have an advanced liver disease which the Chinese social security won’t fully cover.
Accurately measuring the cost of a Chinese employee requires considering 4 factors: the net salary, the individual income tax, and both the employee and employer’s contributions to the social security fund.
The system of social security contributions shows us that the Chinese government means to ensure the benefits of all workers as opposed to a more irregular application of such benefits by individual companies. Companies may then see this as a way of benefiting in two ways, both by removing the need for much negotiation in the hiring process, and by providing a positive alternative to setting up an in-house benefit structure and systems.