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China payroll: Payroll & tax solutions in China

China payroll: Payroll & tax solutions in China

With a large, continually growing economy and unparalleled opportunity, it is no wonder many businesses are entering the Chinese market. When it comes to administering a payroll and calculating the correct contributions, the regulations and processes governing it differ in each country. It is important for employers in China to stay up to date with all regulations and ensure that the correct social security and tax contributions are made. In China social security contributions consist of pension, health insurance, work-related injury insurance, unemployment insurance and maternity.

How Payroll Works in China

In China, employers are required to contribute towards the Social Security of their employees, as well as ensure that the correct withholding tax and deductions are made from employees. Employers also have the duty of providing their employees with pay slips. The Social Security contributions, on both the part of the employer and employee, differ in each city. This means that if a business has employees in different cities in China, the Social Security contributions for those employees may differ.

China Payroll: Social Security Contributions

Social Security can be considered an umbrella term and is made up of the following contributions:

China payroll: Payroll & tax solutions in China

*Employees generally do not contribute towards maternity, which now forms part of the medical contribution.

Pension – The pension contribution is made by both employer and employee, with the employer contributing considerably more than the employee.

Unemployment insurance – This contribution is made to provide employees with short-term relief during periods in which they are unable to work.

Occupational Injury Insurance – Also known as workers’ compensation insurance, this provides coverage for any injuries or fatalities in the workplace.

Medical insurance – Medical insurance is implemented in order to cover medical expenses of employees for any injuries, conditions or illnesses. In China, medical now also encompasses maternity contributions for female employees. Employees are not required to contribute towards the maternity contribution.

Housing fund Contribution – This contribution is not considered to form directly part of Social Welfare, but can be included under Social Security. This contribution is made by both employer and employee and is used in order to make put a down payment on a house or to pay back a loan taken for the purchasing of a property.

China Income Tax

Individual Income Tax (IIT) in China is applicable to all individuals in the PRC, including Chinese nationals and foreigners who reside or derive income from China. For tax purposes an individual is considered to be a resident if they reside in China habitually be means of a registered address, economic ties or family connections. An individual with a Chinese hukou (Chinese household registration system) or passport is generally regarded as a Chinese resident.

A foreign national is generally deemed as not being domiciled in China and, as such, are generally taxed based on their length of residence in the PRC. A foreign national will be deemed to reside in China if they have been living in China for a 183 days or more in a calendar year, according to the revised IIT laws (effective from January 1st 2019).

Why is it Advantageous to Outsource Your Payroll in China?

1. Save Time

Using an outsourced payroll solution is typically more efficient for a small business than processing payroll internally. Leaving payroll to experts frees up hours that you can devote to other important parts of your business. Whether it is your time, staff time, or a combination, chances are the hours could be better spent winning more business, improving customer service, fine-tuning business operations or launching a new product line. Among the areas where outsourcing will save time are:

  • Processing payroll
  • Cutting and distributing paychecks
  • Calculating and paying withholding and employment taxes

2. Save Money

Many business owners underestimate the cost of processing payroll internally by failing to account for all hours spent and resources allocated to pay employees and maintain payroll paperwork. A thorough cost assessment usually proves that a small business saves money by outsourcing the processing, tracking, and filing of payroll documents. To assess your own internal payroll costs, consider:

  • Consider the cost of your time and the time of anyone who processes or “touches” payroll. Often, many people in a small company are involved in the various parts of payroll processing.
  • What savings would outsourcing provide: since an outside provider can handle all the responsibilities involved in managing payroll and answering employee questions, a small business can often eliminate or re-allocate an internal payroll resource.

3. Avoid Penalties

Calculating federal, state, and local employment taxes and filing payroll-related tax paperwork can be more than just a hassle. If it’s done incorrectly, your business may face penalties and even interest on money owed since the mistake was made. In fact, it is estimated that one in three small businesses receive a tax penalty costing over $800 each year. Outsourcing payroll does away with the risk of many of these costs and hassles because:

  • An outsourced payroll provider calculates payroll taxes, based on its expertise and close tracking of regulation changes
  • Monthly or quarterly employment tax reports are managed by the payroll service, ensuring they are submitted correctly and on time
  • Payroll providers may assume penalties that come as a result of incorrect tax calculations

4. The Case of China

Doing business in China is all but an easy task and one major issue will be payroll in China. If you’re incorporated locally, you need to ensure that your local entity is legally capable of running a payroll. Even if you are considering local incorporation in the future, a local payroll provider reduces your liability in the interim. Further, a management company accomplishes all of the same payroll responsibilities, alongside numerous other specialist services that reduce your liability even more.

5. Local Payroll in China

Your employee will need to get paid in China, but establishing a local payroll can be extremely difficult. Even if you already have a local company, you need to confirm that it’s appropriately registered to run a payroll and to file and deduct taxes. This requires sufficient administrative staff that is up-to-date on all tax requirements in China.

6. Setting up a Payroll in China

To set up a local payroll, your company will need to incorporate in China. This will be another issue necessitating extensive research; how long will incorporation take for your company, and how much will it cost? Depending on your budget and time frame, a temporary project may not justify local incorporation. In that case, it’s more efficient to outsource the administration to a local payroll provider.

Even if you plan on incorporating locally, using a payroll provider can present an extra security measure while you complete the process. This enables you to second employees onto a work site immediately, without exposing your company to unnecessary risk.

INS Global can help you find the Best Solution for your Business in China

If you want to find a payroll outsourcing company, INS Global is a local firm based in Shanghai which has helped over 200 foreign companies with its payroll solution. Recognized as the HR Outsourcing leader, we provide premium services in order for you to put your mind at ease while you are setting up your business in China.

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