One of the most crucial aspects contributing to China's unmatched economic progress is its worker force. Other factors which have propelled the country’s global appeal are the pro-business government policies and a flourishing entrepreneurial environment. China plans to accelerate its progress in the coming years by leveraging its young workforce and large-scale manufacturing prowess.
The compensation laws of employees in China are complicated to follow. The large population of workers and the various laws across its cities pose a challenge to global organizations. This detailed guide will help you navigate the complexities of payroll in China.
How is Payroll Calculated in China?
A typical payroll in China comprises gross salary and the social security contribution.
The gross salary is calculated by adding the net salary and the income tax. The net salary is the amount an employee receives every month via their preferred payment method.
The general formula is:
Monthly Gross Salary + Social Security Contribution = Employment Cost.
Important Elements of Salary Structure in China
There are several elements of the salary structure in China. Some of these elements are:
- Gross salary: The amount of money before the deductions for individual income tax and employee contributions is known as gross salary. The gross salary is split into two categories: fixed salary and variable salary.
- ~~Fixed salary – this is the amount that is indicated in the job contract as a fixed amount.
- ~~Flexible salary- Commission, bonus, allowance, overtime payment, or any other changeable sum that is not fixed and may vary from month to month is the flexible salary.
- Annual bonus: Companies might also provide yearly bonuses and the base income. The bonus might be paid once a year or added to the monthly wage.
- Allowances: Several allowances are a part of the salary structure in China. Some of these allowances are:
- ~~Housing Allowance
- ~~Children’s education expense allowance
- ~~Meal Allowance
- ~~Language training allowance
- Social security: This is a mandatory contribution deducted from employees' earnings. Due to differences in municipal rules, social benefit rights and rates are personalized and dependent on the employee's place of employment and resident status.
- Housing fund: The Public Housing Fund (PHF), or Individual Housing Fund, is a government-mandated social contribution in China. While this is a mandatory deduction, it benefits employees because it functions as a savings account for housing purchases. The employer also contributes to this fund. The PHF demands that employees file an annual declaration only if their annual income exceeds RMB 120,000.
Taxes: Employees' tax deductions in China vary depending on the legislation in the city or region where the company is located. It is calculated and paid to the employee every month by the business. The income payroll tax in China is based on the employee's income level. The majority of the government-mandated social benefits are not taxable. On the other hand, the PHF necessitates a more complicated calculation. Unless their annual income exceeds RMB 120,000, employees are not required to file an annual declaration.
How to Set Up a Payroll in China?
You must create a subsidiary and open several bank accounts before setting up a payroll in China. Employees must receive all remuneration in the local currency, the Chinese yuan.
You must also have a robust written employment contract incorporating social insurance, working hour limits, and working conditions. Furthermore, the employer must mention the remuneration and all the protection measures taken in the workplace.
In China, only written contracts are recognized legally. This is done to protect the interests of both the employers and the employees.
A Step-by-step Process of Payroll Processing in China
Listed below are the steps are taken for processing the payroll in China:
- Register the employees in the payroll system: The payroll system collects entries from all employers since it acts as a record for the government. Some information about the employees required for the registration include:
- ~~Number of employees
- ~~Payroll software that you will use
- ~~Payroll Schedule
- ~~Basic information about the employees like name, date of birth, etc.
- Decide the gross pay: Employees' gross wages are their earnings before taxes, and it does not include retirement contributions. An hour, a pay period, or a calendar year can all be used to measure gross wages. When computing gross salary, you must add taxable fringe benefits. For example, if you reimburse your employees for cell phone or parking charges, you must include these perks in their total compensation.
- Calculate the deductions: Once the gross pay is decided, you must factor in all the deductions. This would include taxes or employee benefits that might be a part of the employee's salary structure.
- Deliver the payslips: Before you finish processing payroll in China, you should complete the payroll reconciliation to check for errors. Along with your tax records and general ledger, you should inspect your payroll register. Most payroll software systems allow employees to examine their payslips. Employers who manually process payroll should also provide payslips to employees as proof of income.
- Maintain payroll records: Once all the payslips have been disbursed, you will have to record every transaction in the payroll records. This record has to be maintained for about five years. This is because the records act as proof of payment of the employee salaries.
Several payroll contributions play an essential part in the payroll in China. Some of these contributions are:
- ~Employee Social Security (EESS): Employee contributions in China are 8% and include pensions, health insurance, maternity insurance, work-related injury insurance, and unemployment insurance. These changes are subjective to the employee’s location.
- ~Employer Social Security (ERSS): Employers in China contribute 20% to social security, paying for pensions, health insurance, maternity insurance, work-related accident insurance, and unemployment insurance. This varies by location, but there is usually a cap on the employer payment, with the maximum social security contribution never exceeding three times the average monthly wage.
Chinese law has mandated both employer and employee social security for expats since 2011.
Furthermore, employers should know the three different income tax rates in China based on income.
- For total income, progressive tax rates of 3 percent to 45 percent in excess are applicable.
- Income from operations over the stated amount is subject to progressive taxation at 5% to 35%.
- Interest, dividends, bonuses, income from the lease of real estate, revenue from the real estate transfer, and accidental income are taxed at a proportional rate of 2%.
Most employers release salaries to their employees on the last working day of every month. Furthermore, Chinese employees receive a customary “13th month” or “14th month” pay in the month of the Lunar New Year or Spring Holiday.
China Payroll Options for Companies
There are several payroll options for employers in China. Some of these options are:
- Remote Payroll: When a foreign corporation, i.e., a non-resident company, pays a resident employee in China, this is known as remote payroll. A non-resident company's only way to pay its employees (both local and international) in China is to engage a fully outsourced service like a GEO, like Multiplier, or FESCO (Foreign Enterprise Service Company), which will hire and pay the employees on their behalf.
- Local Payroll Administration: In some circumstances, a business will register in China using one of the accessible forms (RO, WFOE, or JV) but opt to have another company handle its payroll. This can be done with the help of a payroll service. It's crucial to remember that, as the Employer of Record, the corporation is still entirely responsible for ensuring that all employment, immigration, payroll tax in China, and payroll rules are followed. Payroll computations, payments, and filings, on the other hand, can be handed over to a payroll service.
- Internal Payroll: Larger organizations may manage payroll for foreign and domestic employees with an internal team. For this, they must finish the incorporation process, register the company, and hire the essential personnel. However, you will need experienced professionals who have extensive knowledge regarding payroll tax in China.
To ensure that everything is done in full compliance with the Chinese laws, the company will need a local accounting firm and possibly legal assistance.
Entitlement and Termination Terms
Employee rights, such as medical leave, personal days, and maternity leave, should be outlined in an employment contract, which is required before setting up payroll in China. Employees in China are entitled to up to 12 months of paid sick leave if their illness or injury is related to their work. Medical leave for non-work-related injuries can last anywhere from three to 24 months.
The terms of an employee's termination differ depending on their contract. Fixed-term agreements do not require notice, but the length of notice for other types of agreements varies depending on the reason for termination. Employers can fire an employee without notice if they have a legitimate cause. However, terminating an employee without any reason requires a 30 days notice.
China Payroll Processing Company
Partnering with a global PEO-EOR firm can take numerous responsibilities off your shoulders. For instance, a PEO company can handle your employee payroll, compliance requirements, and international employee management, among other things.
You can compare the services of different payroll processing companies online and choose the one that best suits your business needs.
How Multiplier Can Help With Global Payroll?
To streamline payroll processing in China, you can trust Multiplier. We are well-known for providing PEO services to a wide range of businesses across the globe. With Multiplier, you can focus on expanding your business beyond borders while we oversee the compliance, onboarding, and payroll-related activities.
We take pleasure in providing the best SaaS-based PEO services available, which can help you with everything from calculating gross pay to filing federal taxes.
Frequently Asked Questions
Is a verbal contract binding in China?
No, only written contracts are binding in China.
Is the Social Security deduction mandatory in China?
Yes, such kinds of deductions are mandatory in China.
When can the language training fees be reclaimed?
The official tax invoice produced by the indicated education establishments can claim foreign language training and children's schooling fees in China.