The Chinese labor force is one of the most important factors that contribute to the country’s unparalleled economic development. It would have been impossible for China to achieve this kind of rapid economic growth if not for its fundamental resource. That, along with favorable government policies and a good entrepreneurial environment, is the reason why global giants are betting big when it comes to setting up shop in China.
Now that the importance of China’s labor has been established, let's focus on the crucial task of paying them. Navigating the payroll in China for a huge population of workers, where the laws vary from one city to another, is no mean task.
- General Information
The tax year in China is between January 1 and December 31 of the particular year. The employees are remunerated in Renminbi (RNB) or Chinese Yuan (CNY). At each city-level, there is a separate tax filing system. Employers or withholding agents should use the unique user name and passwords granted to log in to the tax filing system and perform the filing and payment. Further, each city social security bureau has its social security and/or housing fund web portal and the local practice may vary.
Annual tax rates are applied to the cumulative annualized taxable income of China-domiciled employees, whereas monthly tax rates are applied to the monthly taxable income of expatriates. To calculate taxable income, the following deductions are granted:
- Standard basic deduction: CNY 60,000 per year
- Specific deduction: This is granted for the employee’s social security contributions
- Specific additional deductions: Includes deduction for formal education expense, medical expense, housing rental, etc.
- Other allowable deductions: It includes contributions to qualified corporate annuities, health insurance premium, etc.
Employment income includes severance payment, bonus, and equity-based compensation. The withholding tax varies for regular employment income, severance pay, and equity-based compensation. The progressive withholding tax rates applicable for employment income ranges from 3% to 45%.
Apart from the aforementioned details, income tax is also withheld from remuneration paid to resident labor/personnel service providers monthly as per the progressive withholding rates ranging from 20% to 40%. While for non-resident labor service providers, income tax is withheld monthly as per the progressive withholding rates ranging from 3% to 45%. Here, a deduction of 20% for expenses is also granted.
- Social Security Contribution
There are two mandatory social security contributions:
- The “Five Insurances”: Basic pension, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance
- Housing Fund: Employee’s contribution to the Housing Fund is voluntary
The monthly social security contribution is a percentage of an employee’s monthly salary, subject to lower and upper salary limits. Social insurance obligations from the employee and employer, respectively, can vary considerably depending on the city in which the contributions are being made.
The rates of social security contributions and the salary base amount vary from city to city and they get updated without any preset frequency which makes it complex for an employer to keep a track.
- Leave entitlement and pay-outs
China’s Labor Law specifies several mandatory leaves that an employer is obliged to provide its employees. Many employers choose to go beyond the legal minimum and offer their employees more beneficial leave days. Following are the several statutory leaves provided in the People’s Republic of China Labor Law:
- Annual Paid Leave: Employees who have worked for more than one year in any organization enjoy paid annual leave. Employees enjoy the same salary as during normal working hours during the annual leave. The holidays prescribed by the state, such as family leave, marriage and funeral leave, maternity leave, etc., and the period of stay and work due to work-related injuries are not included in the annual leave holiday
- Marriage leave: An employee is entitled to 3 days of marriage leave. It may be extended by local government regulations
- Funeral leave: If an immediate relative of an employee passes away, he/she is entitled to 1 to 3 days of funeral leave
- Family visit leave: Family visit leave can be availed if the immediate family does not live together with the employee. In such a case, leave days to visit spouse can be up to 30 days per year, and leave days to visit parents can be up to 20 days per year (single employees) and up to 20 days per 4 years (married employees)
- Sick leave: Sick leave can be availed in case of illness or non-work-related injury. In case of a severe illness, employees in the first year of employment are entitled to a sick leave of maximum 3 months; 1 month of sick leave shall be increased for every next full year, but not more than 24 months totally
- Maternity leave: Maternity leave of 98 days is granted including the leave for prenatal examination, childbirth, breastfeeding period, late pregnancy and delivery
- Paternity leave: While there is no national entitlement to paternity leave, local legislation generally provides male employees with some paid paternity leave
Overtime regulations are complex and vary as per the overtime pay system adopted by an employer. The same is also subject to much litigation and hence, compliance with the PRC Labor Law and Regulations becomes a lot more inevitable. Under PRC Labor Law and Regulations:
Overtime is paid depending on the work-hour system adopted by the employer is based on either based on standard work hours, comprehensive work hours or non-fixed work hours.
- Standard work-hour system is a maximum of 8 hours/day or 40 hours/week for an employee, with the guarantee of at least one rest day per week
- Comprehensive work-hour system adopts a set period (typically one month) as the base to calculate the employee’s working hours
- Non-fixed work-hour system is geared towards positions and employees on the move, who generally do not receive overtime payments, as it is considered impractical to measure their time spent working.
The mandatory requirements concerning the overtime are as follows:
- An employee extending the working hours beyond the statutory standard working hours must be paid overtime of not less than 150% of the hourly wage
- An employee working during a weekend will have to be provided with compensatory time off by the employer. If that is not possible, overtime wages of not less than 200% of the daily or hourly wages have to be paid
- If an employee is working on a statutory holiday, overtime wages shall be paid at not less than 300% of the daily or hourly wage
China has 33 administrative units directly under the Central Government. These consist of 22 provinces, 5 autonomous regions, 4 municipalities, and 2 special administrative regions (Hong Kong and Macau). Each city has its tax & social security bureau. The withholding tax from wage and salary income and labor services remuneration depends on whether China-domiciled individuals or expatriates are employed by the organization. Employers and employees need to contribute to the social security system which varies from one region to another.
You don’t need math to understand how complicated payroll can get in China. And you must make a note of the point that one of the primary languages in which all these payroll transactions and information is exchanged is Simplified Chinese – a language that not all global MNCs will be comfortable in dealing with, especially when it comes to payroll matters.
An emerging solution to these woes seems to be a payroll partner who can take the entire burden of the complex Chinese payroll on their shoulder. Remember to choose payroll services that can manage the statutory compliance and always ensure on-time delivery of payroll. Ramco's Global Payroll covers city level compliances in China spread across various provinces, besides covering payroll of other 45+ countries, on a single platform using powerful automation, equipped with AI and Machine learning capabilities. Simplified Chinese is supported by Ramco China Payroll which can be extremely helpful in various ways, such as providing detailed reports on income tax and social security filing in Simplified Chinese as well as English languages.