China is increasingly attracting more foreign investment into the country, boosting the number of companies starting a business in China. Consequently, the need to hire employees and understanding the local labor law is also an important facet to consider when being a foreigner doing business in the country.
This can become a potential challenge due to the extensive and complexity of Chinese laws, policies and regulations. Failure to comply with these local regulations could cost any company time, money, and most importantly the non-compliance consequences.
This article unveils the most important aspects when calculating an employee’s salary in China, which foreign companies must need to understand and learn to ensure their payroll compliance in China. To make the discussion easier to follow, this piece will be split into three parts that will be uploaded weekly.
Part I: Structure of Labor Cost/ Employee Payroll in China
This section contains information that will answer salary-related questions, such as: “What is China’s salary structure?“,“What is the total cost for hiring an employee in China?”, “How is the salary calculated in China?” But to understand all these questions, there are some terms that we must understand in regards to employee salary in China.
Gross salary is the amount of money that comes before the deduction of the individual income tax and employee’s contribution of statutory benefits. Employee’s monthly gross salary consistent of two parts: fixed salary and flexible salary.
Fixed salary: a fixed amount that stated in the employment contract.
Flexible salary: this normally refers to the commission, bonus, allowance, overtime payment or any other changeable amount that is not fixed and may vary from month to month.
Net salary refers to the amount of money that comes after the deduction of taxes and other deductibles such as insurance or benefits. In short, it is the total amount of money that an employee takes home at the end of the day.
In China, each employee is required to contribute towards their mandatory benefits, while also paying the individual income tax, both will be taken from their monthly gross salary.
During each payroll cycle, company shall calculate each employee’s mandatory benefits contribution base, which will also depend on each individual city’s contribution base and rate policy. It is the employer’s role in China to calculate and contribute the mandatory benefits and individual income tax on behalf of employees.
Employer’s contribution of the mandatory benefits shall be added up to the monthly payroll calculation. As presented below, the structure of your monthly employee hiring cost should be clear and concise.
ER: refers to employer
EE: refers to employee
So far, we have learnt about employee salary structure in China. In the next part, we will discuss about mandatory benefits for employees in China. Stay tune!
Read also: Why You Should Conduct Salary Survey in Your Company
Joy Shen is a Managing Director of HROne China. She is a strategic and business focused professional with extensive experience in multicultural environments. Joy has expertise in assisting foreign entities expanding their business in China market, with an extensive know-how in China market entry, foreign direct investment, employment relationship & practices, China payroll & benefits.
Connect with her on LinkedIn.