How to Calculate an Employee’s Payroll in China? (Part III)

October 11, 20192:14 pm496 views
How to Calculate an Employee’s Payroll in China? (Part III)

Are you planning to run a business in China? Starting company in a foreign country could be daunting, especially if you are not familiar with its customs and laws regarding employment. In this three-part article, you can learn how to calculate an employee’s payroll in China.

Part I and Part II can be read here.

Part III: Individual Income Tax

  • What is the basic individual income tax Calculation Formula?

Monthly Taxable Income= Gross Income – IIT Exemption Threshold

Individual Income Tax Payable= Monthly Taxable Income x Applicable Tax Rate – Quick Deduction

Note:

  1. Gross Income: After deduction of employee mandatory benefit (social insurance & housing fund)
  2. IIT Exemption Threshold: 5,000 per month, 60,000 per year
  • What is the latest individual income tax rate in China?

Due to the modification of Chinese Individual Income Tax policy, the taxable amount and tax rate is calculated changing from monthly to annually. Below is the latest tax rate:

2019 New Tax Rate (RMB)
GradeAnnual taxable incomeTax rateAnnual Quick reduction
1Below 360003%0
236000 to 14400010%2520
3144000 to 30000020%16920
4300000 to 42000025%31920
5420000 to 66000030%52920
6660000 to 96000035%85920
7Over 96000045%181920
  • What is an example of an individual income tax calculation?

Here is one simple example of the employee’s IIT tax calculation, which is based on Employee A’s January, February, and March’s taxable income is RMB 30,000 each month (already deduct the IIT exemption, mandatory benefits, and no specific additional deductions), below is the calculation details of how much IIT shall be calculated in Jan, Feb and Mar:

January:

Annual taxable income: 30,000

Applicable tax rate: 3%

IIT for January= 30,000*3%-0=900

February:

Annual taxable income is accumulated: 60,000

Applicable tax rate: 10%

Accumulated Yearly IIT: 60,000*10%-2520=3480

IIT for February= Accumulated Yearly IIT-IIT for January=3480-900=2580

March:

Annual taxable income is accumulated: 90,000

Applicable tax rate: 10%

Accumulated Yearly IIT: 90,000*10%-2,520=6,480

IIT for March= Accumulated Yearly IIT-IIT for Jan-IIT For Feb=6480-900-2580=3,000

  • Any specific additional deductions that help employees to save the tax contribution?

Yes, according to the new tax laws that already come into effect, an employee is entitled to benefits not only of the RMB 5,000 tax exemption each month, but they also are also entitled to additional deductions under the following requirements, which reducing their contribution towards the individual income tax. Below are the specific additional deductions:

  1. Expenses for children’s education
  2. Expenses for further self-education
  3. Healthcare costs for serious illness
  4. Housing loan interest
  5. Housing rent
  6. Elderly care expense

It is the employees’ responsibility to declare their specific additional deduction through the government official tax system, website or app in a timely manner. Once the declarations have been submitted by the employee, employer is able to get the information through and system and shall apply the deductions towards the individual income tax when calculating the monthly salary and tax.

See also: HR Dilemma: Why Outsource Payroll?

  • How to calculate the individual income tax if my employee applies the specific additional deductions?

Below is an example helps you to understand the calculation:

Background:

In 2019, one employee’s monthly gross salary in each month is RMB 30,000;

Monthly IIT exemption deduction is: RMB 5,000;

Monthly employee’s mandatory benefits deduction is: RMB 4,500;

Employee apply specific additional deductions that adds up to RMB 2,000 (One for children’s education and one for supporting the elderly)

The individual income tax payable in the first three months are calculated below(RMB):

January: (30,000-5,000-4,500-2,000) *3% = RMB 555;

February: (30,000 *2-5,000 *2-4,500 *2-2,000 *2) *10% -2,520-555 = RMB 625;

March: (30,000 *3-5,000 *3-4,500 *3-2,000 *3) *10% -2,520-555-625 = RMB 1,850

Biggest Changes After China Tax Reform in 2019

Foreign company shall know that under the new tax policy in 2019, the taxable amount and tax rate is calculated from monthly to annually. The monthly tax amount is calculated based on the annual taxable amount until the current month minus the tax of previous months.

Using this calculating method, as time passes and the annual income accumulates, the tax rate level will go up, Therefore, even if the monthly gross salary remains the same, the monthly tax amount will increase while the monthly net salary will decrease. This calculating method does not change the overall annual taxable amount nor the annual tax amount.

Due to the complexity and changing policies in China, foreign companies do need to fully understand these polices when handling employee’s payroll and salary or outsource the payroll to a professional agency to ensure the legal compliance and focus on their main business.

China Payroll Calculator

Use HROne’s payroll calculator to have an estimation quickly and easily on the total cost of employment of your employees in China.

Author Bio

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.