Payroll Compliance In China: What Do You Need To Know?
China, the world’s second-largest economy with an estimated GDP of 14.5 trillion dollars, is one of the first places foreign investors look when considering expanding their enterprise. With low-cost labor, a substantial domestic market (given its enormous population), and strategic geographical location, China is a global economic powerhouse with an unparalleled manufacturing sector. Read more about Payroll Compliance in China.
Although Covid-19 managed to slow down China’s economic growth by a few percent, it has remained relatively buoyant in recent months. Investors haven’t lost interest and are still looking at China to establish their businesses; however, it becomes tricky when navigating new business environments, especially where language can be a barrier.
One of the first aspects of establishing a business anywhere is aligning with the local business laws. Given that payroll comprises one of the biggest chunks of operational costs and can quickly become complicated, it needs vigilant compliance. Let’s look at how to navigate payroll in China for smooth operation.
Employment contracts in China can hold for a fixed or non-fixed term or can be based on projects. These contracts must include the name, address, and legal representation of the employer and employee information like their identification information and address. The contract has to mention the terms of service for employment, including the description of the work, probation, remuneration and benefits, social insurance, working hours and overtime, leave policies, and work conditions.
Employee contract information is essential for the formulation of payslips, and that reflects payroll compliance. According to China’s Labor Contract Law, a written labor agreement is mandatory. It must be formed at the start of an employment relationship, which is when the employee begins working. If the employment relationship is already established, the written contract must be formed within one month from when the employee starts to work. Employers who fail to conclude a written labor contract after more than a month but less than a year from the start date of employment are liable to pay the employee two times their regular salary for each month without the labor agreement.
The minimum hourly or monthly wage in China differs by region, making sense, considering the country’s vast economic disparity. Local administration is responsible for setting up new guidelines for minimum wage every 2 years based on the cost of living, the region’s economic health, and average wage levels. The minimum wage has seen a steady increase, considering China’s one-child policy and its effect on the current labor pool. Employers have to comply with the minimum wage requirements under legal employment contracts; otherwise, the employee has grounds for legal claims against the employer.
Operating as a foreign company in China requires understanding the social insurance system in which both the employer and employee are required to contribute. The policies vary depending on where the business operates and include contributions for unemployment, pension, medical insurance, and a housing fund that appear in the payroll compliance. Additionally, the employer has to contribute towards maternity and insurance from work injuries depending on the job’s nature.
Taxes are, naturally, an integral part of payroll compliance. Employees in China have to file individual income tax (IIT) on their gross salary. The taxable amount is withheld by the employer for submission to their corresponding taxation bureau on the 15th of every month. As of 2019, the tax applies to Chinese residents and expats who have been earning in the country for more than 183 days. It can vary up to 45% plus a fixed deduction depending on an individual’s worldwide monthly income and where it falls on the tax bracket.
The tax is levied on an employees’ income and other monetary benefits they may receive, such as stocks and bonuses.
Payroll doesn’t just involve handing out checks to employees. There are several other associated tasks that companies in China need to abide by such as, registering new employees within the payroll system and social security, gross salary calculation and preparation of payslips, disbursement of salary via checks or bank transfer, and maintaining records. Failure to comply with any of the associated regulations may result in hefty penalties imposed by China’s labor, tax, or social security agencies.
When venturing into foreign lands with complicated business requirements, it’s best practice to outsource some of these tasks, like payroll and accounting, to professionals familiar with setting up operations there. Aadmi helps with expanding your business to foreign lands for a broader market audience and continual growth.