Payroll Services in China: How Does It Work?

Whether you are planning to expand your business or establish a new operation in Asia, over the past two decades China has been regarded as a prominent location for business growth. Despite the uncertainties and challenges posed by COVID-19, China has been lauded for its resilient economic recovery and performance.

According to the latest official data released by China’s National Bureau of Statistics, China’s economy grew 8.1% from last year. Even prior to the pandemic, the Chinese market had been seen as a crucial market for multinational companies and SME’s who were seeking business growth and opportunities. Additionally, as an indicator of their tremendous economic activity, China has been the largest exporter of goods since 2009 and is the world’s second largest importer.

For business intending to operate in China, setting up and managing a payroll is one of the things that make it easy to establish a business and begin operations in the country. Here is what you need to know on how to set up and manage a payroll in China:

WHAT IS A PAYROLL?

Payroll is essentially a series of activities that involve compensating employees for a set period or a given date. The activities include calculating total wages or earnings, calculating taxes and other deductions to be withheld, arranging monetary payments, and in most cases filing taxes. It also refers to a list of people which an employer needs to compensate based on work complete or services rendered.

Payroll is usually managed by an accountant, bookkeeper, or an allocated human resources administrator of a business. Larger companies have a specific department which is dedicated to payroll activities, especially if they have a large number of employees, consultants, contractors, and other laborers. In certain cases, major companies will even have internal software or systems developed specifically to manage their monthly payroll.

PAYROLL LAWS

China has a complex legal framework that ensures employees a range of rights and protections, which are the:

• Right to earn minimum wage
• Right to have a formal employment contract
• Right to work a maximum of 40 hours a week, with fixed overtime rates
• Right to secure a housing fund
• Right to have annual leave
• Right to have social welfare that covers pensions, healthcare and unemployment

THE SOCIAL WELFARE SYSTEM IN CHINA

The social welfare system in China consists of mandatory social security contributions to government-run funds. The contributions are made by both the employer and the employee and are withheld by the employer every month.

These mandatory contributions from the employer and employee can vary depending on the city you intend on establishing as your new business location. These contributions are withheld to the following social security funds, namely:

• Medical benefits
• Maternity benefits
• Occupational injury compensation
• Pension fund; and
• Unemployment insurance fund

The housing fund is not considered a type of social welfare, but it is a mandatory contribution which must be made (optional in the case of foreign employees working in China), as such it is informally referred to as a type of social security. The housing fund operates similarly to a 401(k).

The portion contributed by an employer, is typically higher than that of the employee. Employers usually make a contribution of between 5 to 25 percent of the employee’s annual salary, which in some cases can be adjusted or negotiated with the employee during the hiring process.

TAXATION IN CHINA

China has a progressive income tax system, which ranges from 3% to 45% based on the employee’s wage bracket. The Individual Income Tax Law (or IIT) is imposed not only on Chinese employees but also on foreign nationals who are living or are getting compensated from a China-based business.

The preferential individual income tax policy allows foreign employees to enjoy supplementary tax-deductible benefits (relating to children’s educational costs, parental support, home rental expense, critical illness, and more).

Employee taxes are withheld by employers, which are then paid to the tax bureau before the 15th of every month. When applicable, shares tax, bonus tax, or severance tax will also be withheld.

SETTING UP AND MANAGING YOUR BUSINESS PAYROLL IN CHINA

When processing payroll for your business in China, payment to employees needs to be made in the country’s official currency, the Chinese yuan.

You are also mandated by law to have a strong written employment contract that details contracted work and equivalent pay, overtime rates, social security benefits, and other mandatory contributions to be withheld.

An employment contract in China should also include other entitlements such as the number of personal and medical leave days allocated. This is to ensure that both you and your employees have come to terms and agreed compensation, benefits and legal terms should there be a disruption in the employment relationship, such as termination or resignation. For example, an employee in China is allowed up to 12 months of sick leave with pay if the illness or accident is work-related. While there is no need for a formal notice to fire an employee with cause, it is required by law to provide a 30-day notice to an employee who is to be terminated without cause.

In order to hire employees legally and be able to pay them, you will be required to have an entity in China. This would further require your business to hire human resources staff dedicated to payroll management or outsourcing it to an external partner who understands the complexity of Chinese employment and compliance laws.

ADVANTAGES OF OUTSOURCING PAYROLL

1. Enhanced productivity

Outsourcing payroll enables employers and managers to free up valuable time, enabling to dedicate their resources and efforts towards more strategic, high-impact tasks.

2. Cost-savings

By working with a payroll provider, costs associated with processing payroll can be greatly reduced for organizations. This is especially pertinent for small and medium sized businesses with limited resources and money.

3. Heightened security for data

Given the complex nature of payroll processing, the risk of data breach remains evidently present when using in-house processes and software. Outsourcing payroll mitigates the risk associated with compromising activities such as embezzlement and identity theft in cases where confidential information is misused.

4. Access to experts in the field

Outsourcing payroll gives a business access to and allows them to make use of highly trained experts who are able to execute duties under changing regulatory environments and payroll systems.

5. Prevent mistakes and penalties

Given the experience and expertise of dedicated payroll teams, outsourcing payroll administration can eliminate the high and unnecessary costs associated with incorrect payments and filings.

Nowadays, there are service providers that specifically offer accounting and payroll management services, among other things. Even if you are a small business owner with under ten employees, there will always be an external payroll provider who can specifically offer services unique to the business. Some of these services include software that will allow you to keep a precise number of hours worked, worker classifications, and salary rates. Some also offer assistance in the filing documentation and taxes and dealing with government agencies and other regulators.

FINAL THOUGHTS

By using an outsourced payroll service provider, it allows you to focus on the other important aspects of the business, without having to manage the internal payroll. Due to there being service-level agreements tied to the type of managed payroll service you enlist, the risks in paying employees and other workers are significantly reduced because of the assurance that everyone gets paid on the contracted date each time. Payroll service providers also perform such services under regulatory compliance, which helps you save money when compared to internalizing this function.

PAYROLL MANAGEMENT IN CHINA

Having been established and operational in China for more than a decade, Moore MS Advisory has helped numerous companies with their payroll and tax administration needs. Distinguished for our emphasis on the delivery of high quality, our long list of clients extends across different industries and sectors all over China. Get in touch with us today and let our consultants help you with your business needs.

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