MAY 2020
Human Resources in China
The Technical Guide
53
4.1 INTRODUCTION
The purpose of this chapter is to offer HR,
Compensation & Benefits professionals in China an
initial mapping of the different funds that go on top of
the gross salary to employees. Having already
reviewed social security and individual income tax in
China in the previous chapter, here we will look at
how the contributions to those funds are calculated;
and what is ultimately the total cost for an employer
when given a gross salary.
Because it is highly intertwined with the above, this
section will also cover the necessary calculations to
derive from the gross salary the actual net salary the
employee will take home. This is also highly relevant to
the employer since, in China, it is the employer’s
responsibility to calculate and withhold the payments
on the employee side for the employee’s individual
income tax, as well as the employee’s social security
monthly payments.
Definitions
Prior to addressing the mathematics and calculations
implicit in the purpose stated in the above introduction,
it is necessary to establish some definitions.
The following are concepts that we will be referring to
later on, and it is important to clarify them beforehand.
The social security and individual income tax law in
China have been extensively discussed in the previous
sections of this chapter.
Monthly BASE salary: The fixed amount the employer
guarantees the employee on a monthly basis. The
base salary has to be stated in the labor contract.
Monthly GROSS salary: Adding to the base salary, an
employer might offer an employee fringe benefits such
as bonuses, allowances, or even stock. Employers
should be wary though about including such payments
in the labor contract, as this will make them legally
bound to pay them. In the labor contract provisions
can be stated that benefits will be paid if performance
is above a certain level of expectations and if the
business performs well.
Individual Income Tax (IIT): A progressive tax system
with tax rates ranging from 3 to 45 percent. An
employer is responsible for deducting IIT on salary
In China, it is the employer’s
responsibility to calculate and
withhold the payments on the
employee side for the
employee’s individual income
tax and social security monthly
payments.
income before paying a net amount to its employees.
Payments of IIT from other sources of income are the
responsibility of the individuals. For more on IIT, refer to
3.2 Individual Income Tax (IIT) Law in the previous
chapter.
Monthly NET salary: The monthly net salary is the
actual amount the employee will receive in his/her
pocket every month, after adding to the base salary
whichever allowances may apply, overtime pay, and
bonuses; and deducting the employee’s individual
income tax (IIT) and the portion of the mandatory
social benefits payable by the employee.
This is, first and foremost, an employee-relevant
definition. However, for the reasons already explained
in the introduction, the monthly net salary is also highly
relevant to the employer.
All Chinese employees and employers are required to
contribute to social security on a monthly basis. For
more details on social security contributions from part-
time employees, see page 44.
Monthly TOTAL employer cost: This is an employer-
relevant definition. The addition of the base salary,
allowances, bonuses, non-mandatory benefits (i.e.,
non-mandatory housing fund, non-mandatory pension
plans), and the employer’s portion of the mandatory
social benefits results in the Monthly TOTAL employer
cost.
Mandatory social benefits (social insurance and
housing fund): for a thorough review of the different
funds that constitute the social security in China see 3.1
Social Security in China in the previous chapter.
