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Social structure of China(0) [ By Adam Livermore, Senior Associate, Dezan Shira & Associates ] In an increasingly competitive market for skilled labor, foreign-invested companies are restructuring their salary packages as a means of hiring and retaining quality staff. For this article, we outline the fundamental components of salary in China and introduce some of the structures being used by companies to increase retention and motivation levels in their staff. We also introduce the relatively new concept of outsourcing of China payroll management services in China ? a business that is becoming more popular as the operations of foreign invested enterprises in China become more diversified and complex. Compensating your employees Presumably because of its simplicity, a large number of employers still compensate their staff using the most straightforward salary package available to full-time workers in China?a fixed monthly salary with no extra incentives or tax-optimization strategy. Each month, mandatory social security contributions are deducted from each Chinese employee?s gross salary and individual income tax levied on the balance. These contributions do not apply to foreigners. The employer is then required to make social security contributions on behalf of employees as well. Usually mandatory employer contributions total about 40 to 50 percent of an employee?s base salary. There are a lot of factors contributing to the exact proportion; these are examined in the accompanying article ?Social Security in China.? Annual bonuses Many foreign invested companies in China pay annual bonuses to staff. Sometimes these will be a pre-determined, fixed amount known as the 13th month or 14th month salary. Other times they will take the form of individual or corporate performance bonuses. These kinds of bonus perform two main roles: 1. They provide staff with extra income. Bonuses are often paid before the Chinese Spring Festival when local staff will traditionally spend more money than in an average month. An employee based in Dalian receives a monthly salary of RMB10,000, giving them an annual salary of RMB120,000. After deduction of mandatory social security, assuming it is an amount of RMB1,687, their monthly income is RMB 8,313. A further deduction of RMB2,000 gives a total on which to base their taxable income each month. According to IIT calculation rules, their monthly tax burden will be RMB888. Therefore, in the absence of any kind of bonus, their annual tax burden will be RMB 10,656. But if that employee receives a flat monthly salary of RMB 9,000 with an annual bonus of RMB12,000 while still totaling an annual salary of RMB120,000, every month their taxable income will be calculated by subtracting the social security contribution of RMB 1,687 and the deduction of RMB2,000. Therefore their monthly tax burden will only be RMB688. This annualizes to RMB 8256. They will also have another IIT payment to make on their annual bonus. This will be calculated by dividing RMB12,000 by twelve, which equals RMB1,000. The percentage of tax payable on this annual bonus is set by referring to the monthly taxable bracket for employees earning RMB1,000; 10 percent. After taking deductions into account, their tax burden is RMB1,75, and the total IIT contribution for the year will therefore be RMB9,431. As you can see, by paying an annual bonus on top of a lower monthly flat salary the tax burden for the employee is reduced. In the example above, the amount of the reduction is RMB1,225, or 11.5 percent of the original tax burden. The company should balance this tax advantage with the downside?employees may leave the company immediately after receiving a large bonus. It is no coincidence that March is the peak time for job-hopping in China, and a large exodus around this time can cause operational problems in the following months. Social Security in China
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