Chinese payroll runs on two engines. The first is individual income tax, withheld by the employer under a cumulative method at progressive rates from 3% to 45%, after a standard deduction of RMB 5,000 per month. The second is the social insurance system, mandatory contributions whose rates are set city by city, so the cost of the same salary differs between Shanghai, Beijing and Guangzhou. Both engines demand local registration and monthly filings, which is why a foreign company without a Chinese entity cannot simply run this itself, and why the practical options are an entity plus local provider, or an employer of record.
IIT withholding: cumulative, monthly, reconciled annually
Employers must calculate and withhold individual income tax on all forms of employment income, wages, bonuses, stock options and allowances, before paying the net amount to the employee. Withholding uses the cumulative method: each month's tax is computed on year-to-date earnings at progressive rates from 3% to 45%, which makes take-home pay drift downward through the year as the employee climbs brackets. The standard deduction is RMB 5,000 per month for all taxpayers, domestic and foreign alike. Residents, meaning people domiciled in China or present 183 days or more in a tax year, are taxed on worldwide income and settle up in an annual reconciliation filed between 1 March and 30 June of the following year; non-residents are taxed on China-sourced income only.
Social insurance: the rates depend on the city
Employer and employee both contribute to pension, medical (which now absorbs maternity), unemployment and work-related injury insurance, and the employer also funds a housing fund contribution under a parallel scheme. The national architecture is uniform but the rates are set locally: PwC's mid-2026 figures show an employee share around 10.5% in Shanghai and Beijing, while the employer's share ranges from roughly 23.85% to over 28% depending on the city, with pension alone at 8% for the employee and 16% for the employer. Contribution bases are also capped and floored locally. The budgeting consequence is that a China hire cannot be priced nationally; the city on the employment contract sets the employer's real cost above gross salary.
Foreign employees are inside the system
Since late 2011, foreign individuals holding a China work permit are required to participate in the statutory social security schemes, employer and employee contributions alike. Relief exists only by treaty: citizens of the twelve or so countries holding totalization-style agreements with China can be exempted from part of the contributions, primarily pension and unemployment, with the exact scope set by each agreement. Enforcement intensity has historically varied between cities, but an employer building a compliant payroll should budget for full participation and treat any local practice of non-enrollment as risk, not policy. For the employee, contributions also interact with their home-country coverage, which is worth specialist review on any long assignment.
Entity, local provider or EOR
Running payroll in China requires registrations with the local tax and social insurance authorities that only a Chinese employing entity can hold. With a wholly foreign-owned enterprise in place, a local payroll provider runs the monthly cycle for a modest per-payslip cost. Without an entity, an employer of record employs the person through its own Chinese entity, runs IIT withholding and city-rate social contributions natively, and invoices gross cost plus fee; given the employer contribution load, expect the pass-through to add a substantial share on top of gross salary, itemised by city. Whichever route you take, insist on payslips showing the actual IIT and contribution lines; the filings, not the invoice summary, are the evidence of compliance. Nothing here is legal or tax advice.
Questions people ask about payroll in china
What are China's income tax rates on salary?
Progressive from 3% to 45% on cumulative annual taxable income, after a standard deduction of RMB 5,000 per month plus social contributions and eligible special deductions. Employers withhold monthly under the cumulative method.
How much does an employer pay in social contributions?
It depends on the city. PwC's figures for mid-2026 show employer shares from roughly 23.85% in Guangzhou to over 28% in Beijing, with employees around 10.5%, plus housing fund contributions under a parallel local scheme.
Do foreign employees have to join Chinese social insurance?
Yes, work-permit holders have been required to participate since 2011. Partial exemptions exist only for citizens of countries with social security agreements with China, mainly covering pension and unemployment.
Can a foreign company pay a China-based employee directly from abroad?
Not compliantly as an employment arrangement: withholding and social contributions require a locally registered employer. The workable structures are a Chinese entity with a payroll provider, or an employer of record.