Payroll in China: A Complete Guide for US Businesses

China’s payroll system is unlike any other. With 31 provinces and hundreds of cities each setting their own rates and thresholds, the process of managing payroll in China is one of the most decentralized in the world. What works in Shanghai may not apply in Chengdu. For employers, and especially foreign businesses entering the market, this creates both administrative challenges and compliance risks.

To stay compliant, American businesses and entrepreneurs need to properly understand how payroll in China works. This guide covers every key part of the process so you can pay employees correctly, meet legal requirements and avoid costly errors. We'll also talk about how BatchTransfer can help your team do international payroll.

Legal Foundations of the China Payroll Process

China’s payroll obligations are governed primarily by the Labor Contract Law, which mandates that all employees must have a written employment contract within 30 days of starting work.¹ Failure to comply results in penalties and automatic compensation owed to the employee. While this national framework applies across the country, much of the day-to-day payroll administration is shaped by local-level regulations.

Each municipality or province determines key factors such as social security rates, housing fund contribution caps and the local minimum wage. Employers must work closely with local authorities to remain compliant, particularly when operating in multiple cities.

Because of these complexities, businesses that run their own payroll operations in China typically need dedicated HR and finance staff in each locality. If they don’t have them, they rely on professional payroll providers who understand the nuances of each jurisdiction.

Salary Components in the China Payroll Process

Salaries in China are typically divided into fixed and variable elements. The fixed portion includes the base monthly wage, which must meet or exceed the local minimum wage. The variable portion may consist of commissions, performance bonuses, allowances (e.g., housing, meal, transportation) and occasionally stock options or other benefits.

A popular feature of compensation packages in China is the annual bonus, often referred to as the “13th month” salary. This is not legally required but is a widespread practice, typically paid before the Lunar New Year. Employers should plan for this additional payroll cost during annual budgeting.

Gross salary in China includes the full amount before deductions, such as individual income tax and employee contributions to social insurance and the housing fund. The employer also makes separate contributions, which are not deducted from the employee’s gross pay but still increase the overall cost of employment.

Social Insurance and Housing Fund Contributions

A core feature of payroll in China is the mandatory contribution system known as “Five Insurances and One Fund.”² These include:

• Pension insurance
• Medical insurance
• Unemployment insurance
• Work injury insurance
• Maternity insurance
• Housing fund

Both employees and employers contribute to these programs, with rates determined at the local level. For example, in major cities like Beijing or Shanghai, the combined employer contribution rate can exceed 30% of the employee’s gross salary. Employee contributions are typically between 10% and 12%, deducted directly from monthly pay.²

The housing fund is a separate system designed to support home ownership. Contributions usually range from 5% to 12% of gross salary for both employer and employee, again depending on local rules. Employers must register employees with the appropriate housing fund bureau and make timely contributions. These housing fund contributions are strictly monitored and are often a focus during government audits.

Individual Income Tax (IIT) in China

Employers in China are legally responsible for withholding and remitting individual income tax (IIT) on behalf of their employees. The system follows a progressive tax rate structure, ranging from 3% to 45%, depending on the employee’s monthly taxable income after allowable deductions.³

Taxable income includes salaries, bonuses, allowances and most in-kind benefits. Employees are entitled to a standard monthly deduction (currently RMB 5,000), as well as additional special deductions for housing rent, children’s education, continuing education and elderly care.⁴

IIT is calculated and paid monthly, but annual reconciliation is required. The employer must ensure accurate reporting to the tax bureau and provide employees with an annual tax summary. American entrepreneurs working in China are subject to the same IIT obligations as local employees, although some may benefit from the tax treaty between the U.S. and China, which prevents double taxation and holds the withholding tax rate at 10%.

Minimum Wage Variability Across Regions

Unlike some countries with a single national wage floor, China sets its minimum wage at the local level. Each province, autonomous region and municipality establishes its own minimum monthly and hourly rates, adjusted every one to three years based on regional economic conditions and cost of living.

As of 2025, Shanghai has the highest minimum wage at RMB 2,740 per month, while less-developed regions may set rates below RMB 1,900.⁵ Employers must regularly check for updates in all locations where they operate, as failing to meet the applicable minimum wage can result in legal claims and back pay orders.

Minimum wage calculations include base pay only. Bonuses, allowances or overtime pay do not count toward meeting the legal requirement. For part-time employees, separate minimum hourly rates apply.

Overtime Pay and Working Hour Requirements

China enforces strict rules around working hours and overtime pay, which are central to the payroll process. The standard workweek is capped at 40 hours, typically spread over five eight-hour days. Any work beyond this limit qualifies as overtime and must be compensated at premium rates set by national law.

Overtime pay is calculated as follows:

• 150% of regular wages for overtime on weekdays
• 200% for overtime on rest days (usually weekends)
• 300% for overtime on official public holidays⁶

These rates are non-negotiable and must be applied to all eligible hours unless the company uses a legally approved alternative working hours system, such as a flexible or comprehensive working hour scheme. Such arrangements require approval from the local labor authority and are typically reserved for senior managers or employees in special industries.

Employers must track actual working hours accurately and reflect overtime compensation in employee payslips. Authorities have increased enforcement of overtime regulations in recent years, especially in response to public criticism of excessive working hours in sectors such as tech and manufacturing.

Leave, Public Holidays and Payroll Implications

Leave entitlements in China are governed by both national labour law and local practice. These entitlements directly impact payroll calculations and must be included in monthly wage planning.

Employees are entitled to paid annual leave based on their total years of work:

• 5 days for employees with one to 10 years of service
• 10 days for 10 to 20 years
• 15 days for over 20 years

Public holidays are mandated by the central government, with 11 national holidays observed each year. In addition, employees are entitled to paid leave for:

• Sick leave (paid at a percentage of salary, depending on tenure)
• Maternity leave (at least 98 days, with potential extensions by region)
• Paternity leave (typically seven to 15 days, localised)
• Marriage and bereavement leave

Employers must also ensure leave is documented, approved, and accurately reflected in payroll reports. Unused annual leave must either be carried over or paid out according to labour law, creating further obligations for employers who don’t enforce annual leave usage.

Payroll Cycle, Payslips, and Record-Keeping Obligations

In China, employee wages must be paid at least once per month, typically by the last working day of the month. This monthly payroll cycle is a legal requirement, and late payments can be grounds for complaints or legal claims, even if only late by a few days.

Payslips are not optional. Employers must provide detailed statements to employees each pay period, clearly listing:

• Gross salary
• Overtime pay (if applicable)
• Allowances and bonuses
• Deductions for individual income tax, social insurance and housing fund contributions
• Net salary paid

China also has strict documentation and retention requirements. Payroll records, including employment contracts, payslips, tax filings and contribution payment receipts, must be kept for a minimum of five years. These documents may be requested during routine labor inspections or tax audits.

Employers should maintain both digital and physical copies where possible, and align internal HR and finance systems to ensure seamless payroll reporting across all local agencies. Any discrepancies between reported figures and actual payments can trigger penalties or corrections enforced by the authorities.

Termination Procedures and Severance Pay

Employee termination in China is highly regulated, and employers must follow proper procedures when ending an employment relationship. Unless termination is initiated by the employee or based on serious misconduct, companies are generally required to give advance notice and pay severance.

Key rules include:

• A 30-day notice period (or payment in lieu)
• Severance pay equal to one month’s salary per year of service, capped at three times the local average wage
• Pro-rata calculation for partial years⁷

Severance obligations apply whether the contract is fixed-term or open-ended, and must be paid in full at the time of termination. Employers must also submit relevant documentation to the local social insurance bureau to close contribution accounts.

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Payroll Setup Options for Employers in China

Businesses looking to operate or hire in China must choose between running payroll through a local legal entity or partnering with a third-party provider. Each option has different compliance implications, costs and administrative requirements.

Local Entity Payroll

Setting up a wholly foreign-owned enterprise (WFOE), joint venture (JV) or representative office (RO) enables companies to directly employ staff and manage the China payroll process internally. This route requires significant investment, registration with multiple government bodies, and strict adherence to local employment, tax and social contribution rules in every jurisdiction where staff are based.

Companies must:

• Register with the local tax bureau, social insurance bureau and housing fund bureau
• Open RMB bank accounts
• Hire internal HR/payroll specialists or work with local accountants

This setup offers full control but comes with complexity and ongoing compliance risk.

Employer of Record (EOR) or Professional Employer Organisation (PEO)

Many international companies opt to use an EOR/PEO service provider to handle employment and payroll administration in China. These providers act as the legal employer on record while allowing the client company to manage day-to-day responsibilities.

Benefits include:

• Fast market entry without establishing a legal entity
• Full compliance with payroll, tax and labour law
• Local expertise to handle contributions, tax withholding and employee documentation

Leading providers like Multiplier, Skuad, Lano and Acclime offer end-to-end payroll solutions tailored to China’s local frameworks. They also help manage housing fund contributions, overtime pay, individual income tax filings and minimum wage compliance on a city-by-city basis.

Choosing the right setup depends on company size, long-term strategy and how quickly the business needs to start hiring. For many, outsourcing the China payroll process offers a faster and safer path to compliance.

Common Compliance Challenges and Best Practices

Managing payroll in China is difficult, even for experienced global companies. The system is decentralised, regulations change often and local rules vary by city. Without on-the-ground expertise, staying compliant is a constant risk.

Common compliance issues include:

• Misapplying local contribution rates: Each city sets different thresholds and percentages for social insurance and housing fund contributions. Applying the wrong rates can trigger back payments or fines.
• Incorrect individual income tax calculations: China’s IIT system requires monthly withholding and annual reconciliation. Errors can expose both the employer and the employee to penalties.
• Missing minimum wage updates: Wage thresholds change frequently at the regional level. Businesses must monitor updates and adjust salaries to remain compliant.
• Overtime mismanagement: Failure to document or pay overtime at the legally required rates is a common cause of labour disputes.
• Classifying employees as contractors: Some foreign firms mistakenly classify local hires as freelancers to avoid payroll compliance. This can result in reclassification, back pay and legal penalties.

Best practices for staying compliant:

• Partner with a local payroll provider or EOR who understands the latest national and local rules.
• Conduct periodic audits to ensure contributions, tax filings and leave entitlements are properly handled.
• Keep all payroll documentation organised and accessible for at least five years.
• Use payroll software with multi-city functionality to handle localisation needs automatically.

Because of how intricate payroll in China can be, especially with multiple cities involved, businesses are encouraged to take a proactive approach, one that combines automation, expert support, and regular regulatory updates.

Final Thoughts

Payroll in China is one of the most demanding systems in Asia. The local differences add layers of complexity, and the rules can change with little notice. If you’re not actively tracking updates in each location where you employ staff, you’re already behind.

Done properly, payroll in China can support long-term growth, help attract and retain top talent, and reduce risk. But to get there, you need a clear payroll strategy, up-to-date systems and the right partners on the ground.

Frequently Asked Questions About Payroll in China

What is Included in Payroll in China?

Payroll in China includes gross salary, bonuses, allowances, overtime pay, deductions for individual income tax (IIT), social insurance contributions and housing fund contributions. The employer also makes separate contributions to these programs.

How is Individual Income Tax Calculated in China?

IIT is calculated monthly based on a progressive tax scale ranging from 3% to 45%. Employers must deduct tax from employees’ salaries after applying standard and special deductions, and reconcile tax filings annually.

Is there a National Minimum Wage in China?

No. Minimum wage is set by each province or municipality. Rates vary widely depending on local economic conditions and are updated regularly. Employers must ensure they meet the specific rate in the city where the employee is based.

How is Overtime Pay Calculated?

China mandates premium overtime rates: 150% of regular pay on weekdays, 200% on weekends and 300% on public holidays. These rules apply unless the company has special approval for a flexible working schedule.

Do Employers Have to Contribute to a Housing Fund?

Yes. Both employers and employees must contribute to a housing fund. Rates vary by region, usually between 5% and 12% of gross monthly salary. Contributions are mandatory and monitored by local authorities.

Can a Foreign Company Run Payroll in China Without a Legal Entity?

Yes. Through an Employer of Record (EOR) or Professional Employer Organisation (PEO), a foreign company can legally hire employees and process payroll without setting up a local business entity.

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Sources:

1. Labor Law of the People's Republic of China – English Translation (NPC)
2. Bowtie: Five Insurances and One Fund Explained
3. PwC Tax Summaries – China: Individual Taxes
4. China Briefing: Individual Income Tax (IIT) Overview
5. China Briefing: Minimum Wage by Region
6. Working Hours And Overtime in China - Playroll