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How are Individual Income Taxes managed in China？
INTRODUCTION
Effective as of January 1st 2019, China has adjusted tax brackets and changed residency rules in order to reduce the tax burden on low income earners, with new special additional deductions available for resident taxpayers.
The Individual Income Tax is calculated on an annual basis. The China EOR will automatically withhold taxes in advance on a monthly basis on the accumulated income and deductions. Individuals may have additional taxes or tax returns to claim through the annual settlement process.
In China, employers or the payer of contractor's remuneration are responsible for withholding and paying individual income tax (IIT) on behalf of their employees. The IIT is calculated based on the employee’s YTD taxable income, which is their gross income minus any applicable deductions
There are several factors that influence the individual income tax burden in China. Residents are generally subject to China individual income tax (IIT) on their worldwide income, while non-residents are generally taxed in China on their China-source income only.
Q: What factors affect the individual income taxes burden of an employer in China? Is it depends solely on employment?
A: There are several factors that influence the individual income tax burden in China, and comprehensively affected no only by 9 categories of incomes, and taxes deductions by personal situation as well.
China's IIT law groups personal income into 9 categories: Employment income, Remuneration for labor services, author's remuneration, Royalties, Business income, Interest, dividends, and profit distribution, Rental income, Income from transfer of property and Incidental income. Each income category has its own tax rate(s), allowable deductions, etc .
For residents, employment income, remuneration for labor services, author’s remuneration, and royalties are combined as 'comprehensive income' for aggregate tax calculation purpose on an annual basis. Income from the other categories is taxed separately by category on a monthly or transaction basis.
Furthermore, China’s IIT law allows for several deductions when calculating taxable income. For residents, the standard basic deduction is CNY 60,000 per annum (i.e. CNY 5,000 for monthly tax withholding purpose) 1. Chinese social security contributions made in accordance with the Social Security Law and contributions made to the statutory Housing Fund are also deductible for IIT purposes .
Residents deriving comprehensive income, if eligible, can claim specific additional deductions when calculating their annual taxable income. These include deductions for child education, continued education, mortgage interest, rental expense, elderly care, major medical expense, and care expense for children under the age of 3.
Q: Please, could you share the IIT calculation under employment rules for quick reference?
A: Please refer the following details of calculation rules, and you can also refer the China Employment Wage Taxes Withholding Rules nattach for further understanding.
*The tax burden for contractor remunerations will be totally varied from that of employee compensation due to the different tax regulations and requirements for each type of engagement.
YTD income | (A) |
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YTD Tax-exempt Income(Employee Burdens) | (B) |
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YTD Threshold (5000*12 per year) | (C) |
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YTD Special Tax-exempt (Upon personal and family) | (D) |
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YTD Special Tax-exempt Add-on (Upon personal and family) | (E) |
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YTD Other Tax-exempt | (F) |
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YTD Taxable Income | (G) |
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Tax Rate | (H) |
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Quick Deduction | (I) |
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YTD tax break | (J) |
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YTD taxes paid | (K) |
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Net salary of the period= | Gross rate - IIT | ||||
IIT for the period= | (G*H-I)-J-K | ||||
Accumulated Taxable Income(G)= | A-B-C-D-E-F | ||||
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Grade | Accumulated Taxable Income | Tax Rate % (H) | Quick Deduction(I) | ||
1.00 | 0.00 | to | 36000.00 | 3.00 | 0.00 |
2.00 | 36000.00 | to | 144000.00 | 10.00 | 2520.00 |
3.00 | 144000.00 | to | 300000.00 | 20.00 | 16920.00 |
4.00 | 300000.00 | to | 420000.00 | 25.00 | 31920.00 |
5.00 | 420000.00 | to | 660000.00 | 30.00 | 52920.00 |
6.00 | 660000.00 | to | 960000.00 | 35.00 | 85920.00 |
7.00 | 960000.00 | to | …… | 45.00 | 181920.00 |
Q: What is annual one-time bonus personal income tax policy in China?
A: With respect to an annual one-off bonus awarded to an individual, there has been a preferential treatment available whereby the tax payable can be calculated separately from the individual’s annual comprehensive income (including wages and salaries, remuneration for labor services, author’s remuneration, and royalties). The applicable tax rate and quick deduction will depend on the total amount of the annual bonus divided by 12 months, which effectively reduces tax liability of the bonus.
The formula is: amount of tax payable = annual one-off bonus income × applicable tax rate – quick deduction.
A Chinese resident individual may also opt to incorporate an annual one-off bonus into their annual comprehensive income for the calculation of tax payable. Taxpayers can compare the tax burden under the two methods of tax calculation so as to choose the optimal one.
The preferential tax treatment for annual one-off bonus was previously supposed to expire at the end of 2023, and the annual one-off bonus was supposed to be combined into the comprehensive income of a taxpayer for a tax year from then on. As a result, individuals and employers were concerned about the potential increase of tax liability with respect to an annual one-off bonus. The treatment has now been extended for another four years until the end of 2027. You may find the further details in the article → Tax Benefit Policy for Annual One-Off Bonus
Q: How does Resident individual taxpayers access to the Taxation certificates?
A: They can visit the Electronic Taxation Bureau for Natural Persons or through the Official Phone App - IIT
for dynamic monthly withholding, annual taxes return process.
Q: What are the employer are obligated to do on the income taxes of the employee?
A: According to Article 9 of the Individual Income Tax Law of the People's Republic of China, the Employer as the entity paying the income to the individuals, undertakes the obligation of withholding agent during the employment existence. In other words, the EOR is handling of declaration, withholding and payment of in income tax of the employee's wage, and other taxable income caused by working for the employer.
The withholding agent shall withhold the withholding tax on a monthly or monthly basis. The withholding agent shall, within 15 days of the following month, fill in the Individual Income Tax Withholding Return and other relevant materials for the tax withheld or withheld monthly or each time, declare the tax to the tax authorities and hand it over to the state Treasury.
Q; Is it possible to agree "Net Deal" with any individuals in any pattern of workforce engagement? Or is it possible for Horizons to predict the income taxes burden.
A: From the compliance and regulated procedure of taxes burden, as the withholding agent, hiring entity is not allowed to agree "Net Deal" with individual in China.
1) All taxable incomes, deduction and the taxes burden are calculated on Year-to-date accumulated basis. That’s to say, the taxes burden of incomes increases on a monthly basis as well.
2) As mentioned in above answers, the Taxes burden makes strong correlation to the privacy including dynamic personal/family circumstances and comprehensive incomes not only employment but other sources as well.
3) The employer shall fill the contractual gross income as the base of contribution to employer burden.
Q; Is employer in China obligated to proceed annual taxes return on the employee's behalf.
A:
In China, the employer is not obligated to proceed with the annual tax return on behalf of their employees. This means that it is the responsibility of each individual employee to declare their comprehensive incomes from the previous year by 30th June of the current year.
This requirement ensures that individuals take personal accountability for accurately reporting their income and fulfilling their tax obligations. By requiring employees to submit their own tax returns, it promotes transparency and fairness in the taxation system.
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