Calculating payroll in China is a gross-to-net process. Employers start with the employee’s agreed gross salary, add or adjust approved monthly pay items, deduct employee-side social insurance and housing fund where applicable, calculate individual income tax withholding, and then determine the employee’s net salary.
This guide focuses specifically on payroll calculation formulas, deductions, net pay, and employer cost. For the broader monthly payroll process, see HROne’s China payroll guide. For daily and hourly wage conversion using the 21.75 salary-days divisor, see our guide to monthly salary days in China.
Companies that already employ staff through a Chinese legal entity and need support operating these calculations each month can review HROne’s China payroll outsourcing services.
Quick Answer: How Is Payroll Calculated in China?
Payroll in China usually follows this order: gross salary, employee statutory deductions, individual income tax withholding, and net pay. Employer total cost is calculated separately by adding employer-side statutory contributions and other employer-funded costs to gross salary.
| Calculation layer | Formula / rule | What it means |
|---|---|---|
| Gross salary | Base salary + taxable wage items + approved variable pay − unpaid adjustments | The starting point before employee deductions and individual income tax. |
| Employee deductions | Employee social insurance + employee housing fund + other lawful deductions | Amounts deducted from gross salary before net salary is paid. |
| Taxable income for IIT | Gross income − tax-exempt income − standard deduction − specific deductions − special additional deductions − other lawful deductions | The income base used for individual income tax calculation. |
| IIT withholding | Calculated under the applicable resident or non-resident method | The individual income tax withheld through payroll. |
| Net salary | Gross salary − employee deductions − IIT withholding | The take-home salary paid to the employee. |
| Employer total cost | Gross salary + employer social insurance + employer housing fund + employer-funded benefits + payroll or service cost | The company’s real employment cost, which is higher than gross salary. |
The final result varies by employee location, contribution base, local social insurance rules, housing fund setup, tax residency status, and the type of income paid in that month.
Gross salary, taxable income, net salary, and employer total cost are different figures. Gross salary is the starting compensation amount, taxable income is the amount used for IIT after applicable deductions, net salary is the employee’s take-home pay, and employer total cost includes additional employer-side statutory contributions and other employment costs.
What Pay Items Are Included in Gross Salary?
Gross salary is not always only base salary. It may include fixed and variable items depending on the labor contract, payroll policy, and approved monthly payroll inputs.
Common salary-related items include:
- Base salary: the fixed monthly salary agreed with the employee.
- Performance bonus: bonus linked to individual, team, or company performance.
- Commission: variable pay based on sales or business results.
- Allowances: fixed or recurring amounts such as transportation, meal, communication, or remote-work allowance.
- Overtime pay: additional wage payment where overtime is legally payable.
- Other wage items: role-specific or company-specific payments that form part of remuneration.
Employers should distinguish wage items from properly documented business reimbursements. A fixed monthly allowance may be treated differently from a reimbursed business expense supported by valid documents. The classification affects payroll calculation, IIT treatment, employee communication, and audit readiness.
Step-by-Step: How to Calculate Payroll in China
Step 1: Confirm the employee’s monthly gross pay
Start with the employee’s contracted monthly salary, then add or adjust the approved payroll items for that month. These may include bonus, commission, overtime, unpaid leave, sick leave, partial-month employment, salary adjustment, or other approved changes.
The official Foreign Investment Guide of the People’s Republic of China 2024 explains that labor contracts should include key terms such as work content, place of work, working hours, rest and holidays, labor remuneration, social insurance, and housing provident fund. This is why payroll calculation should match the labor contract instead of being handled as a separate finance-only task.
Step 2: Deduct employee-side statutory contributions
Employee-side social insurance and housing fund deductions are usually deducted from gross salary before calculating net pay. The actual deduction depends on the employee’s city, contribution base, applicable rates, and local implementation.
China’s social insurance system includes pension, medical insurance, unemployment insurance, work injury insurance, and maternity-related coverage. Housing fund is administered separately but usually appears in the payroll process. For a deeper review of statutory contribution risk, see our guide to China social insurance compliance requirements.
Step 3: Calculate IIT taxable income
After confirming gross income and statutory deductions, the payroll team calculates the individual income tax base. For resident employees receiving salary and wages, China uses a cumulative withholding method during the tax year.
The official Measures for Individual Income Tax Withholding Returns state that when paying a resident individual salary and wage income, the withholding agent should calculate tax using the cumulative withholding method and file withholding returns monthly. The same rules state that the cumulative standard deduction is calculated at RMB 5,000 per month for the number of months the taxpayer has been employed by the withholding agent in the current year.
| IIT calculation item | Meaning |
|---|---|
| Cumulative income | Total salary and wage income paid by the employer so far in the tax year. |
| Cumulative standard deduction | RMB 5,000 per month multiplied by the number of months employed by the withholding agent in the current year. |
| Cumulative specific deductions | Items such as employee-side statutory contributions where applicable. |
| Cumulative special additional deductions | Employee-declared deductions such as eligible education, housing, elderly care, or other permitted items where applicable. |
| Current-period IIT withholding | Cumulative tax payable minus tax already withheld in prior months. |
For tax residence, deductions and annual reconciliation beyond this worked calculation, read China individual income tax.
Step 4: Deduct IIT withholding
Once IIT withholding is calculated, it is deducted from the employee’s salary. The remaining amount is the net salary payable to the employee.
For resident employees, the withholding amount can change during the year because the calculation is cumulative. An employee may pay little or no IIT in early months, then move into a higher cumulative bracket later depending on annual income, deductions, and prior tax withheld.
Step 5: Confirm employer total cost
Employer total cost is calculated separately from net salary. It usually includes gross salary plus employer-side social insurance, employer-side housing fund, supplementary benefits, payroll service costs, and other employer-funded items.
The final gross-to-net result depends on the employee’s city, statutory contribution settings, tax status, deductions, and monthly payroll inputs. The following example shows how these elements fit together.
Example: Gross-to-Net Payroll Calculation in China
Worked Example: RMB 30,000 Monthly Salary in Shanghai
This Shanghai illustration uses 2026 contribution settings for an eligible resident employee earning RMB 30,000 gross per month, with no bonus, overtime, tax-exempt income or other deductions. Assume the properly registered social insurance and housing fund bases are both RMB 30,000, ordinary housing fund contributions are 7% per side, no supplementary housing fund applies, and the employee has RMB 2,000 of eligible declared special additional deductions per month. These are example inputs, not entitlements for every employee.
Month 1 means the first payroll month of the tax year with no earlier withholding by this employer. To isolate cumulative IIT, the 12-month comparison holds all inputs constant; it is a controlled illustration, not a reconstruction of actual January–December 2026 payroll or any annual base adjustment. For employer cost, assume a direct employer in a Class I industry with a 0.2% work-injury rate and no floating adjustment; an EOR or another industry may have a different assessed rate.
| Item | Amount (RMB) | Calculation / assumption |
|---|---|---|
| Monthly gross salary | 30,000.00 | Contractual example salary |
| Employee pension | 2,400.00 | 30,000 × 8% |
| Employee medical insurance | 600.00 | 30,000 × 2% |
| Employee unemployment insurance | 150.00 | 30,000 × 0.5% |
| Employee work-injury / maternity contribution | 0.00 | No separate employee-side charge in this example |
| Employee housing fund | 2,100.00 | 30,000 × 7% |
| Total employee statutory contributions | 5,250.00 | 2,400 + 600 + 150 + 2,100 |
| Basic expense deduction for Month 1 | 5,000.00 | Tax deduction only; not a cash payroll deduction |
| Special additional deduction (assumed eligible) | 2,000.00 | Tax deduction only; employee declaration required |
| Month 1 cumulative taxable income | 17,750.00 | 30,000 − 5,250 − 5,000 − 2,000 |
| Month 1 IIT withheld | 532.50 | 17,750 × 3% − 0; no prior withholding |
| Month 1 net salary | 24,217.50 | 30,000 − 5,250 − 532.50 |
| Employer pension | 4,800.00 | 30,000 × 16% |
| Employer medical including maternity | 2,700.00 | 30,000 × 9% |
| Employer unemployment insurance | 150.00 | 30,000 × 0.5% |
| Employer work-injury insurance (assumed Class I) | 60.00 | 30,000 × 0.2%; actual assessed rate may differ |
| Total employer social insurance | 7,710.00 | 4,800 + 2,700 + 150 + 60 |
| Employer housing fund | 2,100.00 | 30,000 × 7% |
| Monthly employer salary-and-contribution cost | 39,810.00 | 30,000 + 7,710 + 2,100; excludes benefits, service fees and other employer-only costs |
An assumption of exactly RMB 5,000 in employee contributions would instead produce RMB 18,000 taxable income and RMB 540 of first-month IIT with the same RMB 2,000 special additional deduction. The Shanghai inputs above produce RMB 5,250 of contributions and RMB 532.50 of IIT; the difference comes from the assumptions, not a different tax rate.
Month 1 vs Month 12: How Cumulative IIT Withholding Changes
| Payroll month | Cumulative taxable income (RMB) | Withholding rate | Quick deduction (RMB) | Current-month IIT (RMB) |
|---|---|---|---|---|
| 1 | 17,750.00 | 3% | 0.00 | 532.50 |
| 2 | 35,500.00 | 3% | 0.00 | 532.50 |
| 3 | 53,250.00 | 10% | 2,520.00 | 1,740.00 |
| 4 | 71,000.00 | 10% | 2,520.00 | 1,775.00 |
| 5 | 88,750.00 | 10% | 2,520.00 | 1,775.00 |
| 6 | 106,500.00 | 10% | 2,520.00 | 1,775.00 |
| 7 | 124,250.00 | 10% | 2,520.00 | 1,775.00 |
| 8 | 142,000.00 | 10% | 2,520.00 | 1,775.00 |
| 9 | 159,750.00 | 20% | 16,920.00 | 3,350.00 |
| 10 | 177,500.00 | 20% | 16,920.00 | 3,550.00 |
| 11 | 195,250.00 | 20% | 16,920.00 | 3,550.00 |
| 12 | 213,000.00 | 20% | 16,920.00 | 3,550.00 |
Current-month IIT equals cumulative taxable income × the applicable annual withholding rate − the quick deduction − tax already withheld, assuming no tax reductions. Month 12 therefore gives RMB 213,000 × 20% − RMB 16,920 − RMB 22,130 = RMB 3,550. With the same contributions, Month 12 net pay is RMB 21,200. Salary is unchanged; a higher cumulative tax bracket explains the lower take-home pay.
Tax source: State Taxation Administration cumulative-withholding explanation and rate table and the existing withholding-return measures. The Individual Income Tax Law, republished by the tax authority supplies the underlying resident-income framework. This resident example does not apply the separate non-resident monthly method.
How Social Insurance and Housing Fund Affect Payroll
Employee contributions reduce take-home pay; employer contributions add to employment cost. Contribution bases are determined under local rules and need not equal the current month’s gross salary. For the worked example, both bases are assumed to be RMB 30,000; the employer must verify the registered base, insurance participation and assessed rates for real payroll.
| Shanghai example contribution | Employee rate / monthly amount | Employer rate / monthly amount |
|---|---|---|
| Pension | 8% / RMB 2,400 | 16% / RMB 4,800 |
| Medical including maternity | 2% / RMB 600 | 9% / RMB 2,700 |
| Unemployment | 0.5% / RMB 150 | 0.5% / RMB 150 |
| Work injury | 0% / RMB 0 | Assumed Class I 0.2% / RMB 60 |
| Ordinary housing fund | Assumed 7% / RMB 2,100 | Assumed 7% / RMB 2,100 |
Shanghai HRSS states that the social insurance base range from July 1, 2026 is RMB 7,546–37,731, and describes the prior-year average wage and new-hire rules in its 2026 contribution-base guidance. Shanghai’s September 2026 employee guide confirms employee pension, medical and unemployment rates; the HRSS employer-rate FAQ lists the employer shares. The 2026 medical notice confirms the 9% employer and 2% employee medical rates from March 1, 2026 to February 28, 2027. The 2026 work-injury notice sets eight industry benchmarks of 0.2%–1.9%, subject to the actual assessed floating rate.
The 7% housing fund rate is a selected ordinary-fund setting, not a universal rate. Shanghai’s housing fund framework allows 5%–7% per side; supplementary contributions are separate. See the management centre’s published housing fund guidance and its official policy directory, including the August 18, 2026 annual notice. Confirm the current annual base and approved rate before applying the example. For other cities, see China social insurance contribution rates.
Employers should also avoid social insurance waiver arrangements. The Supreme People’s Court has clarified that contractual agreements excluding social insurance contributions are invalid. Paying employees extra cash instead of contributing to social insurance is therefore not a safe payroll strategy.
How 21.75 Monthly Salary Days Affect Payroll Calculation
Use the applicable monthly wage ÷ 21.75 for daily wage, and ÷ 21.75 ÷ 8 for hourly wage, as explained in the existing Shanghai official salary guidance. The divisor is a wage-conversion standard, not the actual attendance days in a particular month. For application and partial-month examples, see monthly salary days in China.
How Overtime Affects Payroll Calculation
Under the standard working-hours system, calculate the applicable hourly wage as monthly overtime wage base ÷ 21.75 ÷ 8, then apply at least 150% for workday overtime, 200% for rest-day work without compensatory rest, or 300% for statutory holiday work. These distinctions follow Labor Law Article 44, explained by MOHRSS; approved alternative working-hours arrangements require separate review. For wage-base and recordkeeping details, see overtime pay in China.
How Partial-Month Salary Is Calculated
Partial-month salary may arise when an employee joins or leaves mid-month, takes unpaid leave, or has other unpaid salary adjustments. In many cases, employers use the daily wage derived from the 21.75 divisor rather than dividing salary by the actual calendar days in that month.
For example, if an employee’s monthly wage is RMB 6,000 and the employee is entitled to 10 payable days under the applicable payroll rule, the daily wage benchmark would be RMB 6,000 ÷ 21.75. The payable amount would then be calculated based on the approved payable days and the company’s lawful payroll policy.
Employers should ensure the labor contract, payroll policy, attendance record, and payslip support the partial-month calculation. Inconsistent partial-month calculation is a common source of employee disputes.
How Bonuses and Commissions Are Calculated
Bonuses and commissions should be calculated according to the employment contract, commission plan, bonus policy, or written approval record. Employers should avoid vague promises such as “bonus to be decided later” without a clear calculation method or approval process.
Payroll teams should confirm:
- whether the bonus or commission is contractual, discretionary, or policy-based;
- which performance period the payment relates to;
- whether the employee must remain employed on the payment date;
- whether clawback or adjustment rules apply;
- how the item is treated for IIT and payroll reporting;
- whether the payment affects social insurance or housing fund contribution base under local practice.
For sales employees, customer success roles, recruiters, and project-based employees, variable-pay records are especially important. The payroll calculation should be supported by approved performance data, not informal chat messages only.
Check the applicable treatment before processing annual bonuses; see China bonus tax.
Allowances vs Reimbursements: Why Classification Matters
Allowances and reimbursements are often confused. A fixed monthly allowance is usually part of compensation unless clearly structured otherwise. A reimbursement is normally a repayment of a business expense supported by valid documents and approval.
| Item | Typical treatment | Payroll risk |
|---|---|---|
| Fixed transportation allowance | Often treated as a recurring pay item. | May be misclassified if treated as reimbursement without support. |
| Meal allowance | Depends on policy, documentation, and payroll treatment. | Should be consistently classified and communicated. |
| Business travel reimbursement | Usually requires valid supporting documents and approval. | Weak documentation can create tax and audit risk. |
| Remote work allowance | May be treated as a fixed allowance unless supported as business reimbursement. | Needs clear policy before payroll processing. |
Employers should define allowance and reimbursement rules before payroll. Otherwise, the same payment may be treated inconsistently across employees and months.
How to Calculate Employer Total Cost in China
Employer cost is broader than employee gross salary. For workforce budgeting, employers should calculate total monthly employment cost.
| Cost item | Included in employee net salary? | Included in employer cost? |
|---|---|---|
| Gross salary | Partly, after deductions and IIT | Yes |
| Employer social insurance | No | Yes |
| Employer housing fund | No | Yes |
| Supplementary benefits | Depends on benefit type | Yes, if employer-funded |
| Payroll administration costs | No | Yes, where applicable |
| Severance, unused leave, or final payroll exposure | May be paid at exit | Should be budgeted as risk or accrual where relevant |
A company budgeting for a RMB 30,000 monthly salary should not assume its monthly employment cost is RMB 30,000. Employer-side statutory contributions, benefits, and payroll administration costs can materially change the total cost.
With the Shanghai example settings, salary plus employer statutory contributions is RMB 39,810 per month before other employer-funded items. Use the China salary calculator to explore assumptions, then confirm local settings for the employee.
Payroll Calculation for Foreign Employees
Foreign employees may require additional payroll review because tax residence, offshore or split compensation, social insurance participation, treaty exemptions, and expatriate benefits can affect the final calculation.
Payroll teams should confirm the employee’s tax status, total China-related compensation, applicable statutory contributions, and the treatment of any allowances or benefits before calculating net salary.
For a detailed review of these issues, see HROne’s China expat payroll and IIT compliance guide.
Payroll Calculation Records
Employers should retain sufficient records to explain how each employee’s salary, deductions, tax withholding, and net pay were calculated.
Key payroll records may include:
- labor contracts and salary amendments;
- monthly payroll reports and payslips;
- attendance, leave, and overtime records;
- bonus and commission approvals;
- social insurance and housing fund records;
- IIT withholding records;
- final payroll records at resignation or termination.
Payroll records should be accurate, access-controlled, and retained in a way that supports payroll review, employee queries, and regulatory checks.
Common Payroll Calculation Mistakes in China
Common mistakes include:
- Confusing gross salary with net salary. Employees may negotiate take-home pay, while contracts usually refer to gross salary.
- Ignoring employer total cost. Employer-side social insurance, housing fund, and service cost should be budgeted separately.
- Using one city’s contribution settings for all employees. Social insurance and housing fund rules are locally implemented.
- Using actual calendar days instead of 21.75 where the 21.75 divisor applies. Daily and hourly wage calculations should follow the correct payroll method.
- Calculating IIT as a flat percentage. Resident salary IIT withholding is cumulative and depends on deductions and prior tax withheld.
- Misclassifying allowances as reimbursements. Fixed allowances and business reimbursements need different documentation.
- Skipping social insurance by agreement. Social insurance waiver arrangements are not a safe strategy.
- Not documenting bonus and commission approvals. Variable pay needs clear evidence.
- Paying remote employees offshore without local payroll review. Remote work does not eliminate China payroll obligations.
Final Takeaway
Knowing how to calculate payroll in China means connecting gross pay, the employee’s registered contribution bases and rates, eligible deductions, cumulative IIT and net salary, then calculating employer cost separately. Keep the assumptions and supporting records with each payroll calculation.
Companies employing staff through a Chinese entity can outsource payroll calculation to HROne for monthly processing support.
FAQ
How is payroll calculated in China?
Payroll in China is calculated by starting with gross salary, adding or adjusting approved wage items, deducting employee-side social insurance and housing fund where applicable, calculating individual income tax withholding, and paying the remaining amount as net salary.
What is the difference between gross salary and net salary in China?
Gross salary is the amount before employee deductions and IIT. Net salary is the take-home amount after employee-side statutory deductions and IIT withholding.
How is IIT calculated on salary in China?
For resident employees, salary IIT is generally calculated using the cumulative withholding method. The calculation considers cumulative income, the RMB 5,000 monthly standard deduction, specific deductions, special additional deductions, and tax already withheld in prior months.
What is 21.75 in China payroll calculation?
21.75 is the standard monthly salary-days divisor used to convert monthly salary into daily and hourly wage figures. Daily wage is generally monthly salary divided by 21.75, and hourly wage is daily wage divided by eight.
How is employer cost calculated in China?
Employer cost is usually gross salary plus employer-side social insurance, employer-side housing fund, employer-funded benefits, payroll service costs, and any other employment-related costs.
How much tax is paid on a monthly salary of RMB 30,000 in China?
In the Shanghai resident-employee example, first-month IIT is RMB 532.50 after RMB 5,250 employee contributions, the RMB 5,000 basic deduction and an assumed eligible RMB 2,000 special additional deduction. Net pay is RMB 24,217.50. Tax changes with cumulative income, prior withholding, contribution settings and individual deductions.
