The short answer
Three obligations run in parallel once a foreign employee is on payroll:
- Social insurance — pension, medical, unemployment, work injury and maternity, paid monthly by employer and employee on a base set by the city.
- Housing fund — a separate scheme, 5–12% from each side, compulsory for foreign staff in some cities and optional in others.
- Individual income tax — withheld monthly from salary, with the rate and the scope of income depending on whether the employee is a Chinese tax resident for the year.
The employer carries all three. Getting them wrong does not usually fail immediately; it surfaces at the next work-permit renewal or at the employee’s permanent-residence application, when the record is examined.
Who is covered
The Social Insurance Law applies to foreigners employed in China, and in practice the work-permit system and the social-insurance system are checked against each other: an employer that sponsors a work permit is expected to have a contribution record for that employee.
Coverage differs in two places. The housing fund is administered by city housing-fund centres, and some cities do not enrol foreign employees or treat enrolment as optional. And seconded staff covered by a bilateral social-security agreement — China has such agreements with a number of countries, mostly in Europe and Asia — may be exempt from pension contributions at home or in China, depending on the direction of the posting.
What the contributions cost
| Contribution | Employer | Employee | Notes |
|---|---|---|---|
| Pension | about 16% | 8% | The largest single item; totalization agreements can exempt seconded staff |
| Medical | about 9–10% | about 2% | Maternity is merged into medical in most cities |
| Unemployment | about 0.5% | about 0.5% | |
| Work injury | 0.2–1.9% | none | Rate set by industry risk class |
| Housing fund | 5–12% | 5–12% | City policy; often optional for foreign staff |
Two mechanics matter more than the percentages. The base is the employee’s monthly salary, but it is capped at roughly three times the local average wage and floored at around 60% of it, so a high salary does not produce an unlimited contribution. And the base year is reset annually by each city, usually in July, which is why a payroll model built in January is wrong by August.
Budget 25–30% on top of gross salary for a locally hired foreign employee, and treat that as a range rather than a quote.
Tax residency: the 183-day test
China taxes residents on worldwide income and non-residents on China-source income only. Residency is decided by domicile — a permanent home and habitual abode — or by presence: 183 days or more in a calendar year.
| Status | Test | Taxed on |
|---|---|---|
| Non-resident | Fewer than 183 days in the year | China-source income only |
| Resident, first five years | 183 days or more, fewer than six consecutive such years | Worldwide income, with a concession on overseas-paid income |
| Resident, six years or more | Six consecutive years of 183+ days | Worldwide income, including overseas-paid income |
The concession is the six-year rule: a foreign national who has been resident for six consecutive years becomes taxable on income sourced and paid abroad. A single trip out of China of more than 30 days in a year, or any year below 183 days, resets the count to zero. Successive finance-ministry announcements have extended the arrangement; confirm its current expiry before planning around it.
For most employees the practical question is simpler: days are counted on physical presence, so regional travel, holidays in China and short business trips all count toward the 183.
What gets withheld, and when
Salaries are subject to monthly withholding at progressive rates from 3% to 45%, filed by the 15th of the following month. Since 2019 the withholding has been cumulative, so the effective rate rises through the year as the annual brackets are used up — a flat monthly deduction is the wrong model.
Residents then file an annual reconciliation between 1 March and 30 June if they have more than one income source, need to claim deductions not taken by the employer, or want a refund. Non-residents do not do the annual reconciliation; their tax is settled monthly.
The allowances that are still exempt
The expatriate allowance concession survives, extended to 31 December 2027. It covers, when paid in kind or reimbursed against invoices and kept reasonable:
- housing and meal allowances, relocation and laundry costs;
- children’s education in China and Chinese-language training;
- two home-country trips a year for the employee.
The conditions are what matter: cash paid without invoices is salary, and the same expense cannot be claimed twice — once as an exempt allowance and again as a special additional deduction. Companies that pay a “housing allowance” as cash and then also deduct rent are creating an assessment risk that surfaces in an audit years later.
Where payroll goes wrong
- No social-insurance account before the first salary. Arrears accrue from day one, with a daily late fee, and the employee’s record starts with a gap.
- The work permit names one employer, payroll runs through another. This is the most common structure problem for groups with a shared-services entity; the permit, the labour contract and the payroll payer should be the same legal entity.
- Tax residency ignored. An employee who spends 200 days in China but is taxed as a non-resident has an underpayment that the annual reconciliation or a later audit will find.
- Allowances paid as cash. The exemption is documentary, not nominal.
- Departure without a clean-up. A final-month payroll, the annual reconciliation and the tax clearance at exit are three different steps, and the last one is usually forgotten.
The first-hire guide covers the work-permit and payroll set-up, the tax registration page covers the employer’s withholding profile, and the work permit service covers the permit whose renewal checks all of it. When the employee leaves, the exit clearance guide closes the contributions and the final payroll; when the employer changes, the employer-change guide keeps the permit, contract and payroll payer aligned. To model the gross-to-net cost before signing, contact an advisor.