Social Security in China

Social security, also commonly referred to as mandatory benefits in China, is quite straightforward to explain as a concept; however, the calculations to arrive at the correct contribution to be made by the employer and each employee can be complex. This is especially true when employees come from different cities in China or have different working locations.

There are six categories of social security in China. They are:

- Pension

- Medical insurance

- Maternity insurance

- Unemployment insurance

- Accident insurance

- Critical illness insurance

As a general rule, employers should make a contribution to each of these types of social security on behalf of their employees. Employees are also required to make contributions to some of them. The contributions are set as a percentage of average monthly salary.

Because the funds are administered by divisions of local governments, the percentages that should be contributed by employee and employer differ depending on the city in which their employees reside. In China, this is known as the person's hukou. Therefore, the social security contribution that the employer should pay on behalf of two employees earning the same salary, one from Shanghai and one from neighboring Kunshan, Jiangsu Province for instance, can be quite different. Similarly, the amount of individual income tax paid by these two employees will also be different, as social security contributions made by the employee are deductible against tax (up to a certain limit).

Secondly, contributions are capped at a certain amount of salary, defined as 300 percent of the average social salary for the city. Employers will actually contribute a lower proportion of a high-earning employee's salary than would be indicated by simply looking at percentages for the city in which the employee has his or her hukou. As a general guide, the average social salary can be anywhere between 1,500-4,000 yuan ($219.3-584.8) depending on the prosperity of the city in which the employee is a resident, which will make a large difference to the amount of contribution by both employee and employer.

More complexity is added by the varying interpretations of local tax departments concerning the portion of social security contribution that can be deducted by out-of-town workers for individual income tax purposes. Because each city in China changes the mandatory percentage contributions once or twice a year and amends the average social salary figure once every year, this can also be quite complicated.

While the housing fund is not exactly a "social security," it is nevertheless a fund to which employer and employee need to contribute, with the employee's contribution deductible against tax up to a certain point. When an employee switches jobs, it can take several months for the housing fund paperwork to transfer, so in the interim months, the employer should make some accruals on behalf of the employee to avoid over-payment of tax.

If you are operating a manufacturing company, it is likely that you will hire the majority of your workers locally; as a result social security calculations should be quite simple. However, if you are hiring skilled workers from all over China, or you have salespeople in many cities across China, then you can expect more complexity. Hire a specialist human resources team or outsource management to a reliable provider.