Social security

Social Security

The contribution to various social security insurances is one of the major operating cost elements to foreign investment enterprises, and also the legal obligation of the employer. These obligations include the contributions to pensions, hospitalization, unemployment, work-related injury, and birth planning insurances. In addition, the employer has to make contribution to the housing provident funds for the employee. Employers in China shall fulfill the social security obligations for the employees, including the social security registration, making payment of social security every month, the withholding of employee's contribution and making payment on their behalf. The administrative body will impose fines on the enterprise and the legal representative for non-compliance.

Certain contributions like pension and medical insurances are computed on the basis of the "average wage" of the preceding year. Each year the local Department of Labor and Social Security will announce the amount of the said average wage in the first half of the year.

For example, the social average wage in Guangzhou for 2003 is RMB 2,092, the maximum amount of wage is 300% (RMB 6,276) of the average while the minimum is 60% (RMB 1,255). e.g. A manager is paid for RMB 10,000 per month, the company can buy him the social insurance on the base of RMB 6,272; An office clerk has the salary of RMB 1000, the company must buy him the social insurance on the basis of RMB 1,255.

The administrative practices are varied in the implementations of the social security contributions throughout the country. First, different contribution rates, both for the employer and employees, are used according to the living standards and wage levels. Second, it is also observed that the application of those rules is varied from city to city. In Shanghai, the municipal government has not required the employer to pay work-related injury insurance. For the employees without household registrations in Shanghai, the employer has to buy him a comprehensive insurance (including work-related injury). In both Dongguan and Shenzhen, the employer has to pay work-related injury insurance. In both Shenzhen and Beijing, the applicable rates for work-related injury are varied depending on the type of industries and the level of risk at the workplace. In Dongguan, flat rates are adopted for work-related injury insurances. Third, both the employer and the employee have to pay certain types of contributions such as pension and hospitalization insurances. For some other types of insurances, only the employer has the obligation to do so.

The provisions for the above mentioned social security insurances shall not apply to the foreign nationals working in the PRC, and the resident staff who are employees of Hong Kong, Macau, and Taiwan companies.

Individual Income tax

Under the PRC tax law, the employer has the withholding obligation to deduct from the gross pay the income tax, and pay them over to the local tax offices. The contribution to housing provident funds and the social security are deductible from the employee's gross pay, in addition to the statutory deduction for the income tax.

Example: A manager working for a Shenzhen company has a monthly income of RMB5,000. His housing provident fund, the share of his social security contributions, and statutory deductions for income tax are RMB650 (13%), RMB350 (7%), and RMB 1,600 respectively. His income tax liability is calculated in the following way: -

RMB5000（income before tax）- 650 - 350 - 1600 = RMB2,400 (taxable income), RMB2,400 x 15% - 125 =RMB235 (the monthly tax is 235, where 125 is the quick deduction number as provided under the PRC Individual Income Tax Law).

Social security contribution rates for major cities

Shenzhen (2005)

Item	Average wage	Contribution	Employer	Employee
Pension	￥2,661*	14%	9%	5%
Hospitalization	￥2,661	9%	7%	2%
Unemployment	￥2,661	0.4%	0.4%	---
Work-related injury	￥2,661	0.5%	0.5%	---

* The average wage is subject to an upper limit (300%) and a lower limit (60%). The average wage for Shenzhen was RMB2,661 in 2004.

Beijing (2005)

Item	Average wage	Contribution	Employer	Employee
Pension	￥2,362	28%	20%	8%
Hospitalization	￥2,362	10%	10%	2%
Unemployment	￥2,362	2%	1.5%	0.5%
Work-related injury	￥2,362	0.4%	0.4%	---
Birth Planning	￥2,362	0.8%	0.8%	---
Serious Illness	￥2,362	RMB3.00 per employee per month	---	RMB3.00 per employee per month

* The average wage is subject to an upper limit (300%) and a lower limit (60%). The average wage for Beijing was RMB2,362 in 2004.

Shanghai (2005)

Item	Average wage	Contribution	Employer	Employee
Pension	￥2,033	30%	22%	8%
Hospitalization	￥2,033	14%	12%	2%
Unemployment	￥2,033	3%	2%	1%
Work-related injury	￥2,033	0.5%	0.5%	---
Birth Planning	￥2,033	0.5%	0.5%	---

* The average wage is subject to an upper limit (300%) and a lower limit (60%). The average wage for Shanghai was RMB2,033 in 2004.

Dongguan (2005)

Item	Average wage	Contribution	Employer	Employee
Pension	￥820	18%	10%	8%
Hospitalization	￥820	2%	2%	---
Unemployment	￥820	2%	1.5%	0.5%
Work-related injury	￥820	0.5%-1.5%	0.5%-1.5%	---

* The average wage is subject to an upper limit (300%) and a lower limit (60%). The average wage for Dongguan was RMB820 in 2004.

Guangzhou (2005)

Item	Average wage	Contribution	Employer	Employee
Pension	￥2,585	28%	20%	8%
Hospitalization	￥2,585	10%	8%	2%
Unemployment	￥2,585	3%	2%	1%
Work-related injury	￥2,585	0.7%	0.7%	---
Birth Planning	￥2,585	0.7%	0.7%	---
Serious Illness	￥2,585	RMB5.00 per employee per month	RMB5.00 per employee per month	---

* The average wage is subject to an upper limit (300%) and a lower limit (60%). The average wage for Guangzhou was RMB2,585 in 2004.

2003 Social security contribution rates for major cities