Payroll in China follows conventions that are different from what a foreign company may be used to. Understanding these conventions before setting up the WFOE’s payroll avoids surprises, staff dissatisfaction, and potential labor disputes. Here’s how the payroll cycle works and what the thirteenth-month salary is really about.
The Monthly Payroll Cycle
Chinese employers must pay salary at least once a month. The most common practice is to pay salary once per month on a fixed date — typically the 5th, the 10th, or the 15th of the following month. A company that pays on the 15th of the following month is paying the January salary on February 15th, the February salary on March 15th, and so on.
The fixed date is important. An employer that pays on the 10th one month and the 25th the next month is not complying with the law, even if the payment is within the following month. The payment date must be consistent. An employer that can’t meet the fixed date — for example, because the payroll processor made an error — should notify employees in advance and explain the reason for the delay.
The salary payment must be made in Chinese currency — the renminbi — and it must be paid through a bank transfer to the employee’s Chinese bank account. Cash payment of salary is technically possible but uncommon and creates compliance issues — the cash payment must be documented, the employee must sign a receipt, and the cash payment is difficult to reconcile with the social insurance and housing fund contribution bases.
The salary statement — the payslip — must be provided to the employee. The payslip should show the gross salary, the individual income tax withheld, the social insurance contributions deducted, the housing fund contribution deducted, and the net salary paid. An electronic payslip — an email, a PDF, a WeChat message — is acceptable if the employee has consented to electronic delivery.
The Payroll Components
The payroll in China has more components than a typical Western payroll. The base salary is the contractual monthly salary. The position allowance is a fixed monthly amount for the employee’s position. The performance bonus is a variable amount tied to individual or company performance, paid monthly or quarterly. The subsidy component includes meal allowance, transportation allowance, and communication allowance — some companies structure these as fixed monthly amounts, others as reimbursements against receipts.
The social insurance contributions and the housing fund contributions are deducted from the employee’s salary and paid to the social insurance bureau and the housing fund center respectively. The employee’s share of social insurance is approximately 10.5% of the contribution base — the exact rate varies by city and by the social insurance categories that are covered. The housing fund contribution rate is between 5% and 8% of the contribution base, with the rate set by the employer within the local minimum and maximum.
The individual income tax is withheld by the employer and paid to the tax bureau. The withholding is on a cumulative basis — the tax for each month is calculated on the cumulative income for the year to date, not on the month’s income in isolation — and the tax rate is progressive from 3% to 45%. The employer is responsible for calculating the tax correctly and for filing monthly withholding returns.
The Contribution Base
The most contentious payroll issue in China is the contribution base for social insurance and housing fund. The contribution base is supposed to be the employee’s average monthly salary for the previous calendar year. An employer that uses a contribution base lower than the employee’s actual salary — for example, using the local minimum wage as the contribution base when the employee’s salary is three times the minimum wage — is under-contributing and is exposed to liability for the unpaid contributions plus penalties.
The contribution base is capped at 300% of the local average salary for the previous year — the contribution cap. An employee whose salary exceeds the cap contributes on the cap amount, not on the full salary. The cap is different for each city because the local average salary is different. The Shenzhen cap for pension insurance in 2025 was 32,358 RMB per month. The Guangzhou cap was 28,302 RMB per month.
The contribution base is subject to an annual adjustment. Every July — or at the beginning of the calendar year in some cities — the employer reviews the contribution base for each employee against the employee’s average salary for the previous year and adjusts the base if the salary has changed. The adjustment is reported to the social insurance bureau and the housing fund center. A failure to adjust the base — for example, the employee received a salary increase in January but the base isn’t adjusted until July — means the contributions for the intervening months are based on the old, lower salary, and the employer is under-contributing.
The 13th Month Salary
The 13th month salary is a year-end payment of one month’s salary. It’s not a statutory requirement — there’s no law that requires employers to pay a 13th month salary — but it’s a deeply embedded custom in China, and employees expect it. A WFOE that doesn’t pay a 13th month salary should address the expectation in the offer letter and the employment contract, so that the employee doesn’t assume a 13th month salary will be paid and claim it later.
The 13th month salary is normally paid before Chinese New Year — in January or February depending on the lunar calendar — and is tied to the calendar year. An employee who resigns in June is generally not entitled to a pro rata 13th month salary for the six months worked, unless the employment contract or the handbook provides for a pro rata payment. An employee who is terminated without cause is generally entitled to a pro rata 13th month salary — the termination is not the employee’s fault, and the employee should not lose the benefit of the partial year’s work.
The 13th month salary is taxable as salary income — it’s additional salary, not a separate category of income — and the employer withholds individual income tax on it. The tax treatment was formerly more favorable — the 13th month salary was taxed separately at a lower rate — but the separate taxation was eliminated in 2022, and the 13th month salary is now taxed as part of the employee’s cumulative annual income.
Some companies pay a 14th month salary, a 15th month salary, or higher multiples. These payments are discretionary — they’re a retention tool and a performance incentive, not a statutory or customary entitlement — and the company should make clear in the employment documentation that they’re discretionary and non-contractual.
The Annual Bonus
The annual bonus is different from the 13th month salary. The 13th month salary is a fixed payment — one month’s salary, paid at year-end. The annual bonus is a variable payment — the amount depends on company performance, individual performance, or a combination of both — and it’s paid at a time determined by the company.
The annual bonus is normally paid after the company’s annual financial statements are finalized — typically in March or April of the following year. An employee who resigns before the bonus payment date may or may not be entitled to the bonus, depending on the company’s bonus policy and the employment documentation. A policy that says “the bonus is paid to employees who are employed on the payment date” effectively forfeits the bonus for employees who resign before the payment date. A policy that says “the bonus is earned during the service year and paid in the following year” may create an entitlement to a pro rata bonus for the period worked, even if the employee has resigned.
The bonus is taxable as salary income. The former preferential tax treatment — a separate annual bonus calculation at a lower effective rate — was extended repeatedly but was eventually eliminated. The bonus is now included in the employee’s cumulative annual income and taxed at the marginal rate.
Payroll Outsourcing
Many WFOEs outsource payroll to a local payroll service provider. The provider calculates the salary, the social insurance contributions, the housing fund contributions, and the individual income tax, produces the payslips, and handles the payments to the social insurance bureau, the housing fund center, and the tax bureau. The employer signs the employment contracts, manages the employees, and bears the legal responsibility for employment law compliance.
Payroll outsourcing is cost-effective for a WFOE with a small number of employees — the cost of maintaining in-house payroll expertise is disproportionate to the number of employees. The payroll provider’s expertise reduces the risk of calculation errors, missed filing deadlines, and contribution base errors that can result in penalties and interest.
But outsourcing doesn’t outsource the legal responsibility. The employer remains liable for payroll compliance regardless of who processes the payroll. A payroll error by the service provider that results in underpayment of social insurance contributions or under-withholding of individual income tax is the employer’s liability. The employer should supervise the payroll provider, review the payroll calculations regularly, and confirm that payments have been made on time and in the correct amounts.
