China has established a well-structured and comprehensive social welfare system to cover various insurances for employees and workers in China. All employers are required to pay this for employees, and contractors or self-employed individuals can choose to pay contributions to the social welfare fund.
Social Security is mandatory for everyone working in China, and foreign and local employers need to be aware that the types and percentages for contributions of various coverages vary from city to city.
Different types of Social Security system
In essence, Chinese Social Security covers five types of insurance: pension, medical insurance, unemployment insurance, work-related injury insurance and maternity insurance, plus one mandatory housing fund. Take Shanghai, for example, maternity insurance has been merged into medical insurance, so there are only four social insurances, plus one more, being a housing fund.
The premiums for pension, medical insurance, unemployment insurance, and the housing fund are jointly contributed to by the employer and employee, while the employer solely contributes to the premiums for the work-related injury and maternity insurance. The rates vary by location as the local bureaus determine it, but as a guide, the contribution rate for the employer is 33.8% and 17.5% for the employee. This should be noted in the budget for staff costs, as the rates are much higher than in most countries.
Contribution base calculation
It is also important for employers to have a comprehensive understanding of the basic rules of contribution base calculation.
The Social Security contribution base is a figure that is determined by the employee’s average income in the previous year (January to December). The calculation method is as follows:
Social Security contribution base = Total income of last year / 12
The Social Security contribution base for newly onboarded employees is determined based on the amount of their first full month’s salary in the year of onboarding.
The base figures for Social Security contributions have floors and ceilings. Generally, the contribution base is capped at three times the average local salary. The minimum contribution base is usually decided either by the local minimum wage or a certain percentage of the average local wage. For example, the average salary of 2021 in Shanghai was RMB 11,396. The maximum monthly contribution base for those working in Shanghai was RMB 34,188, which is three times the amount of RMB 11,396, and the minimum base was 60% of the average salary, amounting to RMB 6,838. However, considering the bad impact of the COVID epidemic on the local economy, the government determined the minimum base as RMB 6,520 to reduce the burden of enterprises in Shanghai.
The Chinese government releases the average salary amount for various regions each year. Correspondingly, the floors and ceilings of the Social Security contribution are announced yearly, and the Social Security contribution base is required to be adjusted once a year, usually in July.
In Shanghai, for example, if a wholly foreign-owned enterprise (WFOE) hires a local employee whose gross salary is RMB 55,000 from January 2023 to December 2023, the Social Security cost is calculated as below.
RMB 34,188 is the contribution base since RMB 55,000 exceeds the ceiling.
|Employer contribution||Employee contribution|
|Pension||5,470 (16% of contribution base)||2,735 (8% of contribution base)|
|Medical insurance||3,419 (10%)||684 (2%)|
|Unemployment insurance||171 (0.5%)||171 (0.5%)|
|Work-injury insurance||88 (0.256%)||/|
|Housing fund||2,393 (7%)||2,393 (7%)|
|Total||11,540 (34% of contribution base)||5,983 (17% of contribution base)|
Total of employer and employee contribution = RMB 17,523 (51% of contribution base and 32% of the gross salary)
The work-injury insurance percentage changes from 0.16% to 0.256%, depending on the enterprise’s business scope. The basic housing fund rates range from 5% to 7%, which is the common option range for most companies in Shanghai. The basic housing fund, which is mandatory, has a cap of 7%. The contribution can still be increased up to 5% (the rate must be the same for the employee and employer). If a company provides basic and supplementary housing funds at their cap levels, then the maximum contribution is 12%. This supplementary housing fund is not optional and at the companies’ discretion like the basic contribution, and the supplementary part is non-taxable.
In this case, the employer’s total cost is the company’s portion of Social Security contribution plus the employee’s gross salary. The employee’s part is deducted before tax. Although both the employer and employee are obligated to make contributions, it is generally the employer’s responsibility to correctly calculate and withhold the payments for both parties.
If the employment contract is extended for another year, in July 2024, the employer should declare the new base by calculating the average salary of 2023. If the employer fails to declare the new base, in some regions such as Beijing, the authority will automatically reset the new base by adding 10% without informing the company.
What will happen if the employer fails to contribute?
There are some enterprises that take risks to save company costs and do not pay social insurance based on the average salary in the past year. Instead, they use a lower base.
The above practices are highly NOT recommended because:
- If there is a disgruntled employee that wishes to whistle blow to the authorities of underpayment by companies, the social security bureau generally would side with the employee, then the company could be liable for underpayment plus penalties and interest.
- The compliance of social insurance and housing fund plays an important role in the company compliance management structure.
- Any company that would be having due diligence on itself for financing, IPO, or M&A deal needs to avoid being found any irregularities which could affect this or the valuation.
If violations occur related to underpayment of social insurance, the social insurance bureau would calculate the underpayment for both employees and employers, and apply a late interest fine of 0.05% per day.
With labour costs in China increasing but economic growth slowing down, it is easy for foreign investors to consider Social Security contributions to be a burden rather than a benefit. However, based on our years of industry experience, this is not the real case, and we have listed some practical functions of Social Security contribution.
Firstly, the employer’s mandatory Social Security payments for its employees can be treated as reasonable salary expenses and thus can be deducted from corporate income tax.
Secondly, Social Security has the attribute of risk resistance, especially for work-injury insurance. In some manufacturing industries, there is a high degree of work-related injury risks.
For some minor injuries, employees can go to the hospital for medical treatment. Medical expenses that comply with the basic medical insurance drug catalogue, diagnosis and treatment items, medical service facility standards, as well as emergency and rescue medical expenses will be covered by medical insurance. But the medical insurance does not provide 100% reimbursement of the total medical treatment fee. The employee is also required to pay a portion by themselves. Most entities in China will buy general supplementary commercial medical insurance for their local staff, which can reimburse 90% or 100% of the medical insurance coverage and purchase mid to high-end commercial medical insurance for expats, which covers the self-paid portion, even for medical treatment fees in private hospitals.
For some serious injuries, the related government department will reimburse the medical treatment expense after timely reporting of the work-related injury by the employer. If the employer fails to contribute, the medical treatment costs incurred due to a work injury will likely be paid by the employer.
Thirdly, Social Security is critical when recruiting talent, especially for companies that rely heavily on professionals and skilled workers in big cities. For example, in Shanghai, many companies are willing to offer extra supplementary housing fund contributions for their valuable employees and provide the opportunity for Hukou settlement for overseas returning talents by offering high a Social Security contribution base.
Last but not least, during maternity leave for a female employee in Shanghai, the employer does not need to arrange the monthly salary payment according to related policy, whereby the maternity allowance will be paid by the Shanghai government to the female employee directly. Its various though by city, for instance in Beijing the company first arranges the monthly salary during the employee’s maternity leave, and the government pays the maternity allowance to the company afterwards.
Based on the regulations, everyone working in China is required to contribute social insurance, including foreigners (local practice might vary). However, China so far has signed Totalisation Agreements with the following 12 countries: Germany, Korea, Denmark, Canada, Finland, Switzerland, Netherlands, Spain, Luxembourg, Japan, Serbia, and France (not in effect yet), which allow for exemptions for certain contributions if relevant conditions are met. For more information, check our article “Chinese social security coverage for expatriates“.
The Social Security System provides a security guarantee to Employers and Employees, though it is a cost burden on companies, and high as a percentage of salary compared with many other countries. The level of coverage though is quite wide for this. It is though important that companies understand their obligations and follow properly the Social Security Law. These mandatory Social Security contribution obligations cannot be exempted by mutual consensus between employers and employees, and late or inadequate payments will put employers at risk of non-compliance.
Acclime has many years of experience in reviewing social welfare and employment package structures to help find risks and resolve social welfare issues. Companies should audit their social welfare and staff costs, company policies, and insurance coverage to determine risks.
Contact our teams for expert support and further information about HR and employment solutions in China to ensure you are compliant in the market.