The Challenges of Starting a Business in China – Part 8 (China vs. America Payroll Taxes)
As an owner of a small business that started with three employees and grew to over 50, (and writing the back end to a payroll software program), I’ve had to learn a lot about payroll taxes throughout the process. Starting a company in China required learning a whole new set of tax policies that were very foreign to me. You often hear about tax differences between countries, but going through the process on my own I was able to see the net differences between the United States and China.
The first major difference I was made aware of is how social benefits are calculated in China. In America we have FICA (Social Security) at 6.2%, and Medicare at 1.45%. These benefits are both paid by the employee and employer. I won’t get into the .9% Medicare tax for compensation above $200K. As of 2013, Social Security was capped at $7,049.40 for the year for both the employee and employer and Medicare is not capped. America also has FUTA or Federal Unemployment which is only paid by the employer and has a current rate of 6%. FUTA is only taxed on the first $7,000 of income so it is capped at $42 per year. It’s important to note that most states carry an unemployment tax in addition to the federal tax above.
In China, payroll taxes are lumped into Social Benefits which are broken up into Pension, Unemployment, Medical, Workplace (Injury), and Maternity (Yes, even for guys!) insurance. These rates will vary by city, but in Shanghai as of 2013, the employee will pay 11% of their gross salary at a max out of pocket of $3,036 (Based on a 6.12% CNY to USD conversion rate). China also has minimum taxes, which means even if you make $1 a year you have to pay a minimum of $607.15 per year for the benefits. The surprising part is that in Shanghai the employer must match 37% of the employee’s gross salary for a max company expense of $10,210.92 and a minimum of $2,042.04. An interesting point here is how they are calculated. Every year the average salary is collected and the low numbers are based on the average and the high numbers are based on three times the salary figure. This means in 2012 the average salary in Shanghai is 4,692 rmb per month.
The medical insurance, paid by both the employee and employer, is full medical insurance compared to Medicare, which only provides medical benefits to people over the age of 65 or with disabilities. I will discuss more about the difference between the health care systems in China and American later, but it’s important to realize that most companies in America provide health insurance which carries a hefty cost.
In addition to Social Benefit taxes, China also has a Public Housing Fund that is paid by both the employee and employer. This fund also varies by city, but in Shanghai it is 7% for both the employee and employer. This brings the net tax amount for the employee to 18% and 44% for the employer not even counting income tax. This tax also has a minimum and maximum and can be used by the employee to purchase property. However, based on several discussions with locals there are a lot of restrictions on how to access this money and whether it can ever be realized by most.
As it relates to income taxes both China and the United States have similar tax bracket structures. Although in China, there is no separation of single vs. married and number of dependents. In China locals enjoy a yearly $6,862 standard deduction while individual taxpayers in America receive a $6,100 standard deduction.
To help me understand the taxes difference between both China and the United States I ran through several salary scenarios to see how the two countries stacked up to each other. Below are my results (State withholding and state unemployment taxes are calculated based on Kentucky):
The chart above is based on a yearly salary of $30,000 (¥183,600 RMB). In both the United States and China the take home is almost the same with employees based in the U.S. receiving $101.86 more after taxes at the end of the year. The mind-blowing stat is the cost to the employer in China. Based on all the social benefits the employer is stuck with a $9,555.90 bill each year above that of the U.S.. As I mentioned above, these are not apple to apple comparisons because the Chinese employees are receiving several benefits not provided by the United States government. However, these are real costs and can be scary for small startup companies who might not provide the benefits in America.
Jumping up to $50,000 a year, the take home in China becomes a little more promising for Chinese locals giving them $1,743.14 extra spending money in their pockets. The employer cost is still a lot higher. One thing to point out is none of the Social Benefits numbers changed between $30,000 and $50,000 because they were already maxed out. In Shanghai all social benefits are maxed once an employee makes $27,600 or more per year. This makes income tax the only variable for higher wages.
Moving up to $100,000 per year the employer costs move even closer together with only a $4,200 difference. The employee’s take home gets even better leaving the employee with $7,834.83 post tax dollars.
Based off my research the social benefits are very costly for lower waged employees but provide a great benefit for those who might not be able to afford those types of amenities. Looking at a study completed by The Henry J. Kaiser Family Foundation in 2013, employers paid an average of $5,884 for single coverage health care plans and $16,351 for family coverage (http://kff.org/private-insurance/report/2013-employer-health-benefits/) in the United States. As you can see the benefit numbers can add up very quickly.