Culture

What is included in the salary for working in China?

For a long time, the 996 working system of some Chinese enterprises has been criticized by most Chinese and foreign netizens.

We have explained in this article why the 996 working system will not disappear from China in the short term. This is not an excuse but presents real contradictions and conflicts.

In December 2020, a young employee of Pinduoduo, China’s second-largest e-commerce company, died of excessive overtime. The company is believed to have adopted a harsher working system than 996, with employees working 12 hours a day and only two days off a month.

Shortly after the incident, some rumors claimed that the employee’s annual salary at Pinduoduo was 1.5 million yuan (about $231400). This is a very high salary for a recent Chinese graduate, so the rumor once alleviated people’s criticism of Pinduoduo.

But in hindsight, the rumor turned out to be an out-and-out Fakenews. The employee earns only 10, 000 yuan a month at Pinduoduo, and although she has a slightly higher salary package, that’s less than 1.5 million yuan a year.

When we talked about the 996 working system before, we also mentioned that the “hidden high pay” is one of the reasons why some Chinese do not want to boycott the working system. But in fact, high pay is not as good as it seems.

To supplement this point, we will calculate the salary structure of Chinese people in this article.

How is the salary usually calculated?

For Chinese urban residents, when they talk about wages, they talk about two more specific figures, one is wages, and the other is called “hand-to-hand wages”(到手工资) or “after-tax wages”.(税后工资)

As these two names imply, the figures shown at the time of signing a labor contract do not represent the money you actually receive in your bank account each month. However, the term “after-tax salary” is not accurate, and the gap between the figures on the contract and those in the bank account is not entirely due to the payment of taxes, but also includes the annuity of the social security system.

In other words, the disposable monthly salary of Chinese urban residents, like most other countries in the world, is calculated as follows:

Actual monthly income = figures signed on the labor contract – “social insurance and house fund”(五险一金) – personal income tax

First of all, let’s talk about “social insurance and house fund” because the calculation of personal income tax requires us to throw this part out of the original figure first.

“Five insurances and one fund” is the Chinese mainland’s popular name for “social insurance and house fund”. It includes five kinds of insurance: old-age insurance, medical insurance, unemployment insurance, industrial injury insurance and maternity insurance, and “housing provident fund”. Among them, industrial injury insurance and maternity insurance will not be involved in the calculation of your salary, so we will omit them here for the time being.

There will also be a fixed proportion, as well as something called the “wage base”.

To put it simply, if you earn less than 10000 yuan a month in China, it will calculate how much “social insurance and house fund” will be deducted according to the average monthly salary of residents in the city where you worked in the previous year. But if your monthly salary exceeds 10000 yuan, it will deduct 23% of the total “three insurances and one gold” from your salary.

Among them, the endowment insurance fee is 8%, the medical insurance fee is 2%, the unemployment insurance fee is 1%, and the housing provident fund fee is 12%. In other words, under normal circumstances, the figure on the contract should be deducted from this 23% first. Among them, the part of the housing provident fund can be negotiated, but the others are not allowed.

Two examples:

  • If you receive a job with a monthly salary of 8000 yuan offer, because it does not reach the minimum line of 10000 yuan, your salary will be deducted at 23% of the local average salary (for example, 5000).
  • If you receive a job with a monthly salary of 15000 yuan offer, your salary will have been deducted by 3450 yuan (15000-23%) before the monthly tax is paid.

After arriving at this figure, we can then look at the tax deduction.

Before October 2018, China’s taxes were calculated on a monthly basis and deducted on a monthly basis. After October 2018, although China’s tax is deducted on a monthly basis, it is calculated on an annual basis. This greatly increases the complexity of tax calculation, but fortunately, in China, most of this is done automatically, and individuals do not need to calculate by hands unless you need to check it.

In 2017, assuming you earn 8000 yuan a month, you may have to pay a tax of 195 yuan a month. But in 2019, suppose your monthly income is still 8000 yuan, but you don’t have to pay tax before August.

It will not tax until its annual salary reaches 60000. According to the above assumption, your monthly income is 8000 yuan, so you need to pay tax from August.

Because at that time, your cumulative income exceeded 60,000 for the first time, and only then will you begin to deduct tax from that month’s salary.

China’s personal income tax has a progressive tax system, which means that when your income exceeds 60,000 yuan in a year, the more the income increases, the higher the tax.

Of course, the wage figures used to calculate taxes have already excluded “social insurance and house fund”.

This means that a high salary does not necessarily mean as much as it seems.

In Chinese public opinion, “annual salary of one million”(年薪百万) is a subtle word, it describes a person’s annual income of more than 1 million(About 155000 dollars). Once a person earns one million a year, people will subconsciously think that a person is no longer an ordinary guy, that he is a part of the upper class, and that his pain, anxiety and some of the unfair treatment he receives may be “deserved”.

But in fact, according to China’s personal income tax collection method and compulsory insurance premium calculation method. People with an annual salary of 0.5 million can actually get about 0.4 million yuan without any tax avoidance.

So, guess how much people with an annual salary of 1 million actually get?

The answer is about 0.5 million.

On Chinese social networks, “an annual salary of 1 million yuan, but under the 996 work system” is an acceptable condition.
But if it becomes an “annual salary of 0.5 million”, few people will defend the system.

Because it is almost certain that most critics of the 996 work system have not been offered positions with an annual salary of 1 million.

So they assume, “well, although companies require employees to work overtime illegally, they give a 500000 ‘overtime pay’, which seems reasonable.”

But the truth is, the annual salary on the contract from 0.5 to 1 million is not actually that attractive in China.
What’s more, most of the Chinese people under the 996 working system did not get a contract with an annual salary of 1 million at all.

What they often get is a more illusory wage commitment.

In many companies that implement the 996 work system, they use another way to provide salaries to their employees in order to achieve the effect of “seeming an annual salary of 1 million.”

Salaries Package of Internet Companies

So far, we have explained the salary composition of Chinese urban residents when they participate in a “normal employment relationship”.

But another pay structure is often involved in the infamous 996 work system, which we will talk about in more detail next.

First of all, we need to introduce the concept of “salary package” which is a word that originated in western society so that I won’t explain it much. Its general meaning is that large companies do not always pay their employees in cash, especially for key employees. Options, stocks, annual bonuses, performance bonuses, expected salary increases, all of which added up to the value given to their employees, it’s called a “Package”.

In Europe and the United States, companies only give key employees (executives and top technicians) salaries package, with normal salaries for ordinary employees.

But in China’s Internet industry, especially those companies that implement the 996 working system, they are more than happy to give salary packages to all their employees.

There are several obvious benefits for companies to use salary packages instead of cash:

First of all, it relieves the cash flow pressure of enterprises. You can easily offer your employees an annual salary package worth 500000, but the salary you actually pay each year may only be equivalent to giving employees 250000 in cash. Because another 250000 worth of “options” or “stocks” need to be cashed in a few years’ time.

Second, this model allows employees to work “voluntary overtime”. Because the value of the company’s stock is directly linked to the success of the company. If the company promises to give you some shares in the company after three years, then you absolutely hope that the company you work for has monopolized the market in those three years. To achieve this, the 996 working system no longer seems to be what the company requires of you, but your inner impulse.

Third, “bad cheques”. In fact, under the 996 working system, few employees are able to work in a company for a long time, and they may leave or be fired because of mental or physical health problems before the agreement takes effect.

Fourth, as described above, the Chinese government will calculate the cost of personal income tax and compulsory social insurance based on the cash given in the contracts signed between the enterprise and its employees. This means that if you give out something other than cash, the company can spend less of it.

An option is not equity, and it cannot be paid on a monthly basis like a normal salary. Its working mechanism is that the company promises employees to acquire a certain amount of equity or stock in the company at one time after working for a few years. But if the employee leaves or is fired before the commitment takes effect, he will lose it. Nor can the government collect taxes or require the payment of compulsory social insurance fees until this commitment is fulfilled.

Internet companies offer their employees a “monthly salary package” worth 50,000 yuan ( About 7780 dollars), which seems to be very high in China. However, the value of 40,000 yuan comes from the monthly average calculation of one-time options granted three years later. This means that before the agreement comes into effect, the company forces you to leave the company, and your actual monthly salary during your three years of work with the company is only 10,000 yuan. This has significantly reduced the company’s labor expenses.

Of course, in many less successful companies, it is more likely that the company has gone bankrupt five years later. In this case, similarly, the non-cash part of the “salary package” will become worthless.

In some cases, companies require employees to sign an agreement while accepting a “salary package”, which usually requires employees to waive their right to use labor laws to sue the company. Because “when you get the option, you are no longer a laborer, but a shareholder of the company.”

Since all senior high schools in China teach Marxist economics, they more or less retain the memory of the narrative that “capitalists are bound to exploit the working class” in their deep consciousness. This agreement, in turn, takes advantage of this. It seems to say, “you are no longer a worker, you are a capitalist, you are exploiting others, not being exploited”.

Such an agreement is generally invalid in law, but it is spiritually binding on employees. Some employees who want to sue after leaving the company will be frightened by the agreement.

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