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Individual Income Tax (IIT) is applicable to all individuals, including both Chinese and foreign nationals residing in or earning income from China. The tax is imposed at progressive rates ranging from 3 to 45 percent on the entire comprehensive income.
Generally speaking, employers bear the responsibility of accurately calculating and withholding individual income tax from employment income. This includes wages, salaries, bonuses, stock options, and allowances. Only the net amount after deducting the IIT should be paid to employees. In other cases, if your contract says that your income is after tax, then your employer is legally responsible for paying taxes.
Under the IIT Law, various types of income are subject to IIT. These include income from wages and salaries, remuneration for independent services, author’s remuneration, royalties, income from business operations, income from interest, dividends, and bonuses, income from property lease, income from property transfer, and contingent income.
For resident taxpayers, the first four types of income are consolidated into a category known as “comprehensive income.” This comprehensive income is computed annually. However, employers still need to calculate and withhold IIT on a monthly basis.
The taxable income for resident individuals is determined by deducting the standard deduction which is RMB 60,000 per year, as well as special deductions, special additional deductions, and other deductions prescribed by the law, from the income in each tax year.
| Individual Income Tax Rates | |||
| Level | Taxable Income | Rate | Quick Deduction |
| 1 | ≤36,000 | 3% | 0 |
| 2 | 36,000 – 144,000 | 10% | 2,520 |
| 3 | 144,000 – 300,000 | 20% | 16,920 |
| 4 | 300,000 – 420,000 | 25% | 31,920 |
| 5 | 420,000 – 660,000 | 30% | 52,920 |
| 6 | 660,000 – 960,000 | 35% | 85,920 |
| 7 | >960,000 | 45% | 181,920 |
When a company pays wages and salaries to an employee who is considered a resident individual, the IIT amount must be calculated using the ‘cumulative withholding method’ and withheld and reported on a monthly basis.
Under the cumulative withholding method, the ‘IIT amount to be withheld for the current period’ is determined based on the balance of the ‘cumulative IIT withholding amount until the current period’, taking into account the ‘cumulative tax credit’ and the ‘cumulative IIT amount that has already been paid’.
To calculate the cumulative IIT withholding amount until the current period, we would need to first determine the taxable income amount subject to cumulative withholding by deducting various items from the taxpayer’s cumulative income from wages and salaries for the tax year, up to the current month. These deductions include cumulative tax-exempt income, cumulative standard deductions, cumulative special deductions, cumulative special additional deductions, and cumulative other deductions as determined by the law.
After that, the company would apply the applicable withholding rates and quick deductions as specified in the IIT Withholding Rates Table for Resident Individuals.
If the IIT amount to be withheld is negative, no tax refund will be issued in the interim. If the balance amount at the end of the tax year is still a negative value, the taxpayer will need to complete an annual tax reconciliation for consolidated income. This process allows them to obtain a tax refund for any excess tax paid or make retrospective payments if there was any underpaid tax.