How to pay international contractors in China
If you run a global company, you may want to work with Chinese contractors to leverage the country's vast, skilled workforce. However, expanding your workforce to China means understanding the nation’s employment laws and tax regulations.
Before your freelancer submits their first invoice—and definitely before you process any contractor payments—familiarize yourself with the procedures for appropriately categorizing contractors, onboarding them, and ensuring compliance with China's labor laws. This guide will take you through the step-by-step process of managing payroll for Chinese contractors.
Step #1: Classify your workers in China
If you plan to use contractors in China, you must classify them correctly. China’s labor laws strongly encourage employment over freelancing, meaning that hiring independent contractors is legally complicated. Foreign companies have been pursued by the Chinese government for back taxes and other fees for using contractors.
Potential penalties for using misclassified freelancers in China include:
- Fines and penalties
- Back pay for employee benefits, overtime, taxes, and social insurance contributions, as well as any underpayment due to minimum wage or overtime laws
- Late payment interests
- Bans from operating in China
- Loss of intellectual property if the freelancer challenges the ownership of the work they created while under contract
Per Chinese labor courts, an employment arrangement should exist, rather than a contract agreement, if:
- The employee and employer are both legally qualified to enter into an employment relationship.
- The employer’s rules apply to the employee, who is subject to the employer’s labor management and is paid for their work.
- The employee’s work is part of the employer’s business.
Here are more ways to evaluate whether your Chinese worker should be a contractor or an employee:
Contractors
Employees
Self-employed as an individual and not engaged in work by a registered Chinese company.
Employed by a registered company in China.
High level of worker control.
Contractors determine how to complete their work and when/where to do it.
More direction from the employer. Employees receive more direction from their employer, who provides guidance on how to perform the work and may set specific workdays and working hours.
Equipment and tools are provided by the worker.
Equipment and tools are provided by the company.
Less integrated in the company. Contractors tend to be independent, more likely to work remotely, and use their own tools and equipment.
Highly integrated into the organization. Employees are more likely to work on site.
No entitlement to benefits. Contractors don’t receive the same benefits and protections as employees. They’re also responsible for filing their own taxes and paying for social security insurance.
Entitled to benefits. Employees are entitled to employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like maternity leave or sick leave.
Time-bound agreement. Contractors are typically hired for a specific project or period of time.
Indefinite agreement. Employees are generally hired for an indefinite period of time.
Paid upon completion of work, typically at a per-project rate.
Paid an hourly wage or monthly salary.
Step #2: Determine the best way to pay your contractors in China
As part of the onboarding process, agree with your contractor about how they’ll be paid. Employers have more choices than ever for sending compensation to Chinese contractors. The options include:
- Direct deposit. You may use your Chinese bank account to directly deposit funds into your contractor’s accounts. There may be transfer fees and exchange rates vary.
- Bank wires. Bank wires allow you to make international wire transfers. China uses the SWIFT banking system for cross-border wire payments. Alternatively, you can do bank transfers via Western Union or other financial services which allow payments into China.
- Paper checks. You may use paper checks if your Chinese contractor does not wish to set up direct deposit or fill out the information for a bank wire. However, electronic payment tends to be preferred throughout China.
- International money orders. Though a safe and long-standing form of money transfer, this payment method can be slow. The employer needs to physically purchase the money order, and the contractor needs to manually deposit it upon receipt. What’s more, contractors might find this payment method difficult if they don’t readily have access to a bank or post office to process the order. Furthermore, money orders may come with fees and exchange rates can be unfavorable.
- Digital wallets. In this scenario, you can transfer funds from your company’s account to the payee’s bank account or debit card. Exchange rates may vary and there may be fees.
- Payment platforms. Not all digital payment platforms are available in China. Venmo, for example, only works in the US. China is also strict about what payment platforms are allowed in the country. PayPal and Wise are both legal, accessible options. Alipay and WeChat Pay both allow for payments in RMB, which is a restricted currency. However, there may be transfer fees and exchange rates can change from day to day, making it difficult to predict your outgoings.
- Global payroll services. Contractors typically aren't included in payroll because they aren't subject to the same withholdings as employees. Instead, freelance invoices are processed by accounts payable for many companies. However, with Rippling, it’s easy to pay Chinese contractors and other global workers in one system.
Step #3: Use global payroll software to process payments for Chinese contractors
While there are many ways to pay Chinese contractors, the fastest and simplest is by using global payroll software. Rippling allows you to pay employees and contractors around the world in one system.
Want to know more about how Rippling’s global payroll system works? Check it out:
Step #4: Ensure your Chinese contractors have the right tax information
In China, employers don’t withhold or pay income taxes for contractors. In fact, doing so could create a misclassification risk. Freelancers in China should calculate and submit their own taxes.
Employers based in the US need to consider compliance with the Internal Revenue Service (IRS). Employers need to get their contractor’s legal name, date of birth, contact information, bank account information, and identity certificate number (or TIN). The IRS compels employers to have their foreign independent contractors (including those based in China) fill out a Form W-8BEN. Then, employers fill out a 1096 Form which outlines details about their foreign contractor.
Tax compliance can be confusing and challenging—get it wrong and you could risk encountering issues with the tax revenue services of your country as well as China’s. Accordingly, it's important to consult with a tax professional before working with Chinese contractors.
Effortlessly manage contractors around the world
Managing your international workforce is a breeze with Rippling. Pay your global contractors in China and across the world in a single system.
Frequently asked questions about running payroll for contractors in China
Do you need to withhold taxes when paying contractors in China?
No. When using Chinese contractors, employers are not responsible for deducting taxes from their pay. The contractor is solely responsible for their taxes.
Does Chinese minimum wage apply to independent contractors in China?
No, minimum wage and other employment laws don't apply to contractors in China. Instead, they negotiate their own rates.
Do Chinese contractors get benefits?
No, Chinese contractors are not owed benefits and, in fact, giving them benefits may put you at risk of misclassification.
Can you pay contractors in China in your home currency?
You should pay your contractors in Chinese yuan (CNY) or renminbi (RMB), which are interchangeable terms for their currency. You can choose to pay them in your own currency as long as you have a written agreement. If you pay your Chinese contractors in a foreign currency, they may have to pay an exchange rate and wait for processing times.
What information do you need from contractors in China?
When onboarding a new Chinese contractor, make sure to get their:
- Name (matching the account where you’ll deposit their pay)
- Date of birth and date of hire
- Contact information, including their email and physical mailing address in China
- Identity certificate number; for employees using a Chinese ID card for identification, their tax identification number (TIN) is the same as their ID number. However, for those using passports or other types of ID certificates, a TIN will be issued by the local tax office. Passport numbers may be recognized as TINs for foreigners in some parts of China.
- Bank account information or other payment information
Can you manually pay contractors in China?
Yes, you can manually pay Chinese contractors. While it’s common for small business owners to do this to cut costs, the process can be time-consuming, especially as your business expands or if you work with multiple foreign contractors. Manually processing payments also has some risks:
- Compliance. Running payroll manually creates the risk of human error and omission. Rippling can protect your business by automatically enforcing compliance with any applicable local laws.
- Security. Using spreadsheets or paper records comes with security risks, as sensitive contractor information may be lost, stolen, or misused.
- Contractor experience. Manual payments can be slow and confusing. Payment timelines aren't always clear, and contractors may not know exactly what they're being paid for, which makes for a frustrating experience.
Rippling makes payroll automatic, syncing all your business's HR data with payroll and eliminating the need for manual data entry. Your global contractors and employees will be paid quickly and compliantly, no matter where they live.
How do you turn a contractor into an employee in China?
Whether you want to avoid misclassification, want your contractor to become an official part of your team, or you’re seeking to better protect your intellectual property, there are a lot of reasons to convert a contractor. To convert contractors into full-time employees, you’ll need to run the same onboarding as you would with any other new hire:
- If you don’t have any other Chinese employees, you’ll want to decide whether to establish a local entity or use an employer of record service (EOR) to legally hire them in China. Rippling EOR can help you easily transition contractors to full-time employees.
- Supply employees with an employment contract and employee handbook in Standard Chinese, both of which they should sign. Ensure compliance with minimum wage laws, statutory employee benefits, legal working hours, statutory public holidays, severance pay laws, and other Chinese labor laws.
- If you don’t use an EOR, register your employee with the State Taxation Administration, the local Social Insurance Bureau, and the Housing Fund Bureau. An EOR can do this registration on your behalf.
- Verify their information, including their name (matching the account where you’ll deposit their pay), nationality, date of birth, date of hire, contact information, identity certificate number, and pay information. Because of China's strict Personal Information Protection Law, only collect necessary data and use security measures to collect and store it.
- Once you run payroll, you’ll need to withhold and submit federal income tax, as well as social security, which covers pensions, health insurance/medical care (including maternity care, work-related injury insurance, and unemployment insurance).
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
