Navigating the complexities of international payroll can be daunting, especially when dealing with the unique legal and cultural landscape of Hong Kong. From understanding the Mandatory Provident Fund (MPF) system to complying with employment ordinances, a clear understanding of Hong Kong's payroll system is vital. This guide will walk you through the process, making it easier to manage your Hong Kong-based employees' payroll effectively and compliantly.
Step #1: Decide whether or not to create your own entity in Hong Kong or use an Employer of Record (EOR)
As a business expanding into Hong Kong, you'll have to decide between setting up your own legal entity or using an Employer of Record (EOR).
When, why, and how do companies use an EOR?
Companies often turn to an Employer of Record (EOR) when they're hiring in a new country but don't have a registered entity there. EORs serve as a legal entity that hires employees on your behalf, ensuring compliance with local labor laws and regulations. They manage payroll, taxes, and other HR responsibilities, allowing you to focus on your business. Companies typically choose an EOR when they want to quickly establish a presence in a new market without the hassle of setting up a legal entity.
When, why, and how do companies create their own entity?
Setting up your own entity gives you more direct control over your employees, but it also involves navigating Hong Kong's local regulations, taxation, and employment laws, which can be complex and time-consuming.
Companies usually establish their own legal entity when they plan to have a significant, long-term presence in a foreign country. Creating an entity in Hong Kong involves registration with the Companies Registry, opening a bank account, and obtaining a Business Registration Certificate. This process provides more control over operations and employees but also requires navigating Hong Kong's employment laws, tax system, and more.
Step #2: Pick a global payroll software solution
First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.
- Global payroll processors process your payroll, transmit funds, and calculate and file taxes in every country through their own software. They allow you to pay your international employees just as easily as your local employees: together in a single pay run.
- Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.
Step #3: Determine your workers’ employment status
Identifying whether your workers in Hong Kong are employees or independent contractors is a crucial part of the payroll process. The distinction impacts how you withhold and pay taxes, along with what benefits and rights are granted to the worker. Hong Kong law has specific definitions for these categories, and misclassification can lead to legal complications. It's recommended that you seek legal counsel to ensure the correct classification of your workers.
Step #4: Capture your new hires’ Hong Kong payroll information
You’ve decided whether to use an EOR or your own entity, picked a payroll solution, and ensured that your employees are correctly classified. But before you can run payroll, you'll need to collect essential information from your new hires. This includes:
- The employee’s full name
- Hong Kong Identity Card number (HKID)
- Bank account details for salary deposit
- Details of their Mandatory Provident Fund (MPF) scheme
- Marital status and family members (for tax purposes)
This data is crucial for ensuring accurate and timely payment, as well as compliance with Hong Kong's employment and tax regulations.
Step #5: Choose to pay in your local currency or in Hong Kong Dollars (HKD)
When paying your employees in Hong Kong, you can choose to do so in your local currency or in Hong Kong Dollars (HKD). However, paying in HKD may be more beneficial for your employees due to exchange rate stability and ease of use locally. If you choose to pay in your local currency, ensure your employees are aware and agree to it, as exchange rate fluctuations might affect their take-home pay.
Step #6: Run payroll
Now it's time to run payroll. Ensure that you are aware of Hong Kong's specific payroll regulations. This includes adhering to the Minimum Wage Ordinance, understanding the statutory benefits such as sick leave, annual leave, maternity leave, and paternity leave, and complying with the Mandatory Provident Fund Schemes Ordinance (MPFSO). Make sure all payments, deductions, and contributions are made accurately and on time to avoid penalties.
Step #7: File your taxes in Hong Kong annually
In Hong Kong, employers are required to file taxes annually on behalf of their employees. This involves preparing and submitting an Employer's Return to the Inland Revenue Department (IRD), where you report the remuneration paid to each employee during the year of assessment. Also, be aware of the various tax deductions and allowances available for employees, as these can affect the amount of tax payable.
When filing taxes as an employer in Hong Kong, you will need the following information:
- Company’s Business Registration Number
- Employee’s personal details including Hong Kong Identity Card number
- Details of the employee's income, including salaries, bonuses, and allowances
- Contributions made to the employee's Mandatory Provident Fund (MPF)
Frequently asked questions about running payroll in Hong Kong
What are the employer costs for full-time employees in Hong Kong?
In addition to the base salary, employers in Hong Kong are required to make contributions to the Mandatory Provident Fund (MPF), which is a compulsory pension fund. The contribution is 5% of the employee's relevant income, subject to a maximum of HKD 1,500 per month.
Employers might also choose to offer additional benefits like health insurance, transportation allowances, or bonuses, although these are not legally required.
What is the average salary for employees in Hong Kong?
The average salary in Hong Kong varies greatly depending on the industry and level of experience. However, as of 2023, the average monthly salary across all industries and levels of experience is around HKD 36,491.
What are the minimum wages in Hong Kong?
As of 2023, the statutory minimum wage in Hong Kong is HKD 40 per hour.
What information is needed from employees to run payroll in Hong Kong?
Employers need to gather several key pieces of information from employees to run payroll. This includes:
- Full name
- Hong Kong Identity Card number
- Bank account details for salary deposit
- Details of the Mandatory Provident Fund (MPF) scheme
- Marital status and number of children (for tax purposes)
How much does it cost to run payroll in Hong Kong?
The cost to run payroll in Hong Kong can vary depending on several factors including the size of your company, the complexity of your payroll, and whether you choose to outsource the task or manage it in-house.
Can I manually run payroll for workers in Hong Kong?
Yes, it's possible to manually run payroll for workers in Hong Kong. However, due to the complexity of payroll regulations and the need for accuracy and compliance, many businesses opt to use payroll software or hire a professional payroll provider.
What are payroll taxes in Hong Kong?
Hong Kong does not have a specific payroll tax. However, employers are responsible for reporting employee earnings to the Inland Revenue Department (IRD) annually. Employees are then taxed under Salaries Tax on their income, with the rate ranging from 2% to 17%.
What are the late tax filing penalties in Hong Kong?
The Inland Revenue Department (IRD) may impose penalties for late tax filing in Hong Kong. The penalty amount varies but can be three times the amount of tax undercharged, in addition to the outstanding tax owed.
How do you pay contractors in Hong Kong?
Contractors in Hong Kong are typically paid on a per-project basis as agreed in their contract. They are responsible for managing their own taxes and MPF contributions. You would typically pay them through bank transfer, just like a regular employee.
What is the role of the Mandatory Provident Fund (MPF) in the employment contract in Hong Kong?
In Hong Kong, both employers and full-time or part-time employees are required to contribute to the Mandatory Provident Fund (MPF) as part of their employment contract. The MPF is a compulsory savings scheme for the retirement of residents. It's essential to include the details about the MPF scheme and the contribution amounts in the employment contract.
How does the statutory holiday system work in Hong Kong?
Hong Kong observes 12 statutory holidays, also known as public holidays. Employees are entitled to a holiday on these days, irrespective of their length of service. Pay on statutory holidays should be at least the daily average wage of the employee. Employers who fail to grant statutory holidays or pay holiday pay are in violation of the Employment Ordinance.
What does the employment ordinance in Hong Kong stipulate about working hours?
Hong Kong's Employment Ordinance does not prescribe a standard or maximum number of working hours. However, employers are encouraged to adopt voluntary guidelines, ensuring that employees have at least one rest day every seven days and don't work excessively long hours.
How does sick leave work in Hong Kong?
In Hong Kong, the length of paid sick leave depends on the length of service and the number of paid sick days accumulated in the employee's sick leave account. An employee is eligible for sickness allowance if they have accumulated a sufficient number of paid sickness days.
How are public holidays handled in Hong Kong?
Hong Kong observes 17 public holidays. All employees are entitled to these days off. If an employee is required to work on a public holiday, they should be given an alternative holiday or additional pay, as outlined in their employment contract.
How do you calculate the severance payment for an employee in Hong Kong?
In Hong Kong, severance pay is applicable to employees who have been employed continuously for at least 24 months and are dismissed or made redundant. The calculation is based on the employee’s last month’s wages or HKD 22,500, whichever is less, and the length of service.
How does maternity leave work in Hong Kong?
Pregnant employees in Hong Kong are entitled to 14 weeks of paid maternity leave if they have been employed under a continuous contract immediately before the commencement of maternity leave. The daily rate of maternity leave pay is four-fifths of the daily average of the wages earned by the employee.
How are income taxes handled for employees in Hong Kong?
Hong Kong operates on a territorial system of taxation. In other words, tax is levied on income derived from or earned in Hong Kong, and not on income sourced outside Hong Kong. The tax rate varies and is progressive, up to a standard rate of 17%. Employers must understand this when setting up their international payroll.
What is a long service payment in Hong Kong and how is it calculated?
In Hong Kong, if an employee has been employed continuously for not less than five years, they are entitled to long service payment if they are dismissed or if they resign due to ill health or old age. The amount is calculated based on two-thirds of the employee's last month's wages or two-thirds of HKD 22,500, whichever is less, for each year of service.
How is overtime pay calculated in Hong Kong?
Hong Kong's Employment Ordinance does not provide explicit guidelines on overtime pay. It is generally subject to mutual agreement between employers and employees. However, if overtime work is required and agreed upon, employers should clearly state the rate of overtime pay in the employment contract.
What are the regulations for paternity leave in Hong Kong?
In Hong Kong, a male employee is entitled to five days of paternity leave for the birth of his child if he has been employed under a continuous contract. The daily rate of paternity leave pay is four-fifths of the daily average of the wages earned by the employee.
What employee benefits are common in Hong Kong?
In addition to basic salary, many employers in Hong Kong offer additional employee benefits such as medical insurance, retirement scheme contributions, and bonuses. More generous benefits packages may include housing allowance, education allowance for employees' children, and transportation allowance. These benefits form an integral part of the overall remuneration package and can be a key factor in attracting and retaining employees.
How do you hire employees in Hong Kong?
Hiring employees in Hong Kong involves several steps, starting from identifying the job vacancy, advertising the job, conducting interviews, to finally offering the job to the selected candidate. It's important to comply with local regulations during the hiring process, including avoiding any form of discrimination, verifying the candidate's right to work in Hong Kong, and adhering to privacy laws when handling candidates' personal data.
How is retirement scheme contribution calculated in Hong Kong?
Employers and employees in Hong Kong are required to contribute to a retirement scheme, known as the Mandatory Provident Fund (MPF). Both parties contribute 5% of the employee’s relevant income to the scheme, subject to a minimum and maximum relevant income level. The current maximum level of income on which MPF contributions are required is HKD 30,000 per month.
What provisions does the Hong Kong Labour Department have in place for young persons in employment?
The Labour Department in Hong Kong has regulations in place to protect young persons in employment. Persons under 15 years of age are not permitted to work, and persons between 15 and 17 years of age are not allowed to work in certain hazardous occupations. Employers must observe special provisions on employment conditions, including work hours and rest days, for young persons.
How are daily wages calculated in Hong Kong?
Daily wages in Hong Kong are calculated by dividing the monthly wage by the number of working days in a month. This method is typically used to calculate pay for part-time or casual workers. For full-time workers, the wage is usually agreed upon on a monthly basis.
What social security measures are in place for employees in Hong Kong?
In Hong Kong, the social security system is primarily based on the Mandatory Provident Fund (MPF) scheme, a compulsory pension scheme that covers most employees and self-employed persons aged 18 to 65. There are also a range of social welfare programs available for those in need, including the Comprehensive Social Security Assistance Scheme.
What is the wage period in Hong Kong?
The wage period in Hong Kong is typically set on a monthly basis. This is the period for which payment of wages is due to an employee. It must not exceed one month. The due date for wage payment is no later than seven days after the end of the wage period.
What is included in an employment contract in Hong Kong?
A typical employment contract in Hong Kong includes the job title or description, length of the contract, working hours, wage period, monthly wages, entitlements such as holidays and sick leave, and terms for termination, among other items. The contract must comply with the Employment Ordinance and any other relevant laws in Hong Kong.
What is a “lieu of notice” in Hong Kong?
"Lieu of notice" in Hong Kong refers to situations where an employer or an employee wants to end the employment contract without serving the notice period. In such cases, the party ending the contract is required to pay a sum equivalent to the wages that would have been earned during the notice period. This is known as payment in lieu of notice.
How is an employee’s salary determined in Hong Kong?
An employee’s salary in Hong Kong is typically determined through negotiation between the employer and the employee at the time of hiring. Factors that may influence the salary include the nature of the job, the employee's qualifications and experience, the prevailing market salary for similar jobs, and the financial capacity of the employer.
What does the tax year look like in Hong Kong?
The tax year in Hong Kong, also known as the year of assessment, runs from April 1 to March 31 of the following year. Salaries tax, which is the tax on income from employment, is charged on a person's income for a year of assessment.
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.