New optimized IIT withholding method for lower-income taxpayers

Earlier this month, the State Administration of Taxation issued Circular [2020] No. 19 on “Further Simplifying and Optimizing Some Taxpayers' Individual Income Tax Withholding and Prepayment Method” that optimize the IIT withholding and prepayment system for some taxpayers in order to increase the consumption and stabilize the employment.

The Circular applies, starting from the tax year 2021, to resident taxpayers satisfying the following three conditions:

- they have worked under the same employer from January to December of the previous tax year and have prepaid IIT on their wages and salaries through the withholding system;

- the cumulative wages and salaries income from January to December of the previous tax year does not exceed RMB 60,000 (including all kind of remuneration, such as yearly-bonus, without deductions); and

- they are still employed by the same employer in January of the relevant tax year.

Individuals earning remuneration from continuous labor service (i.e., insurance salespersons and security brokers) could also be eligible for the new optimized IIT withholding system.

For those taxpayers, the yearly standard deduction of RMB 60,000 would apply starting from January, meaning that the taxpayer shall prepay the IIT on his/her income only starting from the month in which his/her cumulative income exceeds RMB 60,000.

As a withholding agent, the employer shall verify whether eligible employees could benefit from the above optimized IIT withholding mechanism based on the withholding declaration of the previous tax year.

We suggest companies, employers, and the HR staff thoroughly analyze their employees' withholding declaration during the tax year 2020 and apply the above mechanism for eligible employees.