My salary was withheld at 25% and my freelance pay at 20% — why do I still owe ¥560 after the annual settlement?
Because withholding is only a down payment, not the final bill. During the year, each income stream is taxed separately at its own flat withholding rate. At the annual settlement, all four types of comprehensive income are pooled together and taxed at the progressive 3%–45% annual rate. When the pooled income pushes you into a higher bracket than the flat rates used during the year, the difference comes due — that ¥560 is the gap, not a mistake.
Withholding rates vs. the settlement rate
| Income type | How it's withheld during the year | Withholding rate |
|---|---|---|
| Salary | Cumulative withholding, month by month | 3%–45% on cumulative income |
| Labor remuneration (劳务报酬) | Per payment | 20% / 30% / 40% (three brackets) |
| Manuscript/royalties (稿酬) | Per payment | 20% flat |
| Royalties for IP use (特许权使用费) | Per payment | 20% flat |
| Annual settlement | All four pooled | 3%–45% progressive on the yearly total |
The settlement formula: (salary + labor income + manuscript + IP royalties, each converted to its "income amount") minus ¥60,000 basic deduction, social insurance, special additional deductions, and other deductions = taxable income, taxed at 3%–45%. Compare that with what was prepaid; pay the shortfall or get the refund.
The manuscript 56% rule — and why it still leaves you owing
For manuscript income, only part of what you receive counts as income: first subtract 20% as expenses, then count only 70% of the remainder. So ¥10,000 of manuscript fees counts as ¥10,000 × 80% × 70% = ¥5,600 of taxable income — the "56% rule."
But the withholding rate applied to that ¥5,600 is a flat 20% (¥1,120 prepaid). At settlement, that same ¥5,600 is stacked on top of your salary. If your total income puts your marginal rate at 25%, the manuscript portion really owes ¥5,600 × 25% = ¥1,400. You prepaid ¥1,120, so you owe ¥280 more — on just one ¥10,000 payment. Multiply across a year of freelance work and the ¥560 balance is completely ordinary.
The same logic hits labor remuneration: its top withholding bracket is 40%, but the settlement rate goes up to 45%. High earners with mixed income almost always owe something at settlement.
Frequently asked questions
If withholding is just an estimate, why not withhold at the final rate from the start?
Because no single payer knows your total picture. Your employer doesn't know about your freelance gigs, and your publisher doesn't know your salary. Only the annual pooling sees everything — that's exactly what the settlement is for.
Can I avoid the extra payment by having more withheld during the year?
Not really through the standard system — payers must use the statutory withholding methods. What you can do is keep the settlement from surprising you: if you regularly earn freelance income on top of a salary, set aside roughly the bracket gap each time you're paid.
I only had salary income and still owe money. Is that normal?
Yes, if your salary rose during the year (raise, bonus, job change). Cumulative withholding lags behind rising income, so a year of increases often ends with a small balance due at settlement.
Sources
- 《中华人民共和国个人所得税法》 (comprehensive income, 3%–45% progressive rate, manuscript 70% rule)
- Shanghai Tax Bureau on the annual settlement mechanism: https://shanghai.chinatax.gov.cn/zcfw/zcjd/202502/t475330.html
- 国家税务总局令第57号, 个人所得税综合所得汇算清缴管理办法