How long does a major manufacturing facility take to start and turn a profit?

In China, it’s difficult to recoup the cost.

Currently, in China, how much profit does a company need to make to still earn a profit after taxes? For a company with 2 million yuan in sales revenue, the combined costs of rent, salaries, office expenses, materials, and equipment amount to 1.6 million yuan, resulting in a gross profit of 400,000 yuan. The entrepreneur is thrilled, thinking they’ve made a profit of 400,000 yuan, which seems good… However, after paying various taxes and fees, they end up with only 21,400 yuan! Yes, you read that correctly, 21,400 yuan (not 214,000 yuan).

Suppose you start a factory, and after a year, the business situation is as follows:

• The factory is rented, covering an area of 2,000 square meters. The rent is pre-tax, and the tenant is responsible for related taxes and fees. The monthly rent is 10,000 yuan (pre-tax), so the annual rent is 120,000 yuan.
• Clay is purchased for 100,000 yuan.
• The company has two vehicles: a 5-ton truck for deliveries and a 2.5-liter sedan for office use. The annual gasoline cost is 40,000 yuan.
• Employee expenses (including salaries, bonuses, social security, and withheld personal income tax) total 1.1 million yuan.
• Water, electricity, gas, communication, and office expenses total 150,000 yuan.
• Equipment maintenance and depreciation cost 90,000 yuan.
• This year, 2 million yuan worth of products (including tax) were sold.

How much can I earn this year? Did I earn 2,000,000 – 120,000 – 100,000 – 40,000 – 1,100,000 – 150,000 – 90,000 = 400,000 yuan?
Of course not, taxes must be paid first. Let’s calculate how much tax needs to be paid:

Tax 1: Factory rental taxes
(a) Business tax: 120,000 * 5% = 6,000 yuan
(b) Urban construction tax: 6,000 * 7% = 420 yuan (this is the urban rate; it’s lower in towns, at 5%)
(c) Education surcharge: 6,000 * 3% = 180 yuan
(d) Property tax: 120,000 * 12% = 14,400 yuan
(e) Land use tax:
Taking Guangzhou as an example, the industrial land tax rate is divided into five tiers: 15 yuan, 12 yuan, 8 yuan, 5 yuan, and 3 yuan.
Based on the third-tier land standard, it’s 8 yuan per square meter annually.
2,000 * 8 = 16,000 yuan
(f) Stamp duty: 120,000 * 0.1% = 120 yuan
Total factory rental taxes (a)~(f): 6,000 + 420 + 180 + 14,400 + 16,000 + 120 = 37,120 yuan

Tax 2: Vehicle and vessel tax
720 + 480 = 1,200 yuan

Tax 3: Stamp duty
Sales and purchase contracts (excluding VAT) at 0.03%:
2,000,000 / (1 + 17%) * 0.03% = 500 yuan

Tax 4: Value-added tax (VAT)
(2,000,000 – 2,000,000 / (1 + 17%)) – (100,000 – 100,000 / (1 + 17%)) = 276,100 yuan

Tax 5: Urban construction tax—7% of VAT
161,500 * 7% = 19,300 yuan

Tax 6: Education surcharge—3% of VAT
161,500 * 3% = 8,300 yuan

Tax 7: Local education surcharge—1% of VAT
161,500 * 1% = 2,800 yuan

Total taxes 1~7:
37,120 + 1,200 + 500 + 276,100 + 19,300 + 8,300 + 2,800 = 345,320 yuan

Next, calculate the pre-tax profit, which is the tax base for corporate income tax. When calculating income tax, VAT cannot be deducted from costs. Therefore, when calculating pre-tax profit, VAT cannot be deducted from costs either.
Pre-tax profit = 2,000,000 / (1 + 17%) – 120,000 – 100,000 – 40,000 – 1,100,000 – 150,000 – 90,000 – 37,120 – 1,200 – 500 – 19,300 – 8,300 – 2,800 = 40,200 yuan

Tax 8: Corporate income tax, 25% rate
Pre-tax profit * 25% = 40,200 * 25% = 10,100 yuan

Next, calculate the after-tax profit: 40,200 – 10,100 = 30,100 yuan

To withdraw the company’s profit as the owner’s personal income, dividends must be paid. Dividends are subject to personal income tax.
Tax 9: Personal income tax, 20% rate
30,100 * 20% = 6,020 yuan

The owner’s final take-home amount is: 30,100 – 6,020 = 24,080 yuan. If spread over 12 months, the monthly income is 2,008 yuan. This calculation does not include the social security fees the owner should pay for themselves. According to Guangzhou standards from 2016-2017, at least 1,000 yuan per month is required for social security fees. Thus, the owner’s disposable income is only a few hundred yuan per month. You originally thought there would be a 400,000 yuan profit for the year, but in reality, with such thin margins, you essentially break even for the year.

In the above calculations, the total taxes paid by the owner amount to: 345,320 + 12,700 + 7,600 = 365,620 yuan

There’s at least one more tax not included: gasoline tax. Based on the 2016 gasoline price and tax rate, every 100 yuan of gasoline includes 50.36 yuan in taxes. In this case, the annual gasoline expense is 40,000 yuan, including gasoline tax: 40,000 * 50.36% = 20,120 yuan

Thus, the owner’s total annual tax payment is 365,620 + 20,120 = 385,740 yuan

It should also be noted that this 385,740 yuan in taxes only includes the taxes paid by the company and the owner, and does not include the personal income taxes paid by the employees. In this case, depending on the number of employees and their salaries, the total personal income tax paid could range from tens of thousands to hundreds of thousands of yuan.

This case tells us that currently, in China, if you comply with tax regulations, it’s difficult for low-margin industries to survive. You need to be in a high-margin industry.

Out of the 1.1 million yuan in employee wages, half goes to the government.

An employee with a monthly salary of 10,000 yuan, after deducting social security, housing fund, and personal income tax, takes home 7,454 yuan, but the employer actually pays 14,410 yuan.

Many people complain that their jobs are exhausting, the work is hard, and the pay is low. Do you know that the salary you take home has already passed through several tax checkpoints? How many layers are there exactly?

Why is the actual salary much lower than the nominal salary?

With a monthly salary of 10,000 yuan, you only take home 7,454.30 yuan, while your employer pays 14,410 yuan. Today, I want to tell you a harsh reality: the salary Chinese employees take home is actually less than 60% of the total salary.

Moreover, even more harshly, this percentage may decrease further. So, who “took” your money?

Although it’s a painful topic, I still feel the need to speak out.

1. It’s heartbreaking
   With a monthly salary of 10,000 yuan, you only take home 7,454.30 yuan, while your employer pays 14,410 yuan.
   Recently, Vice Premier Ma Kai stated that the current pension insurance contribution level is too high, with “five insurances and one fund” accounting for 40% to 50% of the total salary. This means that the salary you take home is less than 60% of the total salary.

So, where did the remaining 40% go?
With a pre-tax monthly salary of 10,000 yuan, the five insurances, housing fund, and personal income tax amount to 6,955.70 yuan.
With a pre-tax monthly salary of 10,000 yuan, the five insurances, housing fund, and personal income tax total 6,955.70 yuan. This seems problematic. Some might ask, adding the personal income tax, does that mean the post-tax salary is less than 3,000 yuan? This misunderstanding arises because, in addition to the individual’s contribution, the five insurances and housing fund are mainly paid by the employer.
(1) Individual contribution—social security and housing fund details: pension 8%: 800 yuan; medical 2%: 203 (200 + 3) yuan; unemployment 0.2%: 20 yuan; housing fund 12%: 1,200 yuan. Total individual contribution: 2,223 yuan. Personal income tax: total taxable amount: 4,277 yuan, personal income tax paid: 322.70 yuan.
(2) Employer contribution—social security and housing fund details: pension 20%: 2,000 yuan; medical 10%: 1,000 yuan; unemployment 1%: 100 yuan; work injury 0.3%: 30 yuan; maternity 0.8%: 80 yuan; housing fund 12%: 1,200 yuan. Total employer contribution: 4,410 yuan. From the above calculations, we can see that the take-home income is: 10,000 – 2,223 – 322.70 = 7,454.30 yuan; total employer labor cost: 10,000 + 4,410 = 14,410.00 yuan.
The employer pays 14,410 yuan each month, while the employee takes home 7,454.30 yuan. Where does the 6,955.70 yuan difference go? The following chart provides an explanation.
Of this, the employer’s social security contribution of 3,210 yuan and the individual’s social security contribution of 1,023 yuan go to the social security agency; the employer’s and individual’s housing fund contributions of 1,200 yuan each go to the housing fund agency; and the personal income tax of 322.70 yuan goes to the tax agency.
When your pre-tax monthly salary is 10,000 yuan, the actual cash you take home is 7,454 yuan, which is 51.73% of the employer’s actual labor cost of 14,410 yuan, already more than half. The amount the employer needs to bear is about twice the individual’s take-home amount. This is shocking, isn’t it? It’s enough to make our hearts skip a beat.

Of course, you could argue that a significant portion of the “five insurances and one fund” will eventually return to us. Regardless of whether we can get our pension back decades later, even if we can get it back 100%, the money will have already depreciated by then, which is undeniable. Today, our income, plus the taxes we pay when spending our salaries, means that more than half is indeed taken by the government. This is an undeniable fact.

1. If a lot is deducted, don’t cry—you’re in a “good” company
   The manifestation of “social security” varies across different companies. Dong Dengxin, a council member of the Wuhan Social Security Association, once stated on his verified Weibo account that the level of Chinese laborers can be distinguished based on the five insurances and two funds (five insurances: pension insurance, medical insurance, unemployment insurance, work injury insurance, and maternity insurance; two funds: housing fund and enterprise annuity) provided by employers:
   (1) Laborers with only the five insurances are definitely working in small and medium-sized enterprises;
   (2) Laborers with the full five insurances and one fund are definitely working in large companies or listed companies, which is considered formal employment or decent work;
   (3) Laborers with generous five insurances and two funds are mostly working in monopolistic or high-profit industries.
2. Comparing again will shock you
   China’s social security contribution rate ranks first in the world, with a contribution base 4.6 times that of neighboring countries.
   According to calculations by Professor Bai Chong’en from Tsinghua University, the total statutory contributions for China’s five social insurances are equivalent to 40% of the wage level, and in some regions, it even reaches 50%. China’s social security contribution rate ranks first among 181 countries globally, about twice the average level of the other three BRICS countries, three times that of the Nordic countries, 2.8 times that of the G7 countries, and 4.6 times that of East Asian neighbors.
3. Tears continue to flow
   The rise in social security contributions has become a national trend.
   The Tianjin Human Resources and Social Security Bureau recently announced that in 2018, the minimum and maximum standards for the contribution base of urban employees’ basic pension insurance, basic medical insurance, unemployment insurance, work injury insurance, and maternity insurance in Tianjin are 3,159 yuan and 15,795 yuan, respectively. This means that even if the monthly salary is less than 2,000 yuan, both the employer and the employee must pay social security based on the minimum contribution base of 3,159 yuan.

We found that, in addition to Tianjin, Fujian, Jiangxi, and other regions have also raised the minimum and maximum social security contribution bases. Social security departments in Guangxi, Hubei, and other regions explained that in recent years, the social security contribution base has been increasing annually, generally based on the previous year’s “social average wage.”

China’s social insurance mainly includes pension insurance, medical insurance, unemployment insurance, work injury insurance, and maternity insurance, collectively known as the “five insurances.” According to the “Social Insurance Law” and the “Social Insurance Collection Provisional Regulations,” the social security contribution base is 60% to 300% of the previous year’s social average wage.

Relevant experts stated that this means that as the social average wage increases, the contribution base will also rise, making the increase a common phenomenon. Public data shows that in 2012, the minimum social security contribution base in Beijing was 1,869 yuan, which increased to 2,317 yuan in 2014 and 3,082 yuan in 2018; the minimum contribution base in Zhejiang also increased from 1,908 yuan in 2012 to 2,819 yuan in 2018. The national social security fund released by the Ministry of Finance has also shown a continuous upward trend.

Summary:
Researchers have found that due to rising raw material costs, the profit margin of small and medium-sized enterprises is only 1%-3%. In fact, a 1% profit margin is very fragile and can even be considered a loss because it cannot withstand any fluctuations. According to international standards, a company’s profit margin must be maintained above 12%. Before the 2008 financial crisis, Chinese companies could generally maintain this profit margin, and some even higher. However, now, small and medium-sized enterprises have entered an era of low or even no profit. If this vicious cycle continues, the only result will be the bankruptcy of a large number of small and medium-sized enterprises.

After reviewing all these costs, and considering the profit margins in your industry, you should now understand why running a factory is not easy.