How it is calculated
N = full years of service + (1 if the remainder is 6 months or more, 0.5 if less) Compensation = N × average monthly wage over the last 12 months If the wage > 3 × local average: wage = 3 × local average, and N is capped at 12 N+1 = compensation + one month of last month's wage (pay in lieu of notice) 2N = compensation × 2 (damages for unlawful termination) Tax = (total − local average monthly wage × 12 × 3) × rate − quick deduction (excess only, annual table)
When N, N+1 or 2N applies
| Type | Typical situations | Legal basis |
|---|---|---|
| N | Termination by mutual agreement proposed by the employer, termination for business reasons (difficulties, restructuring), or the employer not renewing on equal or better terms when the contract ends | Labor Contract Law Arts. 46 and 47 |
| N+1 | Termination for illness, inability to do the job or a major change in circumstances without 30 days' written notice | Labor Contract Law Art. 40 |
| 2N | Unlawful termination by the employer (damages instead of compensation) | Labor Contract Law Art. 87 |
Resigning yourself or dismissal for serious misconduct normally carries no economic compensation.
City average wages and caps (used for 2026)
| City | Previous-year average monthly wage (yuan) | Wage cap (3×) | Tax-free limit (3× annual) |
|---|---|---|---|
| Beijing | 12,116 (derived) | 36,348 | 436,176 |
| Shanghai | 12,577 | 37,731 | 452,772 |
| Guangzhou | 14,311 (171,731 a year) | 42,933 | 515,193 |
| Shenzhen | 16,157 (193,881 a year) | 48,471 | 581,643 |
Beijing's notice does not state the average wage, so it is derived as the social insurance cap ÷ 3. Shanghai uses the 2025 all-employer average; Guangzhou and Shenzhen use the statistics bureaus' 2025 on-duty employee averages. The tax-free limit is 3× the annual average, using the published annual figures for Guangzhou and Shenzhen. The average actually applied can differ by region and court.
Examples
- Beijing, started 2019-03-01, last day 2026-08-31, average wage 15,000 yuan: 7 years 6 months → N = 8, compensation 120,000 yuan; with N+1, 135,000 yuan. Within the 436,176-yuan tax-free limit, so no tax
- Shanghai, 15 years 3 months, average wage 50,000 yuan, unlawful termination (2N): N = 15.5, but the high-earner cap gives 12 months × 37,731 yuan = 452,772 yuan; 2N = 905,544 yuan. The 452,772 yuan above the tax-free limit is taxed at 30% − 52,920 yuan → 82,911.60 yuan tax, 822,632.40 yuan net
Things to keep in mind
- The "wage" is the average over the 12 months before termination and includes bonuses and allowances, not just base pay. If it is below the local minimum wage, the minimum wage is used.
- Service before the Labor Contract Law took effect on 1 January 2008 follows the rules of that time, and the high-earner cap is generally read as applying only to service after 2008. This calculator applies the same rule to the whole period.
- Pay in lieu of notice (+1) is based on last month's wage and is not subject to the high-earner cap.
- Under Caishui [2018] No. 164 the tax-free limit is 3× the local previous-year average wage; the excess is taxed separately with the annual table, not added to other income for the year.
FAQ
How is length of service counted?
From the start date to the last working day. One month per full year, one month for a remainder of 6 months or more, half a month for less than 6 months. Example: 3 years 2 months = 3.5 months.
Can I get both 2N and N+1?
If you receive 2N damages for unlawful termination, you do not also receive compensation. Whether pay in lieu of notice is added varies by case and region and follows the labor arbitration or court decision.
Is economic compensation taxed?
Up to 3× the local previous-year average annual wage it is tax-free, so most payments carry no tax. Only the excess on large payments is taxed.
Basis and sources
- Labor Contract Law of the PRC (STA law database)
- STA 12366 — IIT on lump-sum termination compensation (Caishui [2018] No. 164)
- Shanghai HRSS Bureau — 2026 social insurance contribution base limits
- Beijing HRSS Bureau — 2026 social insurance contribution base limits
- Shenzhen Statistics Bureau — 2025 average wages of urban employees