This page gives an outline of the main things to know about payroll in Japan.
Payroll in Japan is usually paid on the 25th of the month, although companies can freely decide which day they pay their employees.
In Japan there are basically two payroll taxes:
Payroll taxes are paid monthly for Social Insurance and once a year in advance for Labor Insurance.
In Japan, income taxes on salary are calculated by companies and withheld from each employee’s salary. There are two main taxes: income tax (the equivalent of federal income tax in the U.S.) and resident tax (the equivalent of state income tax in the U.S.). Resident tax can eventually be paid directly by employees.
Employee withholding tax is normally paid by the 10th of the following month; however, companies with fewer than 10 employees can file a request with the tax office “Noki no tokurei” and pay the withholding tax only twice per year.
The year-end adjustment is for the calculation of income tax due by the employee. During the year, employee tax is withheld each month from each employee’s salary based on the rates published by the tax office. At the end of the year, we calculate the exact tax liability of the employee based on their unique situation (such as how many dependents they have) and we make an adjustment so that the total amount of tax withheld during the year equals the tax liability of the employee. The amount of tax withheld from each employee is reported annually in the withholding tax report “Gokeihyo” filed in January.
For employees whose resident tax is deducted monthly from their salary by the company, new resident tax payment slips are sent by the tax office to the company so that companies can update the amount of resident tax to be deducted from employee salaries in June of each year. The resident tax deduction that starts in June is based on the taxable income from the previous year. Resident tax is roughly equal to 10% of the previous year’s taxable income. Resident tax is paid only by employees who were residents of Japan on January 1st and had taxable income in the previous year. New graduates typically do not pay resident tax.
In Japan, every company must calculate the tax liability of each employee at year-end and adjust the tax due on the last salary payment. Because this process takes time, we recommend that companies that plan to pay a bonus in December adjust their bonus amounts no later than December 8th. Generally speaking, we recommend that bonuses be paid in January, as a bonus paid in January can still be considered an expense from the previous fiscal year if the company ends its fiscal year in December.
Article 39 of the Labor Law outlines the minimum amount of paid vacation for employees. Paid time off is earned based on seniority within the company:
|Paid Vacation earned
Employees may accumulate up to two years’ worth of unused paid vacation. After two years, the unused paid vacation is forfeited. For example, an employee with two and half years of service may accumulate a maximum of 23 days of paid vacation.
The paid vacation schedule above is applicable only when employees have worked more than 80% of the total working days in the previous year.
Employees get a Social Insurance Card that allows them to visit any medical facility in Japan and pay only 30% of the medical fees.
Companies usually pay transportation fees for employees from their residence to their workplace. This is provided by most companies but is not considered an obligation.
As you can see, there are numerous steps you must take if you wish to employ and pay people in Japan. If it seems overwhelming to you, you are not alone. Many of our past clients have not been well-versed in the laws regarding employee compensation and benefits in Japan. If you are confused about payroll tax withholding and other topics related to the Japanese payroll system, JMC can help you develop a better understanding. Our team has decades of combined experience working with businesses trying to break into the Japanese market, and we can help you stay informed about withholding tax for Japan employees and other issues that you will need to address if you want to employ anyone for your overseas operation.
If you have questions about employee tax withholding or about any other topic related to operating a business in Japan, get in touch with our team right away. In addition to providing advice and education about Japanese payroll tax and other topics, we can also provide ongoing services like payroll, accounting, office setup, and more to help your transition to the Japanese market go more smoothly.
Disclaimer: The information provided here is intended for informational purposes only. Companies should consult with a licensed social insurance consultant before making any decisions related to the topics discussed here.