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Setting up payroll in Japan
Income tax and social security in Japan
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Foreign employers who are planning to hire employees in Japan should make sure to fully understand the requirements and obligations they have to fulfill. Processing payroll in Japan involves a high number of tasks payroll teams have to complete.
There are several reports related to tax and social security which need to be composed at various moments throughout the year. Plus, employers are not only obligated to withhold income tax on a monthly basis, but they also need to carry out a final tax assessment at the end of the year to ensure their employees have paid the right amount of income tax to the authorities.
When setting up payroll in Japan, employers must register for:
Tax with the National Tax Authority, which will then issue a withholding tax number, and with the municipality where the employee resides
Social security with the Health Insurance Office and the Pension Office
Labor insurances, namely for unemployment insurance and occupational accident insurance; registration for the latter must also be reported to the Labor Standards Inspection Office
New employees must also be registered with the respective authorities. The deadlines for both employer and employee registration vary from authority to authority. The employer registration with the Japanese authorities may entail the need to submit various reports.
It should be noted that there is no legal requirement to establish a local legal entity just to hire someone in Japan - unless the employee’s role and position is such that it triggers permanent establishment. Payments to Japanese tax and social security authorities must be made from a Japanese bank account.
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Income tax and social security contributions in Japan are withheld and submitted by the employer. The frequency for submitting the withheld amount to the respective authorities varies. Income tax and some of the social contributions are remitted on a monthly basis, the other social insurance premiums are paid once a year.
Tax rates in Japan are progressive and range from 5% to 45%. There is an additional 2.1% surtax, which is calculated based on the employee’s income tax, as well as a 10% local inhabitant tax. Non-residents earning income in Japan are taxed at a 20.42% flat rate.
Taxable employment income consists of salaries and wages, bonuses, income from stock options, living allowances and other benefits in kind - certain exceptions apply. Social security contributions as well as life insurance premiums, charitable contributions and certain medical expenses are deductible for tax purposes. There are further personal tax allowances as well as certain standard deductions which, in case of the latter, are calculated based on the employee’s family situation.
Permanent residents are liable for income tax on their worldwide income. Non-residents are only taxed on income sourced in Japan. Individuals count as residents if they permanently reside in Japan or have had their habitual abode in Japan for more than one year.
Foreign nationals who have spent less than five years during the ten previous years in Japan are classified as non-permanent residents. If the aggregate stay over the past 10 years exceeds five years, the individual counts as permanent resident. Non-permanent residents pay tax on income earned in Japan as well as on income earned abroad but paid and received in Japan.
2022 Tax Bands
Corresponding Tax Rates *
* Plus 2.1% surtax - based on income tax due. Plus 10% local inhabitant tax.
Income tax from employment income is withheld at source. The employer calculates and deducts the appropriate amount of income tax during the monthly payroll process and submits it to the authorities. The payment to the tax authority must be made no later than the 10th of the following month.
Employers must further submit information on the employee’s earnings to the municipality which then calculates the amount of local inhabitant tax due. Upon notification, the employer then deducts the outstanding amount from the employee’s salary and submits it to the municipality no later than the 10th of the following month.
Once a year, the employer must prepare an income and withholding tax report. One copy of the report must be issued to the employee, the other copy must be sent to the tax authority. The deadline is 31 January.
Furthermore, employers are responsible for carrying out a tax adjustment at the end of the year. For his purpose, the employer needs to collect all tax-relevant information from the employee. The adjustment must be made during the last payroll process of the year, which is in December. The tax year is the calendar year. Individuals file a personal tax return by 15 March.
The Japanese social security system is divided into two branches which are the social insurance scheme and the labor insurance scheme. The two schemes comprise the following insurances: occupational accident insurance, unemployment insurance, health insurance (including long-term care insurance for employees between certain age limits) and pension insurance.
Employers are generally obligated to provide coverage for their employees under all four insurance schemes - some exceptions apply with regard to pension and health insurance. However, employees are only obligated to enroll in the schemes if they fulfill certain requirements. Except for occupational accident insurance, which is solely borne by the employer, contributions to all insurances are shared between employee and employer. Expatriates may be exempt from making social security contributions in Japan under an international social security agreement.
Unemployment and pension contributions are the same for the whole country, but health insurance rates vary between prefectures (see table below). Pension contributions amount to 18.3% of the employee’s salary and are paid in equal shares by employee and employer. Employers pay 0.6% unemployment contribution, the employee share is lower, 0.3%.
Pension and health insurance contributions are determined for each employee in the beginning of the employment relationship based on the agreed wages. Thereafter, the employer continues to deduct the same amount every month. Contributions are reviewed every year and a report must be submitted to the competent authorities. The deadline is 10 July.
Employers submit their own share as well as the employee share of the pension and health insurance by the end of the following month. Contributions to the unemployment and occupational accident insurance schemes are paid on a yearly basis. The due date for both payments is 10 July.
Employees working for a Japan-based employer are generally required to pay social security contributions in Japan, regardless of whether they are of Japanese nationality or not.
* Please note that health insurance premiums are set by each Japanese prefecture. It should also be noted that rates are slightly higher for individuals between the ages of 40 and 65 because they are required to contribute to long-term care insurance.
Employees in Japan are entitled to various benefits. These include:
Annual leave and public holidays: 10 to 20 days, depending on the employee’s length of service; plus 16 public holidays
Maternity leave: 6 weeks (14 weeks in case of multiple births) before and 8 weeks after birth; maternity leave is paid
Paternity leave: there currently are no legal provisions for statutory paternity leave, but a new law is supposed to enter into force before the end of 2022, which will give fathers the right to take up to 4 weeks of paid paternity leave (to be taken within the first 8 weeks after birth)
Parental leave: under current regulations, parents are allowed to take childcare leave until their child’s first birthday, but a new law is supposed to enter into force by the end of 2022, under which parental leave may be extended beyond the child’s first birthday; under the new regulations, parents will also be able to take parental leave in two installments instead of only one
Sick leave: no statutory sick leave entitlement, but usually employers implement their own sick leave policies
For more information on employee benefits and other employment requirements in Japan (including severance pay and termination procedures), check out our Global Hiring Guide.
There is no national minimum wage in Japan. Instead, minimum wages are fixed by the different regions and industry sectors. The first 60 hours of overtime (within one month) must be paid with a 25% wage supplement.
For any following hour, the supplement must be at least 50%. Work on days off and on public holidays must be remunerated with additional pay of 35% and 60% respectively. There is no legal requirement to provide employees with an annual bonus like a 13th salary.
Japan’s employment law rules that employees must be paid at least once per month. Semi-monthly and weekly payment is also possible. Employers are free to choose when to pay their employees, but the pay date must be specified in the individual employment contract.
Payments in kind are not permitted, i.e. payments must be made in cash, via bank transfer or via another payment method permitted by law. Employees should be provided with a payslip at the end of each pay period. It is possible to issue payslips electronically. Payroll records must be kept for 40 years.
Learn about tax reporting, compensation laws, registration requirements and more in our free Payroll Guide for Japan.
This country guide is for informational purposes only and should not be construed as legal advice. The content of this guide contains general information, and although we update this guide regularly, it may not reflect current legal developments. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this country guide.
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