Japan Payroll – An Introduction
{The following is based on an article originally written for publication in the newsletter of the Japan Foreign Lawyers Association (RBA).}
Whether we are assisting clients with complex M&A integration or advising first time entrepreneurs, questions about Japan payroll are the amongst the most common queries that we receive.
The following is designed to be an easily understood overview of the most important Japan Payroll issues that foreign companies should understand before commencing operations in Japan.
Introduction – Why Is Japan Payroll Important
It is important that all business owners have a basic understanding of Japan payroll because:
- Business owners need to ensure that they are complying with their legal obligations.
- Japanese employees will have more confidence in a management team that has a basic grasp of how employees should be paid.
- Knowledge of the Japanese payroll system forms the basis of tax planning for both expatriates and locally hired employees. This article provides more information about Japan Taxes: Tax Planning for Foreigners Working in Japan.
This article is divided into five sections as follows:
- Key Features of the Japan Payroll System.
- First Decisions in Setting up a Japan Payroll.
- Initial Payroll Registrations.
- Key Dates Every Month.
- Annual Reporting Requirements.
- Frequently Asked Questions.
1. Key Features of the Japan Payroll System
The following are some key features of a Japan payroll:
- Employees in Japan are usually paid once per month.
- Traditionally, payment is made on the 25th of the month but other dates can be used.
- Statutory deductions are made from an employee’s salary for the following:
- Japanese individual income tax (both national tax and local tax).
- Japanese social insurance. This mainly consists of a statutory retirement contribution, health insurance, and a long-term care premium.
- Japanese labor insurance. This program consists of workers’ accident insurance and unemployment insurance.
Note that, in addition to deductions from the employees salary, there are also employer contributions towards the employee’s social insurance and labor insurance.
Japanese Individual Income Tax Returns
Unlike countries such as the United States, Australia, and the United Kingdom, most Japanese employees are not required to file an annual individual income tax return. The equivalent function is handled within the Japan payroll in December of each year. This is done by way of a so called “Year End Adjustment”.
2. First Decisions in Setting up a Japan Payroll
Before a Japan payroll can be put in place, a number of decisions need to be made by the employer.
- Date for the Monthly Payment of Salary
A date for the monthly payment of salary needs to be decided. Although the 25th of each month is commonly used, other dates (such as the last day of the month, and the 20th) are used.
If the selected payday falls on a weekend / bank holiday, payment is made on the first day that banks are open before the holiday. - Traditional Japanese Bonus System
This is a topic that often causes confusion for foreign management.
Traditionally, Japanese companies take an employee’s annual compensation and divide it by 16.
The employee then receives 1/16th of their annual salary each month except in June and December.
In June and December, the so-called summer and winter bonuses are paid. This means that in June and December, employees receive 3/16ths of their annual salary.
This system is not often used by foreign companies. - Location of the Japan Payroll – Onshore Payroll vs. Offshore Payroll
If your company expects to employ foreign expatriates, consideration should be given to paying them offshore.
When properly structured, expatriate employees may enjoy significant individual tax benefits if an offshore payroll is utilized. These benefits are discussed in this article Japan Taxes: Tax Planning for Foreigners Working in Japan.
Employees paid offshore are generally outside the Japanese payroll system. As a result, arrangements need to be made for matters such as health insurance, workers accident coverage, etc.
In addition, employees paid offshore may need to submit a Japanese individual income tax return by the 15th of each March with respect to the previous calendar year.
3. Initial Payroll Registrations
A number of filings need to be made by a company in order to establish a Japan payroll.
The main filings are as follows:
- Registration for Withholding Tax
The Registration for Withholding Tax is a notice to the Japanese tax authorities (both national and local) to expect the remittance of withheld money. Your company will then be assigned a withholding tax number. - Registration for Japanese Social Insurance
Registration for Japanese Social Insurance is a notice to the Japanese Social Insurance Office. As mentioned above, social insurance consists of health insurance, statutory retirement contributions, and long-term care insurance. Both the employer and employee contribute to the program in equal amounts.
Social insurance is very important to Japanese employees. Health insurance is a particular concern. Most employees expect that social insurance will be handled through the company payroll. However, since it can take up to eight weeks to register a company for social insurance, your employees may be left without coverage during the application period. Options for dealing with this problem are discussed in 6. b below. - Registration for Japanese Labor Insurance
The company needs to register with the Labor Insurance Office. Labor insurance consists of unemployment insurance and workers’ accident insurance. The system requires contributions from both the employer and employee.
Once your payroll provider receives all the necessary information, companies can usually obtain Labor Insurance coverage for their employees relatively quickly.
Bank Account
The company will need a bank account in Japan. In addition to being used to transfer funds to employees, payments to the Japanese tax authorities for Japanese Social Insurance and Labor Insurance are deducted directly from the company bank account.
Japanese bank accounts are difficult and time consuming to establish. It is strongly recommended that you discuss bank account opening with your accounting firm or lawyers during the initial company set-up.
4. Key Dates Every Month
The following are key monthly dates for a typical Japan payroll (assuming a salary payment date on the last day of the month).
15th of the Month: The company provides the current month’s payroll information to the Japan payroll provider.
20th of the Month: The Japan payroll provider sends a breakdown of that month’s payroll and requests funding for the Japan payroll account.
25th of the Month (at the latest): Funds are required in Japan.
30th of the Month: Funds are remitted directly to each employee’s personal bank account. Pay-slips are provided to each employee.
In the Following Month: Amounts withheld for national tax, local tax, and Social Insurance are paid to the Japanese tax authorities.
5. Annual Reporting Requirements
The following are the main annual reporting requirements associated with a Japan payroll:
January Each Year: Annual withholding report. This report advises the tax authorities of the amounts withheld from employees’ salaries (for both national and local taxes) during the previous calendar year. It is filed with both the national and local tax authorities.
May Each Year: Annual labor insurance report.
May Each Year: The annual labor insurance premium is deducted from the company’s bank account. This is a prepayment of one year’s estimated labor insurance premium.
August Each Year: The annual social insurance report is filed.
December Each Year: The year-end adjustment of the Japan payroll. This is one of the most important aspects of the system since, for most Japanese employees, it replaces the need to submit a Japanese individual income tax return. The national tax and local tax that has been deducted from the employee’s compensation during the year is compared to actual compensation received. An adjustment is then made and the employee typically receives either a small refund or has additional tax deducted from her December compensation.
6. Frequently Asked Questions
The following are some common questions we receive regarding Japan payroll:
- How long does it take to establish a payroll in Japan?
The basic payroll can be established quite quickly, However, in the case of a new entity, social insurance coverage for employees (health insurance, statutory retirement contribution, and long-term care insurance) may not be available through the company for up to two months. This can be a significant, not to mention worrying, issue for Japanese employees. We discuss possible solutions below at 6. b. - What options are available to employees if a new company is not yet registered for Japanese Social Insurance purposes?
- As mentioned above, Social Insurance registration for a new company may take up to two months. In the interim, two options may be available to affected employees:
(i) Health insurance coverage through the employees’ former employer. This is sometimes possible for up to two years.
(ii) Coverage through the national system for individuals. It may be possible for employees to obtain interim coverage as individuals by way of an application to their local city office.
Contact JAPAN VISA™ to learn more about how JAPAN VISA can assist your company with your company’s Japan Payroll.
The above is provided for general information purposes only and does not constitute advice to undertake or refrain from undertaking any action. Only qualified Japanese professionals are able to advise on Japan immigration, legal, and tax matters.