Whether we are assisting clients with M&A integration or advising entrepreneurs, explaining Japan payroll is one of the most common requests we receive.
The following is designed to be an easily understood overview of the issues that a foreign company needs to consider when setting up a Japan payroll for its employees.
It is important that all business owners have at least 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 paper 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.
- Typically, statutory deductions are made from an employee’s salary for the following:
- Japanese individual income tax (national tax and local tax).
- Japanese social insurance. This mainly consists of a statutory retirement contribution, health insurance, and a long-term care premium. The employer generally matches the employee contribution.
- Japanese labor insurance. This program consists of workers’ accident insurance and unemployment insurance. Employers and employees both contribute to this program but not equally.
Japanese Individual Income Tax Returns
Unlike countries such as the United States, Australia and Great Britain, most Japanese employees do not file annual individual income tax returns. This means that generally all of an employee’s tax obligations are handled via the Japan payroll.
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 chosen. 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 usually made on the first day that banks are open before the holiday.
Traditional Japanese Bonus System
This is an area that often causes confusion for foreigners attempting to understand the Japan payroll system.
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; meaning that, in June and December, employees receive 3/16ths of their annual salary.
It should also be mentioned that some companies (especially the Japanese subsidiaries of foreign firms) simply divide annual compensation by 12, and pay an equal amount each month.
Importantly, note that this traditional bonus concept is separate from the issue of performance bonuses.
Location of the Japan 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 off-shore payroll is utilized. These benefits are covered in Japan Taxes: Tax Planning for Foreigners Working in Japan.
Employees paid offshore are generally considered outside the Japanese payroll system. As a result, arrangements need to be made for matters such as health insurance, 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
Initial Company 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 to expect the remittance of withheld money. Your company will be assigned a withholding tax number upon registration with both the national and local tax offices.
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. Under normal circumstances, both the employer and employee contribute to the program in equal amounts.
Social insurance is very important to Japanese employees. 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 provided in 6. b below.
Registration for Japanese Labor Insurance
The company needs to register with the Labor Insurance Office for Japanese labor insurance. 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.
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 and Labor Insurance are deducted directly from the company bank account.
Japanese bank accounts can be difficult and time consuming to establish for new companies. It is strongly recommended that you ask your accounting firm or lawyers for a referral.
4. Key Dates Every Month
The following is a brief outline of how a typical payroll operates each month (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 its 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: Withheld amounts 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 estimated 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 a small refund or has additional tax deducted from her December compensation.
6. Frequently Asked Questions
Below are the most common questions we receive about Japan payroll.
How long does it take to establish a payroll in Japan?
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:
- Health insurance coverage through the employees’ former employer. This is sometimes possible for up to two years.
- 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.