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Japan Payroll: An Introduction

Introduction

Whether 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.

Payroll is a basic function that foreign companies need to carry out in Japan. While the calculation of a Japan payroll is a complex task that needs to be handed by Japanese payroll professionals, other professional advisors need to have a basic understanding in order to that such things as employment agreements are appropriate. Understanding Japan payroll will also assist clients in structuring appropriate compensation packages for Japan based employees (this article discusses Structuring a Japan Compensation Package.)

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.

Why Is Japan Payroll Important

Business owners and their professional advisors need 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 six sections as follows:

  1. Key Features of the Japan Payroll System
  2. First Decisions in Setting up a Japan Payroll
  3. Initial Payroll Registration
  4. Key Dates Every Month
  5. Annual Reporting Requirements
  6. Frequently Asked Questions

1. Key Features of the Japan Payroll System

The following are some key features of a Japan payroll:

a. Employees in Japan are usually paid once per month.

b. Traditionally, payment is made on the 25th of the month (or earlier if banks in Japan are closed on that day) but other dates can be used.

c. 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 includes a statutory retirement contribution, health insurance, and a long-term care premium.
  • Japanese labor insurance. This program includes workers’ accident insurance and unemployment insurance.

In addition to deductions from the employees salary, there are also employer contributions towards the employee’s social insurance and labor insurance.

A Note About Japanese Individual Income Tax Returns

Unlike countries such as Australia, most Japanese employees are not required to file an annual individual income tax return. The equivalent function is handled in the December payroll by way of a “Year End Adjustment”.

2. Initial Decisions When Setting up a Japan Payroll

Before a Japan payroll can be put in place, a number of decisions need to be made including:

  • Date for the Monthly Payment of Salary

A date for the monthly payment of salary needs to be decided. The 25th of each month is commonly used, but other dates (such as the last day of the month, and the 20th) can also be used.

If the selected payday falls on a day when banks are closed, 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 businesses.

Traditionally, Japanese companies divide an employee’s annual compensation by 16.

The employee then receives 1/16th of their annual salary each month except in June and December.

In June and December, a so-called summer and winter bonuses is paid. This means that in June and December, employees receive 3/16ths of their annual salary.

  • Location of Japan Payroll – Onshore Payroll vs. Offshore Payroll

If a company expects to employ foreign expatriates, consideration should be given to paying them offshore.

When properly structured, expatriate employees can 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 (mostly) outside the Japanese payroll system. As a result, separate arrangements need to be made for items 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

Establishment of a Japan payroll involves several filings which include:

  • Registration for Japanese Withholding Tax

This is a notice to the Japanese tax authorities (national and local) to expect the remittance of withheld money. The new business is assigned a withholding tax number.

  • Registration for Japanese Social Insurance

As mentioned above, social insurance consists mainly of health insurance, statutory retirement contributions, and long-term care insurance. Both the employer and employee contribute to the program.

Social insurance is extremely important to Japanese employees. Health insurance is a particular concern. However, since it can take up to eight weeks for a new company to fully register for Japanese social insurance employees risk being without coverage during the application period. Options for dealing with this problem are discussed in 6.b below.

  • Registration for Japanese Labor Insurance

Labor insurance consists of unemployment insurance and workers’ accident insurance. Contributions are made by both the employer and the employee.

Companies can usually obtain Labor Insurance coverage for their employees relatively quickly.

  • Japan Bank Accounts

Since cheques are not used in Japan, a bank account is essential in order to pay employees and transfer deductions / contributions to the Japanese authorities.

Japanese corporate bank accounts are very difficult and time consuming to establish. In particular, in most cases, a Japan resident director will be needed.

The issue of bank accounts should be discussed with an accounting firm or lawyers before the initial company set-up.

4. Key Dates Every Month

The following are key monthly dates for a typical Japan payroll (for convenience, our example assumes a salary payment date on the last day of the month).

15th of each Month: The company provides the current month’s payroll information to it’s Japan payroll provider.

20th of each Month: The Japan payroll provider sends a breakdown of the current month’s payroll and requests funding for the Japan payroll bank account.

25th of each Month: Payroll funds are required in Japan.

30th of each Month: Funds are remitted directly to each employee’s personal bank account in Japan. 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 by way of deduction from the company’s Japan bank account.)

5. Annual Reporting Requirements

The main annual reporting requirements associated with a Japan payroll are as follows:

January Each Year: Annual withholding report. This report advises the tax authorities (national and local) of the amounts withheld from employees’ salaries (national and local taxes) during the previous calendar year..

May Each Year: Annual labor insurance report.

May Each Year: The annual labor insurance premium is deducted from the company’s Japan 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: Year-end adjustment of the Japan payroll. This is one of the most important aspects of the Japan payroll 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. The employee typically receives either a small refund or has a small amount of additional tax deducted from her December compensation.

6. Frequently Asked Questions

The following are some common questions we receive from clients regarding Japan payroll:

a. 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.

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.

 

Conclusion

It is important that foreign professional advisors in Japan have a working knowledge of Japan payroll in order to properly guide their clients through the set up of a new business in Japan.

Contact AA International Law (AAI Law) to learn more about how we can assist your company to regarding 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.