Japan Payroll & HR Services: Overview
JTAX is able to provide a comprehensive Japan Payroll & HR Service as part of its Japan Outsourcing Practice. Our qualified professionals are able to handle everything from initial consultations to transferring net funds to employees’ bank accounts each month.
We are also able to provide advice with respect to tax effective structuring of compensation packages.
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Japan Payroll & HR Services - FREQUENTLY ASKED QUESTIONS
Once JTAX receives all the required information, it may be possible to establish a basic payroll within a week to 10 days. 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 immediately available through the company for up to one month. This can be a significant issue for new Japanese employees who are accustomed to receiving coverage through their employer. JTAX’s Japanese professionals can work with your employees to ensure they remain covered.
Before our Japan Payroll & HR Service can commence, a number of decisions need to be made by the employer. These set-up decisions include:
a. Pay Date
A date for the monthly payment of salary needs to be decided. Although the 25th of each month is considered traditional, other dates (such as the last day of the month, and the 20th) are also used by some companies. When the selected payday falls on a weekend/bank holiday, payment is usually made on the first day banks are open before such holiday.
b. Traditional “Bonus” System
Traditionally, Japanese companies divided an employee’s salary by 16. Under this system, employees received 1/16th of their annual salary each month. In June and in December, an additional 2/16th of annual salary was paid (i.e., for a total of 3/16ths) as summer and winter bonuses respectively. (It should be noted that this“bonus” is separate from the issue of performance bonuses.)However, JTAX’s recent experience is that foreign companies simply divide annual compensation by 12, and pay an equal amount each month.
Separate to the above, many companies have a system of annual performance bonus.
A number of applications need to be made by a company in order to establish a Japan payroll.
The main filings are as follows:
a. Registration for Withholding Tax
This is basically a notice to the Japanese tax authorities to expect the remittance of tax withheld from employees’ salaries. Upon registration with both the national and local tax offices, your company will be assigned a number for withholding purposes.
b. Registration for Social Insurance
Social insurance consists (mainly) of health insurance, statutory retirement contribution, and long-term care insurance. Under normal circumstances, both the employer and employee contribute equally to the program.
It is important to understand that social insurance is a very important issue for Japanese employees and they expect it will be handled smoothly through the company payroll.
However, it can take up to eight weeks to register a newly established Japanese company for Japanese social insurance. As a result, your employees may be left without coverage during the lengthy application period. This can be a source of major concern for newly hired Japanese employees and can even lead to newly hired employees reconsidering their decision to join the company. JTAX works with its clients to help ensure that employees do not lose coverage.
c. Registration for Labor Insurance
Labor insurance consists of unemployment insurance and workers’ accident insurance. Contributions are made by both the employer and employee.
Once JTAX receives all the necessary information, companies can usually obtain labor insurance coverage for their employees in a relatively short period of time.
As an employer, your company has payroll related reporting obligations to a number of Japanese government authorities, as well as to your employees. JTAX handles this reporting as part of our Japan Payroll & HR Service.
The main reporting requirements to the Japanese authorities are.
a. Annual Withholding Tax Report
This report is a summary of taxes withheld from employees’ salaries during the previous year. It is filed with both the national and local tax authorities each January with respect to the prior calendar year.
b. Annual Labor Insurance Report
This report is filed with the Japanese labor insurance authorities in May of each year. The annual labor insurance payment is deducted from the company’s bank account. This is a prepayment of one year’s estimated labor insurance premium.
c. Annual Social Insurance Report
This report is filed with the Japanese social insurance authorities in May of each year.
The following is a brief outline of how JTAX’s full-service payroll would operate (assuming a payday on the 25th of the month).
10th of the Month – The client provides the current month’s payroll information to JTAX’s payroll professionals. Details of additional payments (for example expense reimbursements) would also be provided at this time.
15th of the Month – JTAX sends the client a breakdown of that month’s payroll, and (if required) requests a funds transfer to cover the upcoming payroll.
20th of the Month (at the latest) – Funds are received in Japan.
25th of the Month – Funds are remitted directly to each employee’s personal bank account, and pay-slips are provided to each employee. If the 25th falls on a day when banks are closed, payment is made on the first earlier day when banks are open.
Following Month – JTAX makes arrangements to pay the withheld tax amounts (national and local tax) to the Japanese tax authorities. Social insurance is deducted from the company’s bank account on the last day of the month.
Deductions are made from an employee’s salary for:
a. Individual income tax (national and local tax)
b. Social insurance (consisting mainly of a statutory retirement contribution, health insurance, and a long-term care premium), and
c. Labor insurance (consisting of workers’ accident insurance and unemployment insurance).
Social insurance registration procedures for a new company may take up to a month or longer.
For Japanese employees,social insurance coverage is one of the most important aspects of the employment relationship. If coverage is not handled correctly it will cause problems in the relationship between foreign management and Japanese employees. It may be even cause Japanese employees to reject previously accepted employment offers.
While the company is waiting for the Japanese social insurance agency to confirm registration, two options may be available to ensure employees do not lose coverage:
a. Coverage through a former employer. This is sometimes possible for up to two years, but may require timely consultation between the employee and their former employer.
b. 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 ward office. Although the individual would be required to bear the full premium cost, employers can reimburse the employee for the equivalent of the employer contribution.
Note that early planning is needed if either of the above two options may be required.
Once the payroll is in place, JTAX usually requires only a copy of the new employee’s executed employment agreement. If the employee has any questions, one of our Japanese professionals is available to speak with the new employee.
JTAX will then add new employees to the payroll by filing appropriate reports with the Japanese authorities. Once the company has been properly registered for social insurance and labor insurance, new employees can usually obtain coverage from the date they begin work.
In the event an employee resigns, JTAX needs to be advised of the effective date of the resignation and whether any special payments need to be made (e.g., retirement allowance, severance pay, etc.).
The company should obtain a forwarding address for the ex-employee, in order that JTAX can provide a withholding tax statement.
As an employer, you are required to provide employees with an annual certificate indicating the tax withheld during the previous year. In Japanese this is called a “kyuyo-shotoku-gensen-choshu-hyo” (often abbreviated to “gensen-choshu-hyo” or simply “gensen”.)The gensen document is generally provided to employees in December each year. It is also provided to employees after they resign from the company.
With certain exceptions, Japanese employees do not file annual individual income tax returns. The equivalent function is handled by way of a year-end adjustment of the payroll.
The year-end adjustment is a payroll-based function that replaces the need to submit an individual income tax return for most Japanese employees. National and local tax paid during the year is reconciled, and the employee may receive either a refund or be required to pay additional tax. The year-end adjustment is done in December each year.
Japanese employees are offered two main types of statutory benefit.
1. Social Insurance: This consists mainly of the national health insurance and national retirement schemes.
2. Labor Insurance: This consists mainly of unemployment insurance and workers’ accident insurance.
Employee contributions are deducted from the employee’s salary each month as part of the Japan payroll. These deductions are then combined with the mandated employer contributions and remitted to the Japanese authorities.
There can be significant differences between payroll for regular Japanese employees and payroll for foreign expat employees working in Japan.
Prior to an expats Japan assignment commencing, time should be spent to ensure that the expat’s compensation package has been constructed in a tax efficient manner. This may involve consideration of items such as company provided housing (rather than a housing allowance) and compensation paid offshore.
Although directors’ compensation can be run through a regular Japan payroll, there are a number of important issues to be aware of.
a. General Compensation Structuring: Structuring compensation for directors of Japanese companies can be problematic. In part, this is because bonuses (defined broadly for Japanese tax purposes) paid to a director are not deductible for Japanese corporate tax purposes. Non-deductible compensation includes the performance based payments (such as commissions, annual bonuses, etc.) that are often a key component of the compensation packages found in many multinational companies.
b. Statutory Benefits: Directors of Japanese companies are typically not eligible for enrolment in the statutory benefits programs (social insurance and labor insurance) in the same manner as a regular employee.
JTAX can assist with advice regarding efficient structuring of director compensation packages. We are also able to provide Japan Nominee Directors.
JTAX is able to provide advice in a number of payroll / HR related areas including:
- Tax-efficient compensation of employees in Japan (both Japanese nationals and foreign expats).
- Tax-efficient employment agreements.
- Work rules (legal matters are handled by our team of associated Japanese lawyers.)
- Tax issues concerning the compensation of directors.
- Tax consequences associated with specific items of compensation, including housing.
- Preparation of Japanese individual income tax returns for employees (both Japanese nationals and foreign expats.)