Payroll in Japan – Overview
Payroll is an unavoidable part of running a business in Japan. To legally employ people, you will need to understand the payroll system in Japan. Based on our experience serving international clients, the best way to understand this complicated system is start by looking at a standard case of payroll calculations. In this section, we will walk you through a real payroll case so that you will be able to fully understand the payroll system in Japan.
Payroll Calculation in Japan
Below is an example of typical payroll calculation for an employee in Japan including the standard reports: a payroll register and a payslip.
Costs Paid by the Employee
|D||Health Insurance Premium||X * 4.935%||(24,675)|
|E||LT Nursing Care Insurance Premium||X * 0.895%||(4,475)|
|F||Pension Insurance Premium||X * 9.15%||(45,750)|
|G||Unemployment Insurance Premium||Y * 0.3%||(1,635)|
|J||Withholding Income Tax||(23,030)|
Costs Paid by the Company
|E-1||Health Insurance Premium||X * 4.935%||24,675|
|F-1||LT Nursing Care Insurance Premium||X * 0.895%||4,475|
|G-1||Pension Insurance Premium||X * 9.15%||45,750|
|J||Child Benefits Contribution||X * 0.34%||1,700|
|H-1||Unemployment Insurance Premium||Y * 0.6%||3,270|
|K||Workers’ Accident Compensation Insurance Premium||Y * 0.3%||1,635|
|Total Company Cost||81,505|
|X||Standard Monthly Salary||Y * 0.3%||500,000|
A. Base Salary
In Japan, it is a general practice for Japanese companies to pay wages on a monthly basis. In addition to the monthly salary, traditional Japanese companies pay summer (July) and winter (December) bonuses in their standard pay packages. Although companies can freely decide the date of payments to employees, wages are typically deposited into their accounts the 25th of the month.
B. Overtime Pay
Companies are required to pay additional wages as determined in the table below to employees who do any of the following:
(a) work in excess of statutory working hours (8 hours per day excluding breaks)
(b) work on statutory days off designated in company’s work rules
(c) work late at night (between 10 pm and 5 am)
|#||Rate of increase|
|(1)||work in excess of statutory working hours||25%|
|(2)||work in excess of statutory working hours exceeding 60 hours per a month||50%|
|(3)||work on statutory days off||35%|
|(4)||work late at night (between 10 pm and 5 am)||25%|
|(5)||work late at night in excess of statutory working hours||50%|
|(6)||wok late at night in excess of statutory working hours exceeding 60 hours per a month||75%|
|(7)||work late at night on statutory days off||60%|
C. Commuting Allowance
Companies in Japan typically pay a commuting allowance in addition to regular wages although it is not an obligation. Most people who reside near Tokyo commute to office by train or bus. Thus, the commuting allowance is calculated by the one-month cost of a commuting pass on public transportation. The commuting allowance benefit is not used in employee income tax calculations, but considered as a part of Standard Monthly Salary for the social insurance.
D. Health insurance premium
National Health Insurance (NHI) is one of the two major types of insurance programs available in Japan, which is used primarily by part-time workers, sole-proprietors, and unemployed people. Employees’ Health Insurance (EHI) is designated for the full-time employees of companies. Although private insurance is also available, all Japanese citizens, Permanent Residents, and any non-Japanese residing in Japan with a visa of three months or longer are required to be enrolled in either NHI or EHI. Under EHI, employees and their dependents receive 70% coverage of medical treatment fees. The benefits of EHI also include High-Cost Medical Care, Sickness and Injury Allowances and Maternity Allowances.
(Calculation of Health insurance premium)
Employee’s Cost = Standard Monthly Salary* 4.935%
Company’s Cost = Standard Monthly Salary* 4.935%
Standard Monthly Salary: The standard monthly salary is defined by calculating the average salary for the last 3 months. The premium amount is obtained by referring to a standard salary table.
E. LT Nursing Care Insurance Premium
Long-term nursing care insurance provides benefits like home care service for people over 65 years old. Employees aged 40 to 64, have to pay LT nursing care insurance premiums, which are calculated in the same manner as the Health Insurance Premiums.
(Calculation of LT Nursing Care Insurance Premiums)
Employee’s Cost = Standard Monthly Salary* 0.895%
Company’s Cost = Standard Monthly Salary* 0.895%
F. Pension Insurance Premium
As is the case with Employees’ Health Insurance, full-time employees are required to be enrolled in the Employee Pension system. Employees who pay premiums for at least 25 years are eligible to receive a pension after becoming 65 years old. Pension benefits vary depending on the term of payment and the total amount of the premiums.
(Calculation of Pension Insurance Premiums)
Employee’s Cost = Standard Monthly Salary* 9.15%
Company’s Cost = Standard Monthly Salary* 9.15%
G. Unemployment Insurance Premiums
Unemployment insurance provides benefits to employees who become unemployed. The duration of benefits is usually limited to a period of 3 months to one year, and depends on the length of previous employment and age.
(Calculation of Unemployment Insurance Premiums)
Employee’s Cost = Gross Salary Amount * 0.3%
Company’s Cost = Gross Salary Amount * 0.6%
H. Withholding Income Tax
Withholding refers to income tax withheld from wages by employers to pay employees’ personal income taxes. As an employer, you are required by law to withhold personal income tax from the wages of employees on a monthly basis, and must pay the taxation office the taxes withheld at the source no later than the 10th day of the following month. (Notes: a special exemption is provided for small businesses with fewer than 10 employees. This allows them to pay withholding income tax twice a year in six-month installments, with deadlines of July 10 and January 20.)
(Calculation of Withholding Tax)
The amount of income tax withheld is based on the employee’s taxable wages and the number of dependents. Withholding is calculated by using the tax tables available from Japan tax offices.
I. Inhabitant Tax
Inhabitant tax refers to local government tax withheld from wages by employers to pay employees’ personal Inhabitant Taxes. The inhabitant tax is equal to roughly 10% of the employee’s taxable income from the previous year. This amount is deducted in 12 increments starting in June of the following tax year. For example: 10% of taxable income from 2019 will be deducted in equal payments from an employee’s wages from June 2020 to May 2021. In June of each year, new inhabitant tax payment slips are sent by local government offices to companies so that employers can update the amount of inhabitant tax to deduct from their workers’ salaries.
J. Child Benefits Contribution
A Child Benefits Contribution that is designated to provide benefits to people with children is required to paid by the company.
(Calculation of Child Benefits Contribution)
Company’s Cost = Standard Monthly Salary* 0.34%
K. Workers’ Accident Compensation Insurance premium
When workers are injured or become sick due to industrial accidents or commuting accidents, the insurance benefits including Medical Compensation and Leave of Absence Compensation are granted to them. Accident insurance premiums are paid only by the employer and the rates vary depending on the company’s industry.
(Calculation of Workers’ Accident Compensation Insurance premium)
Company’s Cost = Gross Salary amount * 0.3% (Note: Service companies’ premium rate is 0.3%)