Every Japanese employer is a withholding agent. Each payday it deducts income tax from salaries using a monthly table that depends on pay after social insurance and the number of dependants declared. Bonuses are withheld with a separate rate table. The tax withheld in one month must reach the tax office by the 10th of the next month; employers with fewer than ten employees can apply to pay twice a year instead.
Withholding also applies to some payments outside payroll, such as fees to individual professionals and directors' remuneration. Non-residents are generally withheld at a flat 20.42% on Japanese-source pay. All rates have included the special reconstruction income tax, an extra 2.1% of the income tax amount, since 2013, and it is scheduled to run until 2037.
After the year ends, the employer gives each employee a withholding slip, the gensen choshu-hyo, by 31 January, and files copies with the tax office and payment reports with municipalities. The slip is the standard proof of income in Japan.
What it means for a foreign employer
- Ask for the withholding slip. It is the cleanest evidence of a candidate's actual pay. Asking for it at offer stage is normal practice in Japan and resolves most disputes over what "total compensation" means.
- Equity awards need separate handling. Shares or options granted by a foreign parent to employees of a Japanese subsidiary are not usually withheld through payroll, but the subsidiary must report them to the tax office and employees generally file a return.
- Residence status changes the rate. An employee who becomes non-resident mid-year, for example on assignment abroad, moves to a flat rate on Japanese-source pay.
- Late payment is penalised. Late remittance of withheld tax incurs a penalty tax and interest, even if the employee's tax is ultimately correct.
Sources
- Income Tax Act, Articles 183, 212 and 226.
- Special Measures Act for Securing Financial Resources for Reconstruction after the Great East Japan Earthquake (special reconstruction income tax, 2013 to 2037).
- National Tax Agency, withholding tax tables.