Understanding Payroll in Japan: What Global Companies Need to Know About Japan Payroll
Jan 1, 2017
If your business is looking to move into a new international market, Japan is likely near the top of your list. Japan is viewed favorably for its affluence, safe culture, and innovative companies like Toyota, Panasonic, Honda, Mitsubishi and others. It is also one of the world’s top countries for popular culture, dining, fashion, and beauty.
On top of those general reasons, foreign nationals and residents are optimistic about the country’s economy, which is expected to grow in the years ahead. The OECD has predicted a 1% growth for Japan in 2017, while Japan’s government forecasts a more optimistic 1.5% increase. Japan currently has a population of 127.5 million people and a GDP of approximately US $5.960 trillion.
Some of Japan’s growth prospects will depend on whether the new U.S. presidential administration places any tariffs on China’s goods, as promised by President Trump. If that happens, orders to Japanese manufacturers could be affected. Regardless of oncoming changes, however, Japan remains a stable economy for business. For multinational companies, the first step to success in Japan is to set up using the right business structure and begin payroll processing in alignment with all applicable guidelines.
Setting up your payroll in Japan will depend on what type of corporate structure is used. The four most common business structures in the country are:
- Godo-Kaisha, which operates in a similar manner to an American LLC (or ‘limited liability company’) setup;
- Goshi-Kaisha, which is a ‘limited partnership’ company;
- Gomei-Kaisha, a ‘general partnership company’; or
- Kabushiki-Kaisha. The most popular business structure, the Kabushiki-Kaisha is the Japanese version of incorporation. Note: Companies set up this structure must report public statements of financials, unlike other Japanese business of structures.)
If you are considering setting up a KK, you should allow three to four weeks for the incorporation process after preparing and executing the constitutional documents of the ‘KK’ (essentially the articles of incorporation). Once the business is registered appropriately, it’s time to make sure the payroll, taxes, and other elements of the business are properly processed. Here are some details on getting up and running to pay employees in Japan.
Any company seeking to pay employees in Japan must have a bank account in Japan. This account is to be used to pay employees, and also make social insurance and labor insurance payments to the Japanese tax authorities.
Established companies find it easier to get a Japanese bank account than new companies. If you’re an entrepreneurial company seeking your first Japanese bank account, start early and be prepared for a lengthy and heavily scrutinized application processes!
Registrations & Compensation
The following payroll registrations must be made and approved before you can start to pay employees in Japan. Here are some of the main registrations to expect.
- Registration for Withholding Tax: This registration alerts the tax authorities to assign the company a withholding tax number with the local and national tax offices – keeping the company and employees protected from noncompliance with the individual income, local, and national taxes.
- Registration for Social Insurance: This registration sets up the company’s employees with the national social insurance office to start payroll deductions for the social insurance. This deduction is usually for each individual employee’s health insurance and long-term care, as well as for a retirement contribution. (Many Japanese employers have a matching program for the employee contribution.) As a result of employers paying the social insurance tax, all Japanese employees carry a government subsidized social insurance card that qualifies them for a 70% discount on services in any medical facility.
- Registration for National Labor Insurance: In this deduction, the employee’s payroll is deducted for unemployment insurance and accident insurance.
These registrations should ideally be approved and ready to go before a company launches payroll for Japan-based employees. As in many European countries, Japanese companies typically pay their employees once a month, near to the end of the month (typically the 25th).
Payroll & Taxes
Different stipulations hold forth for global companies paying foreign expatriates separately from the Japanese payroll system. The expats receive significant tax benefits by being paid off shore, but lose key benefits of the Japanese payroll system, including health insurance and other measures. (Those areas will need to be handled individually by the expat employee.) In addition, expats being separately or offshore will need to file an annual Japanese tax return for this money earned.
Whether they manage it in-house or outsource payroll in Japan to a third party solutions provider, companies should be aware of the different payment types for employees: monthly (tax exempt), monthly (non-exempt), daily, and hourly. This necessary information for all payslips includes base pay compensation rates for employees' pay packages, any bonus amounts, any housing or commuting allowances, and deductions for the above-mentioned social insurance and labor insurance premiums.
Vacation, Maternity Leave & Holidays
There were 16 public holidays in Japan during 2016, and those are given to employees as days off work. For personal holidays, Japanese companies offer employees a rising rate of paid days off depending on length of work time accrued. For instance, an employer may wait 6-month to first offer 10 days personal vacation time. Then, in each year thereafter, the employer raises the amount of paid time off.
For maternity leave, companies should know that Japanese law allows for up to six weeks’ maternity leave before childbirth. After the birth, employees must wait eight weeks before returning to work. So the entire maternity leave is around 14 weeks (or nearly 4 months). There is currently no paternity leave afforded to new dads following childbirth.
|Date||Japan's Public Holiday Schedule|
|January 1st||New Year's Day|
|January 9th||Coming-of-age Day|
|February 11th||National Foundation Day|
|March 20th||Vernal Equinox Day|
|April 29th||Showa Day|
|May 3rd||Constitution Memorial Day|
|May 4th||Greenery Day|
|May 5th||Children's Day|
|3rd Monday of July||Marine Day|
|August 11th||Mountain Day|
|3rd Monday of September||Respect for the Aged Day|
|September 22nd||Autumnal Equinox Day|
|2nd Monday of October||Health-Sports Day|
|November 3rd||Culture Day|
|November 23rd||Labor Thanksgiving Day|
|December 23rd||The Emperors Birthday|
Japan continues to be a significant business outpost for many American and European companies. Knowing the various labor laws and Japanese requirements can help entrepreneurs and global companies achieve ongoing success in their global payroll operations.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.