Independent contractors planning to work in Japan will want to review the conditions and rules for contracting in that popular Asian business destination. Japan’s culture influences all types of work relationships and may differ from what you are used to in other countries. In general, the rules are highly detailed with many different categories of tax and statutory contributions, for both residents and ex-pats.
This guide will explain how to navigate contracting in Japan. This will include getting paid and meeting social security obligations and taxes in Japan. We also explain the solutions for overcoming any challenge that you might face when setting up your contracts and settling into Japan.
Your Options for Getting Paid as a Contractor in Japan
As a contractor, you will need to set up some form of verifiable payment with your clients. That way, you both are assured of contract fulfilment and prompt payment. One issue to think about is what currency you are going to use for setting your rates and receiving payment. Your Japanese client will probably want to pay you in Yen.
If you don’t have a bank account in Japan then your payment will need to be wired to your home country, and there may be an unfavourable currency conversion applied by the bank if you are being paid in Yen.
You can do all of this on your own or use our resources at Contractor Taxation to help you set a worry-free escrow payment system to use with your Japanese clients.
Are You a Tax Resident in Japan?
If you are going to be contracting in Japan for a year or more, then you will become a resident for tax purposes. That means even if you file and pay taxes in your home country then you will also have to do the same in Japan. In that case, you will probably need assistance in calculating tax rates, withholding and filing a correct Japanese tax form.
Being classified as a tax resident in Japan may seem unfair, but most countries have rules like this because essentially you are living and working inside the country and enjoying the benefits of tax revenue from locals.
For taxation in Japan, taxpayers are classified into 3 categories:
- Permanent resident: A Japanese national or non-Japanese national who has been present in Japan for at least 5 years within the last 10 years.
- Non-permanent resident: Individual of a non-Japanese nationality who has not resided to maintain domicile in Japan for 5 years or more in the last 10 years.
- Non-resident: Individual who has lived in Japan for less than 1 year and does not have a primary base of living in Japan.
How to File Taxes in Japan
In Japan, income tax is based on a self-assessment system. Generally, taxpayers must file tax returns to declare income and deductions and pay the tax due. However, if you’re considered a resident for tax purposes, you may not be required to file taxes due to Japan’s Year-End Adjustment System. This means that wage earners have their tax withheld by the employer and receive an adjustment at year-end to refund or pay the tax balance. You will be required to file a tax return if you/your
- You have an employment income paid outside of Japan
- Your additional income exceeds 200,000 yen.
- You leave Japan before the year ends.
- Your annual salary exceeds 20 million yen.
- You have more than one employer.
Even if an individual is not legally required to file a final return, they can file a refund return if they qualify for any deductions.
Filing taxes in Japan for foreign workers:
1. Collect the required documents for filing a tax return. This includes:
- Individual number card
- Statements of income.
- Withholding statement obtained from employer (Gensen-choushu-you).
- Residence card or alien registration certificate.
- Receipts of payments for dependents, medical expenses, insurance contributions, life insurance, mortgage, earthquake insurance etc,)
- Proof of other earnings (e.g. dividends, real estate income, capital gains).
2. Fill out the Confirmation of the Type of Resident Status form
3. Download the ‘Documents to Submit’ form available here
4. Enter e-tax and fill out the form for a tax return. Print out the completed form.
5. Send the forms from steps 2-4 to the local branch of the National Tax Office.
Filing taxes for locals in Japan:
1. Collect the required documents as outlined above.
2. Tax filing can be done through the Final Return Filing Corner at the National Tax Agency’s website.
- Final returns can be generated here by following the instructions on the screen.
- If the individual is self-employed, they will also fill out a blue final returns form.
3. Print out the data generated and submit it through the post, or using e-Tax.
Tax Relief: Double Taxation Treaties with Japan
The problem with tax residency is that you will potentially be paying double tax. Fortunately, Japan has tax treaties with many countries that allow for tax credits up to the amount of Japanese tax paid. You will want to research ahead of time the exact tax treaty between your home country and Japan.
Social Security in Japan
This same one-year rule applies to social security payments, so if you become a tax resident you will be required to contribute to the national health insurance plan. You can participate as soon as three months after arrival, and this is not a bad option to get health coverage, since your home country’s policy probably won’t cover you in Japan.
How do I stay compliant while contracting in Japan?
As a foreign contractor, you will be concerned about compliance with Japanese law and regulations. Your primary compliance risks are:
- First, meeting tax and social contribution requirements
- Then, business registration and residency for limited companies
- Finally, work visa validity and sponsorship
That is a lot to overcome, especially for new contractors, and you might need the help of an umbrella company. Contractor Taxation has licensed, verified umbrella companies in Japan who are ready to assist you with setting up your contract and making sure that your payments are secure. Here are some of the benefits you get as a result of using an umbrella company:
- Handles all client payments, tax withholding and any social contributions
- Issues you a payslip each month, to a Japanese or foreign account
- Can sponsor work permits
- Helps set up the Japanese contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
Unless you are prepared to handle all of this on your own, you may find that an umbrella company is a valuable partner as you embark on contracting in Japan. Please contact Contractor Taxation with your questions about how an umbrella company can work for you.