Complete Guide to Payroll in Japan: Regulations, Calculations & Compliance

Japan has a strong industrial workforce and remains one of today’s largest economies. The country has a GDP per capita of US$ 40,193.3 and offers ample opportunities for both local and foreign businesses.

With the 10th largest population globally, the country boasts a well-educated workforce and has built one of the most significant consumer markets. The Asian country’s value chain begins from cheap textiles to advanced technology. This is why starting and expanding a business can be an excellent move to grow your venture globally. 

This guide will clear your doubts and help you navigate the Japanese market to understand payroll in Japan.

Payroll policies and procedures in Japan aren’t difficult to understand or follow. 

The key features of Japan payroll policies are:

• Withholding local tax and national tax every month
• Subtraction for Japanese statutory programs
• Deliver annual reports to the relevant Japanese authorities

In Japan, payroll is calculated in four major steps:

• Initial consultation: The Japanese Visa is vital to successfully implement the payroll process while ensuring:

1. 1. Japan’s payroll requirements of both local and international clients are fulfilled. 
   2. Informing clients about the payroll regulations, including the proper date for monthly payment, annual compensations or bonus payment, and payroll location.

• Payroll filing that includes: 

1. 1. Withholding tax registrations with national tax registrations
   2. Withholding tax registrations with local authorities
   3. Registration for social and labor insurance

• Monthly requirements for the payroll process covers:

1. 1. Salary payments of workers
   2. Withholding their income tax
   3. Contributions to social insurance

• Annual reporting includes:

1. 1. Annual withholding of tax reports
   2. Annual labor insurance reports
   3. Annual social insurance reports
   4. Year-end payroll adjustments

The face value breakdowns are different in each company. However, the standard salary structure is largely the same:

• Basic salary: Referred to as the determined payment, it can be allotted in terms of hours, months, or annual basis. These usually don’t contain incentives such as allowances or overtime.
• Overtime allowances: The extra payment for overtime work or exceeding legal hours is guaranteed in Japan. Usually, the overtime allowance is 25% higher than the hourly wage. However, working on holidays or day-offs may have an even higher allowance rate, depending on the employer.
• Commuting allowances: Japanese companies bear the full payment for transportation like trains and buses. Some firms also pay employees for gas if they travel by car. 
• Housing allowances: Regardless of administrative support, housing is also arranged if demanded. 

Various organizations look up Japan’s payroll taxes and insurances.

• Health insurance: The national medical insurance policy assures that the company will offer benefits to employees if they require medical help for any illness or injury. The company covers 70% of the medical expenses.
• Pension: This mainly deals with benefits given during retirement after 65. However, if an employee decides to leave Japan before they turn 65, companies may make a lump sum payment. 
• Income tax: Residential tax is determined by your annual income in the previous year. The amount is around 10% of your salary.
• Employment insurance: Several unemployment benefits are provided with the insurance rate depending on the company policies. It grants unemployed workers a monthly allowance of 60-80% of their previous year’s salary.

Employers can set up payroll in Japan based on their corporate structure. Employers must register all business accounts and monitor all bank account activities. Employees should be formally identified for tax filing purposes. 

The four segments are: 

• Godo-Kaisha: It is very similar to a US LLC
• Goshi-Kaisha: It is a limited partnership company
• Gomei-Kaisha: It is a general partnership company
• Kabushiki-Kaisha: It is the Japanese version of incorporation

Several legal procedures should be followed to maintain a proper payroll process in Japan.

• Appointment of a Japanese resident as the incorporator or managing member.
• Depositing paid-up capital into the employer’s bank account before incorporating it into the company.
• Personal details of employees and company details should be mentioned in the Articles of Incorporation.
• The subsidiary name must be submitted to the Trade Register in English but containing Japanese kanji characters representing Godo Kaisha.
• The Legal Affairs Department must have all the certified documents.

If you wish to hire employees and set up the payroll process, you must:

• Register with Labor Standards Inspection Office
• Register with Social Insurance Office
• Submit an application to and register with the National Tax Agency

Payroll should be contributed by both the employer and the employee. This is why a different scheme is applied for both segments. 

Given below are the contributions by the employer and employee.

Employer Contributions

Employee Payroll Contributions

Employee Income Tax

The payroll cycle takes place monthly. Employers pay on the 25th of every month.  Summer and winter bonuses are paid in June and December.

Additionally, the payroll in Japan includes a customary 13th-month pay at the end of each year.

There are several payroll options in Japan, depending on the requirements and company size.

• Companies may opt to run a payroll internally. Additional human resources can be used for understanding and translating Japanese payroll laws.
• Employers can also hire a Japanese payroll outsourcing company to manage tax, regulations, and compensation. You can act as the employer partner and is a part of the outsourcing company.
• A company can partner with a global PEO that can handle payroll while also acting as the employer of record.

Terminating employees in Japan is a tricky and complex process because Japan thoroughly believes in lifetime employment. Under Japan’s Labor Contract Law, employers must send a minimum 30-day termination notice or pay in lieu. While employers need not provide a termination notice in case of serious misconduct, they must obtain consent from the Labor Standards Inspection Office.

Three ways to dismiss employees in Japan are:-

• Negotiated voluntary resignation: This is regarded as the most common method is to understand the resignation voluntarily. When a company needs to downsize, it can  propose voluntary resignation through an early retirement program. Employers usually provide a time window to employees to consider the offer and negotiate the terms of resignation.
• Termination for the cause: Employers can dismiss employees for serious misbehavior and misconduct like criminal activities in the workplace, continued absence from work, etc. They can even terminate an employee for less serious offenses if they fail to improve even after a prior warning. 
• Economic scenarios: Layoffs and financial distress can be considered another dimension for terminating employees. Case laws suggest that employers look at objective factors such as history, age, and livelihood while planning such a termination.

‍Japan’s Payroll Processing Company

If you still have questions regarding Japan’s payroll rules and regulations, Multiplier can take care of all your problems. Starting from setting up a payroll in Japan, the platform will provide you with knowledge of automated payroll, compliance, and benefits. Your international dreams of creating a business will come true. 

‍Contact us today to learn more about our solutions.

While Japan is Asia’s best market for business expansion, it is crucial to understand the nuances of payroll processing. Thus, hiring a global payroll service provider like Multiplier can be an excellent option. We can effectively guide you through Japan’s laws and regulations, ensuring that your payroll process is fully compliant.