Are you thinking of starting up a business in Japan, but aren’t sure of your tax obligations for your employees? Health insurance, pension, and employment insurance are all potentially part of your responsibilities as a new employer.
It might seem overwhelming at first – what does the law say you need to cover, and how best to implement a payroll system that handles it? We’ll take a look at the main deductions you’ll need to cover first before considering some management methods you can use.
Employee Income Tax
This is the most common deduction you’ll be responsible for, as most employers withhold income tax. The tax rate is based on a percentage of employee salary, which can be checked here. There is a tax-free limit, but that’s the only complicating factor. Unless an employee earns less than ¥550,000 annually, you’ll be calculating tax for them and withholding it. This tax should be paid to the taxation office by the 10th of the following month unless you have fewer than 10 employees. If that’s the case, you can apply to pay twice a year. Keep in mind this is separate to your corporate income tax, which is calculated separately.
What’s the difference between Social Insurance and National Health Insurance/Pension?
All Japanese residents must be enrolled in pension and health insurance programs. The government offers public programs that are available to all residents — the National Health Insurance system (Kokumin Kenko Hoken) and National Pension (Kokumin Nenkin). However, as an employer, you will likely need to enrol your employees in Social Insurance (Shakai Hoken). This is a social insurance program that includes a pension contribution and Social Health Insurance (Kenko Hoken), as well as Employment Insurance.
With the most recent changes in the law, if you have five or more employees, you must offer Social Insurance health and pension coverage to all full-time employees. For part-time employees, any working at least three quarters of the hours of full-time employees must also be enrolled. Finally, part timers working fewer hours may still be eligible under certain criteria which can be found here.
The health insurance component of Social Insurance
Japan’s National Health Insurance (Kokumin Kenko Hoken) is funded by premiums collected by the government from individual residents. When you reach the threshold for enrolling employees in Social Insurance, the health insurance premiums change. You’ll now be working with an insurance company for your insurance plan and premiums will be split 50/50 between you and your employees.
Social insurance is generally considered a standard perk in Japan, so even as a small company, you might want to offer it. As a business owner, you will need to choose a plan to offer your employees. The plan will come with a set contribution rate for premiums. This rate is applied to your employees’ salary to calculate their premium payment. This amount is then split, with the employee and employer both paying half each to make up the monthly premium.
The pension component of Social Insurance
The pension system in Japan is similar to health insurance in how you calculate deductions. Rather than choosing an insurance plan, the employees’ pension insurance system is an extension of the National Pension (Kokumin Nenkin). Premiums will include a National Pension contribution and the Employees’ Pension Insurance. This will be 15.704% of an employee’s monthly salary (with bonuses factored in). Like Health insurance, you will divide the premium equally between your company and the employee.
The same criteria for health insurance applies to who you must enroll in this system. For employees who do not meet the criteria, they remain on the National Pension (Kokumin Nenkin) with no supplement. You may deduct this pension contribution from their salary if you want to, or let them pay independently. You do not have to match their contribution, and they are responsible for the entire premium.
Although often omitted, this is also a part of Social insurance. This is a contribution paid towards unemployment services, such as unemployment benefits. It also funds furlough pay, employer financial aid to prevent layoffs, and maternity leave. These are usually factored into with pension and health insurance benefits. The premium for this is currently 1.35% of an employee’s salary. The employee pays 0.5% and the employer is responsible for the remaining 0.85%. All employers, barring a very small number of exceptions, must collect this.
Managing your payroll
So, with this list of deductions to contend with, how can you make your life easier? Calculating and managing deductions manually might be an option for smaller companies. Remember, you don’t have to enroll in Social Insurance with fewer than five employees. This means you can leave health insurance and pension to your employees to manage, leaving only income tax and employment insurance to take care of. As both are flat rates, they are the easiest to calculate and deduct. Practically, it may be an expectation of employees, so even if you have fewer than five employees, it may be worth your while to sign on for social insurance.
For larger companies, when Social Insurance is a factor, you may consider outsourcing to a payroll company or agent. They can take the stress of managing deductions off your shoulders, and the market offers several bilingual companies that manage the entire process. As an additional benefit, they also offer a greater level of legal knowledge and possibly more data security with employee details. As Japan uses the “MyNumber” system to control employee deductions and contributions, an employee’s My Number is considered sensitive information. Many payroll agents provide encrypted servers and management solutions to ensure security.
If complete outsourcing is too expensive or not viable, a middle ground is payroll management software. This is where a semi-automated system manages your payroll under the supervision of an in-house employee. While it will mean having to manage more on the payments side, such as registering with the tax office and the mountain of pension forms, the employee side is automated. Deductions will be made automatically and you’ll receive most of the employee-facing services of a payroll agent at a more economical price. However, bilingual solutions are rare and information security is now your responsibility, so it’s worth weighing your options before making a decision.