Insurance Rate Update March 2024

The Japan Health Insurance Association (Kyoukai Kenpo) published new rates effective March 2024. The rates will change by less than 0.2%. Health insurance rates will increase for 24 prefectures, remain unchanged for one prefecture (Kanagawa), and decrease for 22 prefectures including Tokyo, where the rate will decrease from 10% to 9.98% of standard monthly salary. Nursing care insurance rates will decrease across Japan from 1.82% to 1.60%. As health and pension insurance payments are withheld from salary the month before they are paid, the first payroll the new rate will apply from will be April 2024. For bonus calculation, the new rate will apply from March 2024.

Overtime Rate Increase April 2023

As of April 1, 2023, the minimum overtime rate small and medium enterprises (SMEs) are required to pay increased from 125% to 150% of employees' hourly rate, for overtime hours exceeding 60 hours per month. Large companies have been required to pay this minimum overtime rate since 2010, whereas SMEs were given a grace period before the increase. Now, all companies must follow this overtime requirement. Read more on overtime requirements below. If agreed with the employees, employers may provide paid leave instead of compensation.

Payroll in Japan is made up of 40 components in 6 categories - base salary, worktime, allowances, tax, pension, health, and labor insurance, and deductions. Each one is explained below.

Base salary

Base salary is the basic amount of compensation an employee receives in exchange for work. It can be expressed as an hourly rate, or as a monthly or annual salary. Using annual salaries to calculate monthly payroll causes rounding errors. Monthly salary or hourly rate should be used.

Payroll period

Salaries in Japan must be paid at least once a month, and can be paid monthly, fortnightly, weekly or daily. The pay date is set by the employer in the work rules and can be any day of the month, but is commonly paid monthly on the 25th or last day of the month. If the pay date is a holiday, salary is paid on the day before.

Proration

If an employee doesn’t work their full hours, their base salary is reduced in proportion to what was actually worked. Proration is required when an employee:

• Starts or leaves in the middle of a payroll period
• Takes unpaid leave
• Begins or ends long term leave in the middle of a payroll period

Retroactive Adjustments

When making an adjustment for a change that occurred in a previous month, such as a base salary change increase, it is required to record the difference between what was paid, and what should have been paid in each affected month. This is to ensure the employee's standard salary is calculated correctly. If this is not done, it might incorrectly cause an increase or decrease in the employee's health and pension insurance contributions.

Employment Type

The employment class of a worker will affect how their payroll is calculated. There are 4 classes:

• Regular
• Part time
• Short time
• Director

Regular workers are permanent employees. Their working hours must not exceed 40 hours per week and 8 hours per day, excluding breaks, unless an additional labor agreement is made. No minimum hours are specified in law. Even with an agreement, overtime is limited to 45 hours per month, or 360 hours per year. If there is a temporary unforeseen increase in workload, the overtime limit can be raised to 100 hours per month or 720 hours per year.

Part-time workers must work at least ¾ the hours of a regular employee to be eligible for health and pension insurance through their employer. It is possible to register an employee who works less than ¾ the hours of a regular employee if the company applies to the health and pension office to be a ‘specially recognized employer’. Companies with more than 100 employees enrolled in health and pension insurance must apply for this recognition. It is optional for companies with fewer employees to do so. With this recognition, an employer can enroll employees who meet the following criteria with the company's health and pension insurance:

• Work more than 20 hours a week
• Intended to be employed for more than 2 months
• Earn at least 88,000 JPY per month
• Not a student

Short-time workers work reduced hours compared to regular employees. There are restrictions on which employees can be employed as short-time workers. They may request to be exempt from overtime or midnight work. All companies must have some kind of short-time working provision in their work rules. Short-time workers must:

• Be raising a child under 3 years old
• Have been employed for at least 1 year
• Work at least 6 hours a day
• Be a salaried employee
• Not be on childcare leave
• Not be exempt due to a labor agreement

Directors aren't considered ‘employees’ so aren't eligible for labor insurance coverage. However, if they are a director in name only or are also functioning as an employee (such as a team director) they may apply.

Overtime

Overtime is time worked that exceeds statutory working hours or time worked on statutory days off. Employees must have one statutory day off a week. Most companies assign Saturday and Sunday as statutory days off. The minimum pay for overtime is between 125% to 175% of the employee's hourly rate. The percentage depends on the day and time worked. The employer can pay higher percentages but has to pay at least the minimum. There are eight types of overtime defined by law:

• Regular overtime starts after statutory work hours end and ends at 10pm
• Regular over 60 hours - regular overtime exceeding 60 hours
• Midnight overtime, starting from 10pm and ending at 5am
• Midnight over 60 hours - midnight overtime exceeding 60 hours
• Midnight under minimum - if the employee worked less than the statutory working hours between 10pm and 5am
• Holiday overtime, worked on statutory days off between 5am and 10pm
• Holiday midnight overtime, worked on statutory days off between 10pm and 5am
• Midnight premium only - even for employees exempt from worktime regulations, the law requires employers to pay them 125% of their hourly rate for time worked between 10pm and 5am, on top of their salary.

Fixed Overtime

Employees' salaries can include a fixed amount of overtime hours. This is legal if a written agreement between employee and employer states the base salary and the amount for the included overtime hours. The amount for overtime must be at least the amount that would be paid if the employee actually worked those overtime hours. They will receive the full amount of Fixed Overtime even if they don't meet the included hours of overtime. Overtime that exceeds the included hours has to be paid according to government regulations.

Leave and time off

Employers must provide vacation days to employees providing they have at least 80% attendance. They increase in accordance with their years working at the company, from 10 days after 6 months to 20 days after 6 and a half years. They are also required to provide:

• Maternity leave
• Childcare and Paternity leave
• Family care and Nursing care leave
• Menstrual leave
• Jury duty leave

It is not required to pay this leave, but employers can if they choose. It is not common to do so. Any unpaid leave will require proration.

Employees taking sick leave, maternity leave, or childcare leave may be entitled to payments of around two-thirds of their regular salary from health and labor insurance offices during this leave. These payments will be reduced if the employer also pays while the employee is absent.

In the case of a leave of absence due to reasons attributable to the employer, the employer must pay the worker 60% or more of the average wage during the leave period. This would include absence due to a lack of the tools or personnel to work or malfunctioning facilities.

Allowances vs. Benefits in Kind

Allowances are additional payments made on top of base salary. Compensation must be paid in cash, however, if employees agree and it is stated in their work contract or the company work rules that they may receive benefits-in-kind, such as meals or discounted sales of goods. This includes:

• Items, housing, or services at reduced or no cost
• Exempting or paying personal debt

There are five parameters to allowances:

Fixed or variable

Fixed allowances are paid every month at the same amount. Variable allowances don't have to be paid each month and can vary in amount. Fixed allowances will be prorated for employees' non-working days as specified in the company's work rules. Fixed allowances are considered in the calculation of the employee's hourly rate for overtime payments unless it's one of the following five types of fixed allowance considered unrelated to work - commuting, housing, family, separation, or child education allowance.

Included in labor insurance calculation

In principle, allowances are included when calculating labor insurance contributions. Non-work related allowances are not (congratulations, condolence etc.).

Included in health and pension calculation

Allowances are subject to health and pension contribution unless they are one of the following six types - non work related, business trip expenses, temporary benefits, gifts or awards, housing, or meals.

Taxable or non-taxable

In principle, all allowances are taxable. Non-salary items paid to the employee through payroll, such as a reimbursement from the health insurance office, are not taxable.

Gross-up

Allowances are taxable, therefore the actual amount of an allowance an employee takes home is reduced. To ensure the employee receives the whole allowance, the company can gross-up an allowance. An additional allowance payment equal to the tax that was deducted is paid. The employee then receives the whole amount.

Housing Allowance

Employees can receive an allowance to assist with rent. If employees directly rent the housing, the allowance is taxable. If the company rents the apartment and provides it to the employee, they can use the legal rent system and a portion is non-taxable. See the detail of how legal rent is calculated on our Company Housing Calculator

Commuting

Employers commonly pay an employee’s commuting costs. It's not mandatory. The cost can be paid in part, or in full. A portion of the commuting cost is non-taxable. The non-taxable portion depends on the mode of transport used:

• Public transport - Up to 150,000 JPY per month including tax
• Private transport - Up to 31,600 JPY per month including tax. The amount depends on the distance to the workplace, and excludes parking

Amounts exceeding the non-taxable portion limit are taxable. The route must be the shortest, or most economical route e.g. a regular shinkansen or train seat is economical, a green car seat isn’t. The green car fee would be taxable.

Multiple transport modes - Employees can commute using more than one transport type e.g. cycle to the station then use a train. The non taxable portion of the commuting allowance is the sum of private and public transport limits, up to maximum 150,000 JPY (including consumption tax).

Commuter passes - Commuter passes are paid for upfront and allow unlimited travel between two points. They're available in 1-month, 3-month or 6-month periods. Although the cost is paid to the employee as a lump sum, the monthly cost must be tracked. Commuting allowance is included in standard salary, which affects pension and health insurance contributions. Recognizing the total commuting cost in one month would raise the standard salary and social insurance contributions. There's a small cost saving (around 10%) when purchasing 3 month or 6 month commuter passes. However the additional work of tracking the cost breakdown per month, and recovering costs from employees who leave before the commuter pass expires makes 1 month commuting passes a better choice.

Other non taxable allowances

There are 12 other allowances and benefits in kind which are either non-taxable, or partially taxable:

• Non-taxable
  • Relocation allowance
  • Travel expense allowance
  • Marriage, childbirth, condolence allowance
  • Uniform
  • Welfare facilities usage
  • Discounts on merchandise
  • Working from home allowance if calculated using the National Tax Agency's exact cost method. If provided as a fixed allowance, it is taxable.
• Partially taxable
  • Night or day allowance (up to 4,000 JPY per day)
  • Gifts (under 10,000 JPY) excluding tax
  • Long service award (more than 10 years). Subsequent awards must be minimum 5 years apart
  • Interest-free loan
  • Meals - the meal price minus the cost paid by the employee is taxable income. Meals are non-taxable if the employee paid more than 50% and the total cost to the employee is below 3,500 JPY per month.

Who pays tax?

Residents pay tax on income they earn. Non-residents pay tax on income they earn whilst physically in Japan. The employee is considered a resident if they meet any of the following conditions:

• Have lived in Japan continuously for 1 year or more and spent at least 183 days in Japan
• Have an occupation normally requiring continuous residence in Japan for 1 year or more
• Have Japanese nationality and “connections” in Japan. Connections include a spouse or assets in Japan.

Tax types

There are two types of tax - local tax (inhabitant's tax), and national tax.

Local Tax is tax paid to the employee's loxal tax office in the area where they live as of January 1st. Local tax is levied on an employee's prior year income e.g. 2021 local tax to pay is based on 2020 income. It is 10% of taxable income + a standard amount. The standard amount is decided by each prefecture and is between 5000-6200 JPY. There are 2 ways to pay:

• Deducted from salary each month and paid to the local tax office by the 10th of the following month
• Quarterly paper invoices sent by the local tax office to the employee. There are 6 cases where an employee can use this method:
  • There are only two or fewer employees at the company whose inhabitant tax is deducted from salary.
  • The employee has “Otsu” tax status.
  • It is not possible to deduct the employee’s inhabitant tax from salary because the salary amount is not high enough or because the employee is on leave, such as maternity leave or childcare leave.
  • The employee’s salary payment schedule is irregular.
  • The company is a small family business, or the individual is self-employed.
  • The employee is planning to leave the company by the end of May of the current year.

National tax is tax levied directly on an employee's income and paid to the National Tax Agency (NTA). The monthly withholding is based on the taxable income in the current month. There are 7 tax rates from 5% up to a maximum of 45%. National tax must be withheld from an employee’s income and paid directly to the tax office by the employer on the 10th of the following month. If the 10th is a holiday, the deadline becomes the next business day. Delinquent tax is charged on late payments.

For non-residents, national tax is levied at a flat rate of 20.42%. This can be waived if the non-residents' actual country of residence has a tax treaty with Japan. An income tax convention form must be submitted to the national tax agency before the employee is paid. The form must be submitted each year. Withholding tax payments for non-residents can be paid at the end of the following month instead of by the 10th.

Taxable income

Income subject to tax is called taxable income. It is equal to gross income, minus tax deductions, non-taxable allowances, private pension plans, and health, pension, and labor insurance insurance deductions. Gross income is the sum of base salary, allowances and benefits in kind, pension received, capital gains and prize money, and dividends. Tax deductions depend on an employee's income, and their personal and dependents' status during each month. There are 8 kinds of tax deductions - 1 standard exemption, 1 basic deduction, and 6 deductions for dependents, spouse, disability status, working student status, widow status, and single parent status.

Year End Tax Adjustment (YETA)

National tax is withheld from an employee each month based on their income and personal circumstances in that month. The tax is recalculated at year end in December using the employees total income, personal circumstances, extra deductions and a tax credit which are only available at year end. The year end tax is compared to the amount withheld. If too much was withheld, the employee is refunded in the next payroll. If not enough was withheld, the shortfall is withheld from the next payroll. This process is called the Year End Tax Adjustment (YETA).

A withholding tax refund can be received from the tax office if an overpayment is made. An application form must be sent stating the amount overpaid and the reason for overpayment. The tax office will confirm the amount and process a refund.

Otsu and Kou Status

Employees who have tax withheld each month are split into 2 categories. The percentage of tax to be withheld depends on the employee's category:

• Otsu - the default category. All employees are Otsu until they declare themselves Kou. The Otsu tax rate is about 5 times more than Kou.
• Kou - the category assigned to the employee after they submit their dependent declaration form the their employer. The employee can only submit 1 dependent declaration form. If they have 2 jobs, only one job can have Koh status. The other will be Otsu, and the employee will have to submit a March 15 Tax Return.

March 15 Tax Return

Employees who meet any of the below conditions must declare their income on a tax return and pay the tax due by March 15, even if their employer withholds tax:

• Annual salary is over 20 million yen
• Has two or more jobs
• Is non resident
• Side income exceeds 200,000 JPY
• Has capital gains on shares
• Has foreign stock-based compensation

Social Insurance contributions are deducted from employees' monthly salary, and contain three parts - pension insurance, health insurance, and labor insurance (unemployment and accident compensation).

For a detailed explanation of social insurance, read Social Insurance Practices.

Private Pension Plans

There are seven pension plans that companies commonly contribute to monthly, in addition to pension insurance:

Corporate Defined Contribution (DC) Plans. Make payments monthly up to a government set monthly limit. Companies not participating in any another other retirement allowance plan may contribute a maximum of 55,000 yen monthly per employee. Companies with another retirement allowance plan may contribute a maximum of 27,000 yen monthly per employee. Contributions stop at 60 years old when the pension can be drawn. These savings can be transferred if the employee changes employer. Retirement allowance contributions paid by a company are tax-deductible. Companies may allow employees to match their employer's DC plan contribution providing their annual contribution exceeds neither the company's contribution nor the annual limit set by the plan.

Individual DC Plans. Employee who have enrolled in an individual DC plan may elect to have their contributions withheld from their salary, rather than paying separately. A form must be submitted to the DC plan provider when the employee joins the company if they would like to do this. Employees cannot contribute more than 23,000 JPY a month into their individual DC plan. Individual DC plan contributions are tax deductible and can be claimed during the Year-End tax Adjustment.

Defined Benefit (DB) Plans. Unlike DC Plans, DB Plans have no maximum contribution amount. The contributions paid by the company are deductible from taxable income, and can be expensed right away. DB Plans have lower return than DC Plans, as the investment risk is borne by the employer, requiring higher management fees and more conservative investment risk.

Retirement Allowance is paid as a lump sump when the employee retires. The amount can either be based on number of years of employment, position, or circumstances of departure. It can only be expensed by the company when it is paid to the employee. In practice, the tax office may judge retirement for directors to be "unreasonably high", which then affects how it can be expensed by the company.

Corporate Pension Funds are a defined benefit pension product. Employees can receive the benefit as a lump sum or a pension paid over a period of 5, 10, 15 or 20 years. The premiums are paid by the employer and are a percentage of the employee's standard salary (using the same bands used for pension insurance). On top of the fee for the pension fund premium, employers will also pay a percentage for the administration costs of managing the pension fund. Contributions end when the employee turns 65. Though corporate pension funds are being phased out and new plans cannot be created, existing plans are maintained.

Chutaikyo (SERAMA). Chutaikyo, or the Smaller Enterprise Retirement Allowance Mutual Aid (SERAMA) plan, was established by the government for small businesses. For the first year of the plan, the government will contribute half of the company's contribution up to a maximum of 5,000 yen per month per employee. It is only available to companies where the number of full-time employees is under 300 and the paid-in capital is under 300 million yen.

Tokutaikyo, or the Tohoren Retirement Allowance Special Mutual Aid plan, is for companies whose head office is located in the Tokyo area. All contributions are paid by the employer in units of 1,000 yen. The maximum monthly contribution is 30,000 yen per employee. The employer can choose a different contribution amount for each employee.

Employee Stock Purchase Plan (ESPP)

It is common for companies to offer their employees company stock or shares at a discounted price, commonly between 10% to 15% less than market price. Employees must contribute money via payroll deductions to a purchase pot until the purchase date, the date which the shares can actually be purchased. The discount price and purchase date are set by the company in a written agreement between employees who participate. Discounts are not available to directors.

On the purchase date, the employee can choose to purchase the discounted shares using the pot of money they’ve been contributing to each month. If the employee chooses not to purchase the discounted shares, the pot of money is returned to the employee. If the employee purchases discounted shares, the discount benefit is treated as taxable income. Purchase date market value - purchase price * qty = taxable income

For a detailed breakdown of how payroll in Japan is calculated, use our Payroll Calculator.

To learn about our outsourced bilingual payroll services, see Payroll Services.

These descriptions are not intended nor are they a substitute for professional advice. Payroll regulations are complex and qualified professional payroll advice should be obtained prior to taking any action.