1. Interest Income Interest income includes interest from bonds, debentures, and interest on savings, as well as distributions from earnings derived from investment and loans trusts. In general, income tax is withheld by the payer at the time of payment. Interest earned on savings with overseas banks not subject to withholding tax must be declared. Interests on loans to individuals or companies do not fall under the category of interest income. They are classified either as miscellaneous income or business income.
2. Dividend Income Dividend income includes payments received as surplus and distribution of profits of investment trusts (excluding corporate management investment trusts such as public and corporate bond investment trusts and public offering bonds). Individuals deemed as having paid separate taxation at source do not need to declare this income in their returns because the tax procedure has been completed when it was withheld at source.
3. Real Estate Income Income from real estate includes income from leasing land, building, property right, sailing vessel, aircraft, etc. Down payment, contract renewal fee, fee for transfer of title are generally treated as income from real estate. However, down payment, etc. arising from setting up land-leasing right may be classified as income from capital gain.
4. Business Income Business income includes income derived from wholesale and retail commerce, hotels and restaurants, manufacturing, construction, finance, transportation, maintenance, and any income derived from sales of products or services. It also includes income of doctors, lawyers, writers, actors and actresses, professional baseball players, traveling salespersons, carpenters and those involved in fisheries or similar enterprises.
Business income encompasses agricultural income defined as income from agricultural production, fruit growing, sericulture, rearing of poultry and livestock, the manufacture of straw goods or similar activities, and dairy farming.
5. Employment Income Employment income includes salaries, wages, amounts paid to former employees based on prior service, pensions other than lump-sum pensions, bonuses and similar amounts, reduced by the earned income deduction. Allowances (cost of living allowances, child education allowances, medical allowances, tax allowances, housing allowances, etc.) and fringe benefits (benefits received on employer-provided housing with low or no rent payments and benefits received on a employer-provided loan with low or no interest rate) are included in employment income.
6. Retirement Income Retirement income includes retirement allowance, severence pay, lump sum payment from social insurance systems, and any other payments triggered by retirement from employment.
7. Forestry Income Forestry income include income derived from lumbering or the transfer of timber.
8. Capital Gain Income Capital gains income includes income from the transfer of tangible and intangible property, but does not include income from the sale or transfer of land or buildings or the proceeds of sales of inventory or other property continuously transferred in business.
9. Occasional Income Occasional income is incidental income of a nonrecurring nature that does not fall into the aggregate assessment income tax categories of interest income, dividend income, lease income, business income, employment income or capital gains.
10. Miscellaneous Income Miscellaneous income is income that does not fall into any other category of income. Common miscellaneous income includes annuity from insurance system and income of a nonrecurring nature such as interest received from a loan to a friend and/or a family member.
"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." [Commissioner v. Newman, 159 f2d 848 (Ca 2, 1947)]
In plain English, Judge Learned Hand is saying that the courts have stated many times that there is nothing wrong with minimizing taxes. Everybody, rich or poor, does it. Nobody owes any public duty to pay more taxes than necessary. We are forced to pay taxes and they are not voluntary contributions. To ask people to pay more taxes than necessary because "it is the right thing to do" is stupid.
As some have already been introduced in WJA, there are many ways to minimize taxes and social insurance premiums. I believe that as long as those arrangements are reasonably supported by law (as long as one doesn't cross the line between legal and illegal), it is ok to take advantage of them. It is the responsibility of tax and social insurance premium professionals to work for their clients' best financial interests and to advise tax and social insurance premium saving plans.
My “2005 Christmas article” briefed about the difference in payroll cycles between US and Japan. Employees in US are paid biweekly while employees in Japan are only paid once a month. This forces spendthrift expatriates (basically Americans) to budget their spending, something many aren’t good at. Quite a few times I’ve encountered in my practice where an expatriate employee would, like an allergic reaction, reject the notion of being paid on a monthly basis and insist he (and he mostly) be paid biweekly. (For my Japanese readers not accustomed to the practice of being paid on a biweekly basis, a year is divided into 52 weeks and employees are paid 26 times a year, usually on every other Thursday or Friday.)
As mentioned earlier in “is your employer behaving at least to the law’s minimum expectations?”, Labor Standard Law sets employment standards employers are required to maintain at the minimum. Therefore, even though Labor Standards Law Article 24 states that wages be paid at least once a month on a definite date of the month, employers are free to pay employees more than once a month. A biweekly payroll cycle is possible in Japan too. It’s just that the concept is still foreign to the Japanese. And in addition, payroll calculation gets a little complicated which is probably the bigger reason why Japanese will come up with just about any excuse to avoid such practice. How complicated?
Basically, the withholding tax table widely for payroll calculation is based on a monthly payroll cycle. Therefore, to implement a biweekly payroll cycle, a few extra steps need to be taken to adjust the monthly amounts on the table to the appropriate biweekly amounts. First, your biweekly payroll amount must be determined. This can be done by dividing your annual gross pay by 26 (or divide by 52 and multiply that by 2). Then, multiply this amount by two to derive the monthly amount. Look for this monthly amount on the withholding tax table and search for the withholding tax amount that corresponds with the appropriate number of dependents you claimed. Finally, divide this amount by two and withhold that amount from your biweekly paycheck.
That wasn’t too bad huh? That’s because we’ve only looked at the withholding tax portion of the calculation. Don’t forget that there are other deductions such as health insurance premiums, pension contributions, and employment insurance premiums that need to be adjusted to a biweekly basis. Complications arise because there are no set rules as to how to compute these other deductions. Employers are on their own to figure it out, and that’s just why they want to avoid biweekly payroll cycles.
Companies often rent an apartment and provide this to its employees either as benefit or part of compensation. In such cases, because the employee receives economic benefit, the amount of taxes he/she bears increases (on a monthly basis because the rent is usually paid by the company on a monthly basis). However, as there are exceptions to all hard rules, there is an exception to this one too: if the employee bears a sufficient portion of the rent (usually done through payroll withholding), the employee faces no tax implications. This is what is known as legal rent.
Sufficient amount to be withheld from an employee’s paycheck is calculated as follows:
Sufficient amount = (Actual rent paid) x (certain percentage)
Question then is, how much should this certain percentage be? Many companies set this at a flat 10% (example 1 below), whereas aggressive companies set it at 5% (example 2 below) and conservative companies set it at 15% (example 3 below).
Example 1 Actual rent paid is 250,000 yen and the company applies a 10% rate 250,000 yen x 10% = 25,000 yen
Example 2 Actual rent paid is 250,000 yen and the company applies a 5% rate 250,000 yen x 5% = 12,500 yen
Example 3 Actual rent paid is 250,000 yen and the company applies a 15% rate 250,000 yen x 15% = 37,500 yen
What you must be aware of is that there is a risk involved in this calculation method. The risk materializes when the employee is not bearing sufficient portion of the actual rent paid by the company. But not enough based on what standard? This is the toughest part. The standard is computed using the assessed value of the apartment and the land for property tax purposes along with the total area of the property. Assuming that the three values have been collected, applying them to the examples 1 thru 3 above reveals the following result.
Assessed value of apartment for property tax purposes = 10,000,000 yen Total area of property = 55 m2 Assessed value of land for property tax purposes = 11,000,000 yen
10,000,000 yen x 0.2% + 12 yen x 55 m2 / 3.3 m2 + 11,000,000 x 0.22% x 50% = 32,300 yen
The simplified calculation method introduced at the beginning multiplies a certain percentage on the actual rent paid and require employees to bear this amount. However, using the formal method reveals that 5% or even 10% withholding is not enough. Rather, the company needs to withhold 15% of the actual rent paid. If the company has neglected to withholding income taxes on the rent paid assuming that no tax implications existed because the employee has been bearing sufficient portion of the rent, the company may be in trouble. Because legal rent is an area where insufficient withholding is common, the Tax Office auditors will most likely look into the propriety of your company’s tax treatments.
Thinking about working in Japan? Preparing to move overseas almost becomes a full-time job in the final weeks of your departure. Many people quit their jobs weeks before so they can devote their time to preparation. But what about your health insurance? Short-term health insurance plans are a great solution. ↓
Below are links to Certified Social Insurance and Labor Consultants providing services in English. Also below are useful links related to working in Japan and links to women balancing career and personal happiness. WJA realizes and promotes women's increasing value in the labor market.