Under the Japanese Income Tax Law（所得税法）, salary income（給与所得） includes salaries and wages, bonuses, and allowances. Common allowances include allowance relating to cost of living, education allowance for children, medical allowance, tax allowance relating to gross-up, and housing allowance. Fringe benefits such as interest free or low interest loans are also included in salary income. Unfortunately, salary income is one of the 10 income categories subject to tax withholding.
The amount of withholding tax is calculated with reference to 給与所得の源泉徴収税額表 or Table for Withholding Tax on Salary Income. Please note that the Table has been renewed as of January 1, 2007 due to the termination of 定率減税 or a fixed rate tax deduction, an automatic tax deduction, which has been in effect for the past years. Using the Table, the amount of tax withhold from your monthly paycheck is determined based on (1) your monthly salary including all allowances and fringe benefits valued at fair market value, (2) whether you have submitted the annual 給与所得者の扶養控除等（異動）申告書 or the Deduction for Dependents Report, and (3) the number and health conditions of dependents claimed on the Report.
(1) Because the Japanese tax system uses the progressive rate system（累進課税制度）, the more salary you earn the more amount of tax will be withheld from your paycheck. (2) To minimize your withholding tax (and increase your net pay), you should always, and I can’t emphasize this enough, submit the Report to your HR by January 1 of each year. Strictly speaking, without your Report in hand, HR is technically required to withhold more tax from your paycheck. (3) Also, if you’re financially supporting your parents, siblings, and relatives, you should claim them on your Report unless they’re claimed on someone else’s Report (you can’t claim your parents as your dependents if your older brother claims them as his dependents). Your dependents don’t have to be in Japan like it is in the US. If you’re sending money over to your aunt in Vietnam, claim her as your dependent. But be careful. I’ve seen a few Chinese nationals working in Japan who claimed their entire family and relatives in China as dependents. If those people were really supporting all those people and could prove it to the Tax Authority when they come knocking on their door for tax audits than that’s fine. But if they were simply abusing the system, they’d be in deep shit if caught. It is important to know that there is a line between tax minimization and tax evasion.
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.