How to run international payroll for employees in Japan (Updated 2024)
Running payroll for employees in Japan for the first time? Get it right, and you can hit the ground running with your employees in Japan. But if you miss a step, you could rack up thousands of dollars in penalties—or even risk legal action from the National Tax Agency (NTA).
Here’s a step-by-step guide to running payroll in Japan, with everything you need to get it right every time.
Table of Contents
- Step #1: Decide whether or not to create your own entity in Japan
- Step #2: Pick a global payroll software solution
- Step #3: Determine your workers’ employment status
- Step #4: Capture your new hires’ Japanese payroll information
- Step #5: Understand the implications of paying in Japanese Yen
- Step #6: Run payroll
- Step #7: File your taxes in Japan
- Frequently asked questions about running payroll in Japan
Step #1: Decide whether or not to create your own entity in Japan or use an Employer of Record (EOR)
To hire employees in Japan, first you need to establish a business entity in Japan. You can do this by either creating your own local entity or by using what’s known as an “Employer of Record” (EOR).
EORs allow you to hire and pay employees through their own entities. They’re responsible for calculating and withholding the appropriate taxes (more on that below) and for paying your taxes to the NTA.
When, why, and how do companies use an EOR?
When companies expand their operations to other countries, like Japan, they typically use EORs like Deel, Papaya Global, and Rippling to run payroll, issue benefits, and navigate international compliance issues.
This is because EORs can take months to set up, depending on how you apply and whether the NTA manually reviews your registration. It’s a significant administrative load, and most smaller companies don’t have the time or resources to spare.
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Why do companies create their own entity?
Companies typically create their own entities once the costs of an EOR outweigh those of opening a new branch on their own. Remember: If you decide to create your own entity, you’re legally responsible for things like running payroll and classifying employees.
How to set up your own entity in Japan
First, you need to determine your business structure. There are four types in Japan, but the two that are by far the most common are an LLC or a stock company. The Japanese government requires companies to have a physical location in the country before they can apply for registration, so you’ll need to secure an official workspace. And, if you don’t have a Japanese bank account, open one: You can’t register a business in the island nation without it.
Additionally, you’ll need the following documents to apply for business registration in Japan:
- The information of your personal bank account in Japan
- Your business’s articles of incorporation (teikan) and/or documents that provide specific information about your company’s plans for the future, financial history, and similar details
- Notarized signatures from each of the company’s owners or directors
Japanese authorities also require businesses to develop and then register their own company seals before opening. You need at least three different versions of this branding: one for the representative who’s legally allowed to sign company documents, one for banking information, and one for stamping onto payment documents to employees and clients.
Once you’ve solidified your business structure, tapped authorized representatives, and prepared your application, you can submit it to the Legal Affairs Bureau. Expect fees typically ranging from JPY 60,000 to JPY 150,000, depending on your entity. If approved, you also need to register with the NTA before you can legally pay employees while withholding the required income taxes.
To ensure you’re withholding taxes for other mandatory contributions to Japan’s social security programs, you also have to register with the following government agencies:
- Ministry of Health, Labor, and Welfare: to pay health insurance premiums
- Japan Pension Service: for retirement payments
- Hello Work: Japan’s service center for unemployment insurance
- Labor Standards Bureau: for worker’s compensation coverage
Participation in these programs is mandatory. Once you register and start paying employees, you need to make the required deductions.
After all of your registrations have been approved, you’re legally cleared to operate a business in Japan.
Step #2: Pick a global payroll software solution
First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.
- Global payroll processors actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Simply put, global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
- Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.
- Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.
Step #3: Determine your workers’ employment status
Before onboarding your workers, and certainly before you run payroll, it’s crucial to classify your team members as either employees or independent contractors. Not only will this ensure you remain in compliance with Japanese employment law, but misclassifying workers could result in big fines. Also, if they’re employees, there are payroll deductions you’re responsible for, including tax obligations and superannuation contributions.
Japanese authorities use multiple criteria to determine whether a worker is an employee or an independent contractor, including:
- The level of control the employer has over the worker's activities
- Who owns their tools and equipment
- Whether they work on an ongoing or per-project basis
- Whether a worker has the freedom to accept or reject requests from supervisors
- Exclusivity of service
- Degree of integration into your company
Step #4: Capture your new hires’ Japanese payroll information
Once you’ve decided whether to use an EOR or your own entity, picked a payroll solution, and ensured that your employees are correctly classified, you should be able to automatically collect (and then pay) your team in Japan. Just make sure you’re adhering to statutory requirements when calculating each full-time employee’s payroll deductions.
Here’s the information you need to collect:
- Name (as it appears on official documents like their passport) and date of birth
- Date of hire
- Contact information, including their mailing address in Japan
- Bank account information
- Amount to be paid in JPY (including any bonuses)
- The 12-digit ID number on their My Number card*
- A Basic Pension Number, which keeps track of retirement contributions on an employee’s behalf
*Both citizens and foreign residents in Japan receive a 12-digit number the government uses to identify them in the Social Security and Tax Number System, nicknamed the “My Number” System.
Step #5: Choose to pay in your local currency or in Japanese Yen (JPY)
Determine how you’ll be paying your workers in Japan: either in your local currency or in Japanese Yen (JPY).
Generally, employers must pay their full-time employees in JPY. If you’re working with independent contractors, however, it’s perfectly fine for the two of you to decide which currency they’ll be paid in.
Should you choose to pay a contractor in your local currency, be aware of the challenges associated with dealing with fluctuating exchange rates. At times, unfavorable rates could mean you’re paying more to cover the worker’s wages. You may also need to account for fluctuations in the exchange rate when calculating your financial statements, a complex and difficult task for someone who isn’t a trained accountant.
Step #6: Run payroll
You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under Japanese law. Time to run payroll!
Here’s a preview of how Rippling’s global payroll system works:
Step #7: File your taxes in Japan
Once you’re up and running paying your employees in Japan, you have to withhold a certain amount of taxes to send the NTA. Employers are responsible for calculating and withholding:
- Income taxes
- Pension contributions
- Health insurance contributions
- Unemployment insurance
- Worker’s compensation insurance
Under Japan’s withholding tax system, most employees don’t need to file their own tax returns. Employers usually pay taxes on behalf of their employees monthly, due by the 10th of the following month from when you last ran payroll. They also have to file annual returns with the NTA.
Frequently asked questions about running payroll in Japan
What are the employer costs for full-time employees in Japan?
Employers are responsible for deducting “social insurance premiums from their employees’ paychecks. This money is paid into Japan’s social security system and helps to cover things like maternity leave, sick leave, health insurance, retirement, and other Japanese entitlements.
Employers also need to withhold taxes for labor insurance, which covers unemployment and worker’s compensation. Premiums are calculated based on an employee’s salary. See the breakdown below.
Pension
9.15%
Health insurance
4.92%-6.49%
Unemployment insurance
0.30%
Worker’s compensation insurance
0.25%-8.80%
What is the average salary for employees in Japan?
Market guides for Japan show the average monthly salary for Japanese employees in January 2023 was around JPY 315,917.
According to a study by experts at the Japan Economic Research Center, bigger companies were expected to hike wages by around 2.85% on average in 2023 to help buffer against inflation. Data from the OECD shows Japan’s wages increased 5% over the past 30 years, which is a far slower growth rate than countries with similar economic profiles.
What are the minimum wages in Japan?
As of October 2023, Japan’s national minimum wage is JPY 1,002 per hour. Japan’s prefectures* can also set their own higher minimums. Tokyo’s, for instance, is JPY 1,113.
*Japan is made up of 47 administrative prefectures, spread throughout eight regions. The prefectures operate beneath Japan’s national government, and each has its own elected officials and localized authority.
What information is needed from employees to run payroll in Japan?
Here’s the information you need from salaried employees to process their payroll:
- Name (matching the account where you’ll deposit their pay).
- Date of birth and date of hire.
- Contact information, including their mailing address in Japan.
- Bank account information.
- Amount to be paid in JPY (including any bonuses).
- A tax number (also known as My Number) to keep track of tax withholdings
- A Basic Pension Number, which keeps track of retirement contributions on an employee’s behalf.
How much does it cost to run payroll in Japan?
Most payroll software is priced on a per-employee basis, or per pay run. Payroll service pricing varies according to:
- Payroll frequency.
- The number of employees on your payroll.
- The number of provinces and territories where you employ Japanese workers.
- How often you add and remove payees.
- Any additional services you need, such as year-end processing or mailing out pay stubs.
Can I manually run payroll for workers in Japan?
Some small business owners choose to run payroll themselves, using a payroll calculator and making a direct deposit to employee accounts, in an attempt to cut costs. But running payroll can be a time-consuming process, especially as your business grows. If you go this route, there are potential risks to keep in mind:
- Compliance: Running payroll manually in Japan, without using native global payroll software, puts you at risk of manual errors,omissions, and unwittingly violating Japanese labor laws. Rippling handles your compliance work for you—enforcing Japanese minimum wages and overtime rules, which can save you from heavy fines.
- Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.
What are payroll taxes in Japan?
Employers are responsible for deducting certain costs from their full-time employees’ paychecks, including an income tax, pension contributions, worker’s compensation insurance, and unemployment insurance. See our employer cost tables for a more detailed breakdown.
The national income tax rate is determined based on a Japanese employee’s taxable income, which is their total earnings minus any exemptions. Below is a breakdown of income tax rates for different income brackets.
Annual Salary (JPY)
Income Tax Withholding
0-1,950,000
5%
1,950,000-3,300,000
10%
3,300,000-6,950,000
20%
6,950,000-9,000,000
23%
9,000,000-18,000,000
33%
18,000,000-40,000,000
40%
More than 40,000,000
45%
What are the late tax filing penalties in Japan?
- Delinquent tax penalty: The NTA imposes a delinquent tax rate if your filing is overdue. If you file within two months after the original due date, a 7.3% fee is typically applied. If you’re more than two months late on a filing, the fee doubles to 14.6%.
- Added tax for improper filings: Tax returns that are filed late are also subject to an additional tax that is 15% more than the principal tax owed. If the principal is more than JPY 500,000, a 20% “additional tax” is applied. This penalty can also apply to underreporting what you owe; if your return needs to be changed because of a deficient filing, the NTA can impose an additional tax of 10% of what you were supposed to pay (15% if that amount exceeds JPY 500,000).
- “Heavy tax:” Any Japanese taxpayers who are found to be willfully deceptive of their financial information are susceptible to a 35% added fee on their taxes for understating what they owe, and a 40% fee if they never filed at all.
How do you pay contractors in Japan?
- First, ensure you’re correctly classifying your workers as a contractor (you can use Rippling’s free Worker Classification Analyzer).
- Next, agree on the payment terms with the contractor: the hourly or project rate, the payment cadence, and the method of payment.
- Collect their payroll information, including their name, date of birth, contact information, and bank account information.
- Use your chosen payroll software to pay the contractor in JPY. With Rippling, you can pay contractors in Japanese dollars, in a single pay run, without waiting on transfers or conversions.
Remember, when hiring Japanese contractors, employers are not responsible for deducting taxes from their paychecks. Instead, the contractor is responsible for tax remittance to the NTA. But employers must still keep an accurate record of employment and payroll information for each worker.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.
