How to pay international contractors in Japan

Step #2: Determine the best way to pay your contractors

Now that you’ve correctly classified your Japanese contractors, it’s time to figure out how to best pay them. With a boom in global workforces and remote work, there are far more options than ever for making international payments to contractors:

• Bank wires. In this situation, you’d open a Japanese bank and use those funds to deposit payment into your Japanese contractors’ accounts. You could also use your bank to send a global wire transfer.
• International money orders. While this is an old-school method, it often comes with fees and bad exchange rates. It’s also slow, as employers must physically purchase the money order, then the contractor needs to physically deposit it.
• Digital wallets or payment platforms. Many digital platforms are not available in Japan. This includes Venmo and CashApp, which only work in the United States. Some employers use platforms like Wise to transfer money across borders. However, exchange rates can fluctuate, making your outgoing amounts less predictable.
• Global payroll services. In most cases, contractors aren’t included in payroll, as they’re not subject to tax withholdings from their employer. Instead, they invoice for their services rendered, payment is processed through accounts payable, and contractors handle their own tax payments.

Step #3: Use global payroll software to process payments for contractors 

Though there are many payment options for Japanese contractors, the easiest and fastest way is using global payroll software.

Here’s a glimpse into how Rippling’s global payroll system works:

Step #4: Managing taxes for contractors

Employers aren’t responsible for deducting taxes from contractors’ paychecks; contractors must pay their own income taxes to the National Tax Agency (NTA). However, keep an accurate and thorough record of work rendered and invoices paid for each contractor.

If your company is based in the US, you’ll want international contractors to fill out an IRS Form W-8BEN. This form certifies their contract status for the US government.

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FAQs about paying contractors in Japan

Do you need to withhold taxes when paying contractors in Japan?

No, foreign companies don't have to withhold payroll taxes when paying Japanese contractors. Contractors must pay all of their own taxes and also make their own social security contributions.

What information do I need to process payment for contractors in Japan?

First, agree on payment terms, including the hourly or project rate, payment cadence, and payment method. Outline those details in a contract agreement. Next, collect the contractor’s name, date of birth, contact information, and bank account/payment information.

Does the Japanese minimum wage apply to independent contractors in Japan?

As of 2023, Japan’s current national minimum wage is 961 yen (JPY) per hour. Japan’s prefectures can also set their own higher minimums. In Tokyo, for example, the minimum wage is JPY 1,072.

Minimum wage does not apply to independent contractors in Japan. Contractors set their own pricing or agree to rates. Other employment laws may also not apply to Japanese contractors.

Do Japanese contractors get benefits?

Not only are independent contractors in Japan not entitled to benefits, but offering benefits to them may increase the risk that they are considered misclassified employees. 

Can you pay contractors in Japan in your home currency?

It's typical to pay Japanese contractors in their own currency, Japanese yen. You can choose to pay Japanese contractors in your currency, but this needs to be agreed upon and documented in writing. 

Many international payment providers, like Rippling, support contractor payments in multiple currencies, including Japanese yen.

Can you manually pay contractors in Japan?

While small business owners may manually process contractor payments to cut costs, this can be time-consuming. Manually processing payroll also increases in complexity as your business grows and begins to work with contractors in different countries. 

Manually processing payments comes with some major risks to you and your business:

• Compliance. When you manually input data, you risk human error and omission.
• Security. Be mindful of security risks, especially if you use spreadsheets or paper records. Sensitive contractor information can be easily lost, stolen, or misused.
• Contractor experience. Manual payments are often slow and lack transparency when it comes to payment timelines, creating a frustrating experience for contractors.

How do you turn a contractor into an employee in Japan?

Hiring independent contractors can come with flexibility and financial benefits. However, you may choose to onboard a contractor as a full-time employee to avoid misclassification, because your contractor wants benefits and other employee protections, or because you simply want them to be a part of your team. Of course, converting a contractor isn’t as simple as drafting up an employment contract. There are many legal considerations, including payroll deductions, enrolling them in benefits, making social security contributions, and more.

You must also establish a legal entity in Japan or use an employer of record (EOR) like Rippling. On paper, an EOR is the official employer of your workers, allowing you to hire and pay them. EORs also withhold income tax on employee paychecks and contribute to pension, health insurance, unemployment insurance, and workers’ compensation insurance.

Setting up your own entity is possible, but can take many months. Most small and mid-size companies don’t have the resources for this huge administrative undertaking. What’s more, because you can outsource payroll and benefits to EORs, it’s often easier for your operation in the long run, especially if you have employees in many different countries.