Many employers hire contract workers to fill in the gaps in their workforce and tackle special projects. And, with technology making it easier than ever to do business across borders, it’s no wonder that you may be considering hiring a contractor in Japan. However, while technology may simplify connecting and communicating with your freelance workers, complying with Japan’s labor laws and tax laws can be complicated.
Before you onboard your contractor and accept your first invoice, find out how to correctly classify, onboard, and pay them in accordance with Japanese employment laws. Plus, learn tips and tricks about which parts of the process you can outsource and simplify.
Step by step: How to run payroll for contractors in Japan
Step #1: Classify your workers in Japan
To avoid costly fines and penalties, make sure you’ve classified your Japanese workers correctly. While workers entering into an independent contractor agreement (known as gyomu itaku keiyaku) aren’t entitled to protections and benefits, such as paid time off and health insurance, that’s not the case for those who are under employment contracts (koyo keiyaku). If you’ve misclassified your worker, they’re owed those benefits. Misclassifying employees as a contractor can also result in:
- A fine of up to JPY 300,000 and/or imprisonment up to six months.
- Back payments for social security contributions.
Japan has a series of tests to determine whether a hire is considered an employee or contractor. Not only would a court look at the contract agreement, but they’d also question how the relationship works in practice.
High level of worker control. Contractors decide how, when, and where to complete their work. They can accept or reject work requests. They are not heavily supervised.
More direction from the employer. Employees are subject to direction from their employer regarding how to complete their work, where to work, required working days, and more.
Equipment and tools owned by the worker.
Equipment and tools typically provided by the company.
Paid for services rendered. Contractors are typically paid per project or time spent per project. They are not paid the same amount as employees.
Paid a set wage or salary, regardless of the work rendered.
No benefits. Contractors are also responsible for paying their own taxes.
Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as severance pay, paid holidays, retirement systems, health insurance, paid sick leave, and maternity leave/paternity leave. Employees have taxes withheld by their employer.
Not subject to discipline. Contractors aren’t subject to workplace rules and policies.
Subject to discipline. Employees must follow workplace policies and codes of conduct.
Non-exclusive services. Contractors cannot be contractually bound to a single company; they can provide their services to more than one organization.
Exclusive services. Employees can be contractually bound to provide services to just one organization.
If you’re worried about classifying your Japanese workers correctly, try Rippling’s Worker Classification Analyzer.
Step #2: Determine the best way to pay your contractors in Japan
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 Japanese 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 Japanese 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 employee.
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.
Frequently asked questions about running payroll for 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.
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?
This is uncommon. In most cases, it’s standard to pay international contractors in their local currency, the Japanese yen. However, you may pay contractors in your home currency if they agree to it in writing.
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 employee information can be easily lost, stolen, or misused.
How do you turn a contractor into an employee in Japan?
Hiring independent contractors can come with 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. You must consider 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). On paper, an EOR is the official employer of your worker, and you can hire and pay employees through their entity. EORs also withhold income tax on employee paychecks and contribute to a 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.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are. See Rippling today.
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.