Doing payroll in Japan isn’t as hard as in some other countries, but you will need to pay close attention to some specific rules and nuances you don’t face domestically. Because running international payroll means you have to abide by another country’s laws that you may not be familiar with, you must take your time and set yourself up for success.
Need to simplify hiring, payroll, and compliance for remote teams worldwide? With Oyster you can: |
|
A note about currency:
Japan’s currency is the Japanese Yen (Yen, ¥). For comparison purposes, we’ll note the equivalent US Dollar (USD) figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 Yen = 0.0071 USD. Make sure you check current conversion rates to ensure accurate calculations.
Use these seven steps as a guide on how to do payroll for Japanese workers.
Step 1: Set Up Your Business as an Employer
Before running your first Japan payroll, you have to register your business. Like many other countries, Japan does not allow foreign companies to hire and pay employees inside Japan.
Foreign companies can partner with and pay independent contractors, something that might be the more efficient option if you’re only looking for a handful of workers. But if you’re looking to hire a larger workforce or you intend to expand your presence in Japan and hire direct employees, you’ll need to either register as a business in Japan or partner with a local employer of record (EOR) that can manage your workforce.
We recommend Remote if you want solid EOR services with robust intellectual property protection tools. Aside from helping you hire and pay international workers, it has a wide range of solutions for managing benefits, taxes, and local compliances.
To set up your business legally in Japan so you can hire and pay employees, you’ll need to determine your business structure. Most businesses in Japan are either a stock company (Kabushiki Kaisha, or KK) or a limited liability company (Goudou Kaisha, or GK). A KK is the more common type of company, but a GK can provide owners with more liability protections and cannot be publicly traded.
You then need to find a physical work location. This cannot be a virtual office, residence, or temporary location. You can use month-to-month office rental spaces but you may need to provide evidence of a signed agreement to the Japanese government.
You’ll also need articles of incorporation (teikan) or other documents that provide a clear business proposal. Include specific details about your profit and loss, business ownership history, and a business plan. The more detail and information you provide, the better. If the government isn’t satisfied with what you’ve provided, you’ll need to start over.
When you apply for business registration in Japan, you’ll need to provide at least the following:
- Your personal bank account information in Japan
- Articles of incorporation
- Notarized signatures of each owner or director
Luckily, you don’t have to open a Japanese business bank account to run payroll. Japan allows foreign bank accounts to pay employees in Japan. However, you will need a Japanese bank account (either a personal or business account) to pay taxes like social security. As such, it can be easier and faster to set up a local business bank account, since you’ll need to open an account in Japan anyway.
Japan has a unique requirement for business operations: company seals. These are stamps containing the company’s name or logo and sometimes an authorized representative’s signature. These seals must be used on all company documents showing company approval and must be registered to be valid.
You’ll need to create three company seals:
- A Representative Seal (daihyoin) for the person authorized to sign company documents
- A Bank Seal (ginkoin) to deal with banks
- A Company Name Seal (shain) used when issuing receipts and invoices
You’ll also need to create personal seals (jitsuin) for every person in the company with high-level roles who can sign off on company matters. The jitsuin is similar to a personal signature in the US.
After you’ve prepared everything, you need to locate your Registry office (Homukyoku). You’ll give them all your documentation and pay a fee that starts at ¥150,000 ($1,085) for a KK and ¥60,000 ($434) for a GK.
Once approved, you’ll need to register with the National Tax Agency. This will allow you to operate legally in Japan and withhold and pay appropriate taxes. Note that if your business operates in Tokyo, you’ll also need to register with the Tokyo Bureau of Taxation.
Japan has universal insurance that all businesses must participate in, which includes both health and pension. Your business must register with the Ministry of Health, Labor, and Welfare, as well as the Japan Pension Service. It will be your job to ensure appropriate taxes are withheld and paid to the relevant authorities.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process to follow so that you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? The general payroll cycle in Japan is monthly, though you can do more frequent runs. If you pay monthly, all payments must be made by the 25th of each month.
- Type of employees: Are you looking to hire for a full-time or part-time role?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, via Excel, or through a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
To ensure your company processes Japan payroll effectively, you should also have policies on:
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Japan is much less than in the US, generally about half as much. In 2021, the average Japanese worker made ¥3,688,800 ($26,509.56) in a year. When determining what you’re going to pay your Japanese workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having Japanese workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
Japan has similar employment and payroll compliance laws to the US, but some go further in providing additional benefits to employees. It’s vital that you understand these differences so you remain compliant.
The minimum wage in Japan varies based on location. Tokyo recently increased its minimum wage to ¥1072 ($7.71) per hour. The minimum wage is ¥1023 ($7.35) in Osaka and ¥968 ($6.96) in Kyoto.
While not a law, it is customary to pay employees a 13th-month salary at the end of the calendar year. Some companies even pay a 14th-month salary in the summer. Because this isn’t an obligation, however, some companies have begun bucking this trend and moving toward more straightforward 12-month pay systems.
The typical Japanese workweek is 9 a.m. to 6 p.m., with a mandatory one-hour lunch break, for a total of 40 working hours per week. If an employer operates outside these hours or needs employees to work holidays or overtime, they’ll need to sign a 36 agreement, named after Article 36 of the Labor Standards Act. Article 36 states that any work in excess of eight hours in a day, 40 hours in a week, overtime, or holiday work requires an advance written agreement between the employee and the employer, or a labor union and the employer.
Overtime in Japan is calculated monthly versus daily and weekly in the US. If an employee works up to 60 overtime hours in a month, they must be paid at least 25% more than their normal hourly wage for the overtime hours. If they work more than 60 overtime hours in a month, they must be paid at least 50% more than their normal hourly rate. Employees in managerial positions are exempt.
Paid time off in Japan is a right of all workers. Every worker gets at least 10 paid vacation days each year. The more tenure an employee has, the more time off they receive:
- One-and-a-half years: 11 days
- Two-and-a-half years: 12 days
- Three-and-a-half years: 14 days
- Four-and-a-half years: 16 days
- Five-and-a-half years: 18 days
- Six-and-a-half years: 20 days
Employees may also roll over up to two years’ worth of unused paid time off to the following year. This time doesn’t have to be paid out upon separation of employment but, if a company wants to provide an incentive for an employee to resign, they may offer to pay out the full amount of unused vacation days.
Japan does not require employers to give workers time off for holidays or to pay them if they’re required to work on a holiday. However, it is common practice for companies to pay employees for the following holidays as days off:
- New Year’s Day (Jan. 1)
- Coming of Age Day (Second Monday in January)
- National Foundation Day (Feb. 11)
- Emperor’s Birthday (Feb. 23)
- Spring Equinox (March 21)
- Showa Day (one week; end of April through the beginning of May)
- Constitutional Memorial Day (May 3)
- Greenery Day (May 4)
- Children’s Day (May 5)
- Marine Day (Third Monday in July)
- Mountain Day (Aug. 11)
- Obon (up to three days in the middle of August)
- Respect for the Aged Day (Third Monday in September)
- Autumnal Equinox (Sept. 23)
- Sports Day (Second Monday in October)
- Culture Day (Nov. 3)
- Labor Thanksgiving Day (Nov. 23)
Note that Christmas is not listed here. Most businesses in Japan treat December 25 as a normal working day. While many Japanese celebrate the holiday in some fashion, it’s technically not a national holiday.
Japan doesn’t require employers to provide paid sick leave. Many employers have their own sick leave policies or provide additional time off employees may use each year for any purpose. Japan also has a social insurance system that employees can rely on.
Japan provides both maternity and paternity leave. Maternity leave consists of 14 weeks of paid leave—six weeks taken before the due date and eight weeks after. This is fully paid leave through Japan’s social insurance system. The amount of pay is calculated as roughly two-thirds of the employee’s average monthly salary.
Paternity leave is available to fathers for up to one year, but it is fully unpaid. It’s only paid if the company has a written policy that fathers may take paid leave or if paid leave is stipulated in their employment contract. Fathers may be entitled to partial pay through Japan’s social security system.
Japan requires employers to provide up to five days of paid leave for bereavement. This applies to an employee’s immediate family member, including a father, mother, spouse, or child. Employees can take up to three days’ leave for the death of a grandparent, grandchild, sibling, child’s spouse, or spouse’s parent. If the employee is in charge of funeral arrangements, they can request, but are not guaranteed, an additional two days of leave.
Japan also allows for family care leave. This leave is fully unpaid and available for employees who need to care for a parent, child, spouse, or grandparent. Employees can take up to three months of job-protected leave.
At-will employment does not exist in Japan, so employers cannot terminate an employee without cause. In Japan, employers may only terminate employees for two reasons: gross incompetence of the employee or serious financial hardship of the company. Both reasons are difficult to prove and, unlike the US, Japan favors the employee’s rights over the company’s, making it very difficult for an employer to terminate an employee.
If a legitimate reason is available to terminate the employee, a company should provide that employee with 30 days’ notice. While this is not a requirement, it is customary to do so. If notice isn’t given, employers can provide one month’s pay as severance. Aside from this, severance is not common or legally required in Japan.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your Japanese employees. Japan doesn’t require employment contracts, though they are commonly used. Whether an employment contract or offer letter, your document must include the following, showing that both parties agree to the terms:
- The term of employment
- The physical location of the work
- The job description
- Working hours, overtime, rest periods, holidays, and leave
- Hourly rate and regular wage
- Terms for wage increases
- Termination of employment procedures
You’ll also need to collect documentation to provide to government authorities. For example, you’ll need to submit pension and health insurance forms within five days of an employee’s start date.
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, they often use paper time sheets. We don’t recommend this, as it’s ripe for errors and misuse. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve time sheets before they get to your payroll team for processing.
Once payroll gets the time sheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your Japanese payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from Japanese government agencies.
Type of Payroll Deduction | Employer Share | Employee Share |
|---|---|---|
Pension | 9.15% | 9.15% |
Health Insurance | 4.92% to 6.49% | 4.92% |
Unemployment Insurance | 0.30% | 0.30% |
Work Injury Insurance | 0.25% to 8.80% | 0% |
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Here are the current tax brackets in Japan.
Annual Salary | Income Tax Withholding |
|---|---|
Up to ¥1,950,000 | 5% |
¥1,950,001 to ¥3,300,000 | 10% |
¥3,300,001 to ¥6,950,000 | 20% |
¥6,950,001 to ¥9,000,000 | 23% |
¥9,000,001 to ¥18,000,000 | 33% |
¥18,000,001 to ¥40,000,000 | 40% |
Over ¥40,000,000 | 45% |
For reference, the top tax bracket here is equal to about $290,000. It’s also important to note that Japanese taxpayers are frequently taxed at the local level, usually at a flat rate of 10%.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined and put into your employee’s contracts.
If you have just a single or handful of employees in Japan, you may want to outsource your payroll to a local provider. They will be licensed and familiar with Japanese payroll laws and processes. While you’ll pay them a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your Japanese workforce, you may want to hire an international payroll and HR expert to handle payroll in-house, depending on cost differences. If you opt not to outsource, make sure you or your payroll team are familiar with Japanese payroll laws and deductions to ensure you’re making the right deductions from employees’ paychecks and sending tax payments to the right Japanese government authorities.
Step 7: Document & Store Your Payroll Records
Payroll records in Japan must be kept for up to seven years. Your payroll records should include, at a minimum:
- Each employment contract for each employee
- The dates of employment and rate of pay
- The frequency of pay
- Deductions
- Total regular and overtime pay
- Net employee pay
A Note on Japanese Culture
Japanese work culture is quite different from US work culture. While both cultures encourage workers to work long hours and take little vacation time, US workers tend to be more forward than their Japanese counterparts, who often seek managerial approval for even routine decisions. This is a nod to traditional Japanese culture called ho-ren-so, yielding authority to elders and those in higher positions. This often results in slow decision-making processes and a feeling of micromanagement since employees must seek approval for all decisions.
While remote work is becoming more common, if you have a workplace in Japan, expect it to be much more formal than in the US. Business casual isn’t really an idea in Japan. Most workers who aren’t in uniform stick to traditional business attire.
In the US, we often see co-workers at the bar together having a drink and letting off steam. In Japan, they do the same thing and while it’s not a requirement, there is more social pressure and even an expectation to engage in these activities.
There’s also more focus in Japan on the company’s goals instead of the career path of the individual workers. While workers band together as a team, that can come at the detriment of their individual career interests. This is why cultural fit is extremely important when hiring in Japan.
Bottom Line
Doing payroll in Japan for the first time is overwhelming but it can be done. If you’ve determined that adding Japanese employees is right for your business, make sure you stay compliant by following this guide.
