What Is Japan Taxation? A Guide to Major Taxes and Calculations

By Yocia Oke | November 18, 2024

Understanding Japanese taxation can be a complex process, especially for expatriates and residents unfamiliar with the system. However, it’s impossible to thrive in the country without a thorough understanding of the system.

Because Japanese income tax calculation is so necessary for financial planning and compliance, we’ve created this guide, and through it, we’re going to walk you through the essentials of Japanese taxation.

Stay with us to learn more about individual income taxes, corporate income taxes, withholding income tax in Japan, and more. By the end, we hope to relay to you a clearer picture of how Japan's income tax works and how to manage your tax obligations.

Japan Taxation on Individual Income

In Japan, income tax for individuals is based on a progressive tax system, which means that as your income increases, so does the Japanese income tax rate.

The tax system is thus designed to make sure that people with high incomes contribute more of a share of their earnings in tax.

Japanese Income Tax Rates

The Japanese income tax rate is divided into multiple brackets, and each of these applies a different rate to different potions of income. For the fiscal year 2024, the tax rates for individuals are as follows:

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%
Over ¥9,000,000: 33%

For example, if you earn ¥5,000,000 annually, your income tax would be calculated in the following way:

The first ¥1,950,000 is taxed at 5% – ¥97500
The next ¥1,350,000 (¥3,300,000 - ¥1,950,000) is taxed at 10% – ¥135000
The remaining ¥1,700,000 (¥5,000,000 - ¥3,300,000) is taxed at 20% – ¥340000
The total tax for this amount is thus ¥572 500.

Japanese Income Tax Calculation

Similar to the above, calculating the Japanese income tax includes determining your taxable income and applying the appropriate rates. Here’s a step-by-step guide utilizing the same framework applied above:

Step 1: Determine the gross income. Add all your income sources—salary, bonuses, and other earnings.

Step 2: Subtract deductions. Here, all the allowable expenses, like social insurance premiums and specific deductions, are removed from the amount calculated in Step 1.

Step 3: Apply tax rates. You can now use the income tax brackets to calculate the tax owed based on your taxable income.

Step 4: Finally, sum the tax amounts for each bracket to get your total tax liability.

If you need help creating and managing a bank account to streamline your income, check out this guide.

Taxes on Corporate Income

On the other hand, corporate income taxes in Japan are levied on the profits accrued by businesses.

In this way, the tax system for corporations differs from that for individuals since it focuses on the company’s net income rather than personal earnings. In light of that, understanding these taxes is essential for business owners and managers.

Corporate Tax Rates and Calculation

Corporate tax rates in Japan are based on the company's income and size, where, for the fiscal year 2024, Japanese taxation has generally been in the following rates:

Small to Medium-sized Enterprises (SMEs): 15% on the first ¥8,000,000 of taxable income, with a higher rate that applies to income exceeding this threshold.
Large Corporations: 23.2% on all taxable income.

Therefore, to calculate corporate tax liability, here’s how the process happens:

Step 1: First, determine the total income. You’ll have to sum up all the business revenue.

Step 2: Subtract your business expenses. You’ll want to deduct the allowable business expenses to find net income in this step.

Step 3: Apply tax rates. Use the appropriate corporate tax rates to calculate the tax owed.

Learn more about tax rates with the Japan Tax Agency.

Withholding Income Tax

Withholding income tax is a system where employers deduct a portion of an employee's salary and remit it directly to the tax authorities.

This system is essential because it ensures that tax payments are made regularly throughout the year rather than as a lump sum at the end.

Withholding Tax Rates and Calculation

The taxation rates for withholding tax are based on the type of income and the employee's tax bracket.

For salaries, the withholding tax is calculated using a schedule provided by the Japanese tax authorities, and this considers factors like annual income and tax allowances.

Here’s how you can calculate withholding tax:

Step 1: Determine monthly salary. You’ll have to find the gross salary before deductions first.

Step 2: Apply withholding tax rates and use tax tables to find the appropriate rates.

Step 3: Deduct and remit. You can subtract the calculated tax from the salary and remit it to the tax authorities.

How to Manage Withholding Tax

Managing withholding tax means having accurate deductions and timely remittances. Employers have to regularly review tax tables and adjust withholdings as needed.

Employees, on the other hand, need to monitor their pay slips to ensure correct withholding, as well as address any discrepancies with their employers.

Find out about getting a credit card in Japan here!

Conclusion

In short, understanding how Japanese taxation works is the best way to manage your finances effectively while living or working in Japan.

From individual income taxes to corporate taxes and withholding tax, knowing how these systems work allows you to stay within compliance and regulations, helping you avoid any potential issues.

However, if you’re interested in finding a job position first, check out openings and work at OCE (One Coin English)! Visit the website and apply to find the perfect job.