Year-End Tax Adjustment in Japan: A Simple Guide for Employers

Hi, my name is Taisei Koshida, and I am a certified public accountant and tax accountant in Japan.

I assist foreign business owners with accounting and tax matters in Japan, especially those who may have difficulty dealing with Japanese accounting and tax procedures.

If you employ people in Japan, you may have heard of the “year-end tax adjustment,” or 年末調整 (nenmatsu chosei).

The year-end tax adjustment is an important part of the tax system in Japan. In this article, I will explain the basic system, including monthly withholding income tax, tax deductions, and the payment of withheld income tax.

What Is the Year-End Tax Adjustment in Japan?

The year-end tax adjustment is a process for calculating the final annual income tax on salaries paid to employees and executives during the calendar year.

Employers generally withhold income tax from salaries each month. At the end of the year, they calculate the actual annual income tax and compare it with the total amount already withheld.

If too much tax has been withheld, the difference is generally refunded to the employee. If too little has been withheld, the difference is collected.

 Monthly Withholding Income Tax

When paying salaries to employees and executives, businesses in Japan generally must withhold income tax from salary payments.

The amount withheld each month is calculated using withholding tax tables. Therefore, the total amount withheld during the year does not necessarily equal the employee’s final annual income tax.

The year-end tax adjustment is used to calculate and settle this difference.

Tax Deductions in the Year-End Tax Adjustment

Certain deductions that are not fully reflected in the monthly withholding tax calculation can be taken into account during the year-end tax adjustment.

For example, employees may be able to claim deductions for life insurance premiums and certain other items by submitting the required documents to their employer.

The mortgage loan tax credit may also be handled through the year-end tax adjustment from the second year onward if the requirements are met. In principle, however, the employee must file an individual income tax return for the first year.

Medical expense deductions are not handled through the year-end tax adjustment. An individual income tax return is generally required to claim them.

Paying Withheld Income Tax in Japan

As a general rule, businesses must pay withheld income tax to the Japanese tax authorities by the 10th day of the month following the month in which the salary was paid.

However, businesses that regularly have fewer than ten employees receiving salaries may apply for a special payment schedule.

If this special rule applies, eligible withholding taxes can generally be paid twice a year: by July 10 for taxes withheld from January through June, and by January 20 of the following year for taxes withheld from July through December.

Year-End Tax Adjustment Is an Important Annual Procedure

For many employees in Japan, the year-end tax adjustment allows their annual income tax to be settled through their employer without filing an individual income tax return.

For employers, however, it requires collecting the necessary information from employees, calculating the final tax amounts, and making the appropriate adjustments.

For foreign entrepreneurs and business owners, Japanese payroll and tax procedures can sometimes be difficult to understand, particularly when they are dealing with them for the first time.

Need Help with Accounting, Payroll, or Tax in Japan?

Our accounting firm in Japan assists foreign business owners with accounting, payroll, and tax matters.

If you need English support with year-end tax adjustments, withholding income tax, payroll, or other Japanese accounting and tax procedures, please feel free to contact us through our inquiry form.