7 Common Questions Foreign Employees Have About Japanese Payroll

Japan’s payroll and social insurance systems can be quite confusing for foreign employees and overseas HR teams. The rules are unique, the terminology is unfamiliar, and in many cases the logic is very different from what people are used to in their home countries.

In this article, we answer seven of the most common questions we receive from foreign employees and HR teams about Japanese payroll. We hope this will help you better understand how payroll works in Japan and support your employees more effectively.

1. Why is “Residence Tax” deducted a year later?

Residence (Inhabitant, Local) tax in Japan is calculated based on the previous year’s income. The annual amount is divided into 12 installments and deducted from salaries starting in June of the following year.

The annual residence tax is divided by 12, and any amount less than 100 yen is added to the June installment. From July onwards, the deducted amount is generally the same every month.

2. Why does Japan have so many types of social insurance?

Japan has several separate social insurance systems, including:

• Health Insurance
• Employees’ Pension Insurance
• Employment Insurance
• Workers’ Accident Compensation Insurance

For each insurance, the portion paid by the employee and the portion paid by the employer are clearly defined. Because the calculation rules differ for each system – for example, which income components are included in the calculation – the overall process can feel very complex.

3. Why is overtime calculation so detailed?

Japan’s labor laws specify overtime premium rates in detail, and payroll must generally calculate working hours on a minute basis.

Unlike the Exempt / Non-exempt concept commonly used overseas, Japan requires overtime payment for almost all employees as a legal requirement. This is often surprising for foreign companies that are used to a different classification system.

4. Bonus is taxed differently? Why?

Bonuses are subject to separate calculations for social insurance contributions and income tax, and are withheld differently from regular monthly salaries.

Whether a payment must be treated as a “bonus” or can be combined with monthly salary depends on factors such as:

• the purpose of the payment
• the number of times it is paid annually

Because of this, two payments with the same gross amount may lead to different take-home pay depending on how they are classified.

5. Why is transportation allowance treated differently?

Japan has a unique system under which commuting expenses can be non-taxable, up to a certain limit. This tax-free transportation allowance is uncommon in many other countries and often leads to questions such as:

• Should transportation allowance be included in base salary?
• Is it better to pay it separately as a non-taxable allowance?

Understanding how to structure transportation allowance correctly is an important part of Japanese payroll design.

6. Why do we need to report monthly salary changes (Gekkyu Henko / 月額変更)?

When there is a change in fixed monthly payments such as base salary, and certain conditions are met, the insurance contribution amounts for the following systems will change:

• Health Insurance
• Nursing Care Insurance (when applicable)
• Employees’ Pension Insurance

The company is responsible for reporting these changes to the relevant authorities. Once the report is accepted, the revised standard monthly remuneration will be applied, and the new insurance premiums will generally take effect from the second month after the change.

7. Why does income tax change even when the salary amount is the same?

Japan’s withholding income tax (“gensen choushu”) varies depending on the number of dependents an employee claims.

This means that even if two employees have exactly the same monthly salary, the employee with more dependents will have lower income tax withheld each month.

In some countries, dependent deductions are reflected only at the time of the annual tax return. In Japan, they are also reflected in the monthly withholding, which can be surprising for foreign employees and HR teams.

Need help with Japanese payroll and social insurance?

For many foreign employees and overseas HR teams, Japanese payroll can feel complicated and time-consuming to understand. However, with the right explanations and structure, it becomes much easier to manage.

Suzuki HR & Payroll Consulting specializes in supporting foreign-affiliated companies and English-speaking HR teams with Japanese payroll, social insurance procedures, and compliance. We also provide explanations in English for employees and overseas headquarters.

If you have any questions or would like to review your current payroll process in Japan, please feel free to contact us.