Payroll Services in Japan

Employer social insurance in Japan is about 15.70% of remuneration for a Tokyo-based general-business employee under 40, and 16.51% from age 40 when nursing care insurance begins. The components for FY2026 are health insurance at half of Tokyo’s 9.85%, the new child and childcare support levy at half of 0.23%, nursing care insurance at half of 1.62% where it applies, Employees’ Pension Insurance at half of 18.3%, the child allowance contribution at 0.36% employer-only, employment insurance at 8.5 per thousand for general business, workers’ accident compensation at 3 per thousand for the default office classification, and the asbestos general contribution at 0.02 per thousand. The employee carries a broadly matching 14.69% or 15.50%.

Two things make the headline percentage misleading at the top of the salary range, and both are worth modelling properly. The social insurance components are charged on the banded standard monthly remuneration and they cap – pension at ¥650,000 a month and health insurance at ¥1,390,000 – while the labour insurance components are charged on uncapped actual gross wages. So the blended employer rate falls as salary rises: 15.70% up to about ¥7.8 million of annual salary, then 13.61% at ¥10 million, 9.06% at ¥20 million and 6.43% at ¥30 million. Maximum employer pension contribution is ¥713,700 a year however much the employee earns. The 2025 pension reform raises that ceiling in stages from September 2027, so this particular advantage narrows.

Health insurance is prefectural and it is set by where the insured establishment is registered, not where the employee lives. FY2026 rates run from 9.21% in Niigata to 10.55% in Saga, with Tokyo at 9.85%, Aichi 9.93%, Fukuoka 10.11%, Osaka 10.13% and Hokkaido 10.28%. On a ¥6 million salary that spread is worth about ¥40,000 a year of employer cost between the cheapest and most expensive prefecture. A company headquartered in Tokyo with a branch registered as a separate establishment in Kyushu therefore runs two different health insurance rates in the same pay run, which surprises people. Forty prefectures cut their rate for FY2026 and the other seven held it, and the national average fell to 9.90% – the first reduction in 34 years.

Workers’ accident compensation is employer-only, has no employee deduction ever, and is rated by industry across 54 classifications from 2.5 to 88 per thousand. Most white-collar employers sit in the default all-other-businesses classification at 3 per thousand, or financial services, insurance and real estate at 2.5. Construction is 9.5, food manufacturing 5.5, forestry 52 and mining 88. Unlike the monthly social insurance cycle, labour insurance operates on an annual declare-and-reconcile basis: the annual settlement runs from 1 June to 10 July and declares the prior year’s final premium alongside the current year’s estimate, with a three-instalment option where the estimated premium reaches ¥400,000.

This is the mechanic that makes Japanese payroll different, and getting it wrong is expensive because it compounds over twelve months. Contributions are calculated on a graded figure – the standard monthly remuneration (標準報酬月額) – rather than on actual pay. The health insurance table has 50 grades running from ¥58,000 to ¥1,390,000; the pension table has 32, from ¥88,000 to ¥650,000. Because the health table is much longer at the top, an employee on ¥900,000 a month sits mid-table for health insurance but is pinned at the pension ceiling – so a rise from ¥700,000 to ¥900,000 increases health and nursing care contributions and changes pension not at all.

Three events set the grade. On joining, it is determined from contractually agreed remuneration, filed within five days of hire; someone joining between January and May holds that determination until August of the same year, while a June-to-December joiner holds it until August of the following year and skips that year’s regular determination entirely. Then the annual regular determination, filed by 10 July on the calculation form (算定基礎届), averages April, May and June and applies from September through the following August. And then occasional revision, filed on the change form (月額変更届), which is compulsory rather than optional whenever three conditions are all met: a change in fixed wages, a resulting shift of two or more grades, and three consecutive months each with 17 or more payment-basis days. It takes effect from the fourth month after the fixed-wage change – a change in April applies from July.

Four details in that paragraph cause most of the errors. First, the April-to-June months are months of actual payment, not months of work: for the very common arrangement of paying the previous month’s salary on the 25th, the window is really March to May work, and misreading it shifts every employee’s grade at once. Second, a month only counts toward the average if it has 17 or more payment-basis days – 11 for short-time workers at expanded-coverage establishments – with fallback rules where fewer months qualify. Third, the two-grade test for occasional revision is on the grade table, not on the percentage increase, so a modest rise that happens to straddle a boundary triggers a compulsory filing while a larger rise inside a band does not; it cannot be eyeballed. Fourth, and the one that catches people most often: the trigger is a change in fixed wages, which includes introducing or increasing a fixed commuting or housing allowance. Because commuting allowance is income-tax-exempt up to ¥150,000 a month, there is no tax signal to prompt anyone, and the missed occasional revision surfaces later as retrospectively collected premiums.

What counts as remuneration is broader than most foreign employers expect. It includes base salary, overtime, commuting allowance, housing allowance, position and family allowances, and benefits in kind valued using the prefectural in-kind valuation table rather than at the employer’s cost. It excludes condolence and congratulation payments, business travel expenses, retirement allowance, dismissal notice pay and insurance benefits. The dividing line for bonuses is the four-times-a-year rule: a payment made four or more times a year is remuneration and folds into the monthly grade, while three or fewer times makes it a bonus with its own separate treatment. That means moving from two bonuses a year to quarterly bonuses re-characterises the whole amount and can materially change total contributions without changing the amount paid – compensation redesign in Japan has a social insurance consequence that has nothing to do with the total.

Bonuses then have two different cap mechanics operating in the same payment. The standard bonus amount is the actual bonus rounded down to the nearest ¥1,000. For pension and the child allowance contribution the cap is ¥1,500,000 per payment, with multiple bonuses in the same month aggregated first. For health insurance, nursing care and the new support levy the cap is ¥5,730,000 cumulative across the fiscal year – and the fiscal year runs April to March, not the calendar year used for income tax, so a system configured on a calendar year gets the annual cumulative cap wrong. A ¥3 million summer bonus is therefore capped at ¥1.5 million for pension but counted in full for health insurance.

National income tax is withheld monthly from the withholding tax tables, with which column applies determined by whether the employee has filed a dependent deduction declaration. The employer then performs the year-end adjustment (年末調整) at the final salary payment of the year, normally December – recalculating each employee’s actual annual liability and settling the difference against the tax withheld. Because the employer carries out that reconciliation, most Japanese employees never file a tax return at all. This is a genuine transfer of the assessment function to the employer and it is unlike almost every other jurisdiction. Employees earning over ¥20 million and those on the non-declaration column are excluded and must file personally. The withholding statement must be issued to the employee and the required copies submitted by 31 January, which is the same deadline as the resident tax wage payment report.

Tax reform has moved the numbers twice in two years, and most commentary is still describing the first move. The 2025 reform raised the employment income deduction floor from ¥550,000 to ¥650,000 and restructured the basic deduction, taking the salary at which national income tax first becomes payable from ¥1,030,000 to ¥1,600,000 – the widely discussed end of the one-point-oh-three-million-yen wall. The 2026 reform, enacted on 31 March 2026, then raised it again: the basic deduction to ¥620,000 plus a special addition of up to ¥420,000, and the employment income deduction floor to ¥690,000 plus a special ¥50,000. That puts the tax-free salary at ¥1,780,000 for the 2026 and 2027 tax years.

The special additions are temporary. They cover 2026 and 2027; the ruling coalition has said it intends to hold the threshold at ¥1.78 million, but the mechanism from 2028 has not been legislated. And there is a separate threshold that gets conflated with it constantly: the income limit for someone to be claimed as a dependant, which rose from ¥580,000 to ¥620,000 of total income – ¥1,360,000 for someone with salary income only. Two different numbers, ¥1.78 million for the employee’s own tax and ¥1.36 million for dependant status, are the most common source of confusion in Japanese payroll conversation this year.

Both reforms reached employees through the year end rather than the monthly tables, which explains an unusual pair of Decembers. The 2025 changes took legal effect for the 2025 tax year but the monthly withholding tables only changed from January 2026, so the whole benefit arrived as unusually large refunds in the December 2025 year-end adjustment. The 2026 changes take effect on 1 December 2026 and are applied through the December 2026 year-end adjustment, with the monthly tables following in January 2027 – so December 2026 produces large refunds again, and employees and cash planning should both expect it. From 2026 the monthly withholding mechanics also recognise specified relatives, which feeds the monthly calculation rather than only the year end. Looking ahead, the special reconstruction surtax falls from 2.1% to 1.1% on 1 January 2027 and a new 1% defence surtax begins alongside it – the combined rate is unchanged, but it means new withholding tables, new payment slips and new year-end handling for 2027.

Resident tax is a second, entirely separate withholding system, and administratively it is the heaviest thing in a Japanese pay run. The rate is broadly 10% – 4% prefectural plus 6% municipal – with a flat per-capita levy of ¥4,000 plus ¥1,000 of forest environment tax, so ¥5,000 in practice. An employer that withholds national income tax is a statutory special collection agent (特別徴収) and must also withhold resident tax. It is not optional and not at the employee’s election.

Two features make it awkward. The municipality entitled to tax an employee is the one where they were resident on 1 January, regardless of where they live or work later in the year. And the basis is the prior calendar year’s income, so the resident tax collected from June 2026 to May 2027 is assessed on 2025 income – a full year’s lag built into the system. The annual cycle runs: file a wage payment report for each employee with their municipality by 31 January; receive a determination notice from each municipality by 31 May showing the annual amount and twelve monthly instalments; deduct monthly from June through the following May; and remit to each municipality by the 10th of the following month.

The employer does not compute resident tax – the municipality does, and tells the employer the exact yen amount per employee per month. But the employer must file a report to, receive a notice from, and make a separate monthly bank remittance to every municipality in which any employee lives. That is where the burden sits. There is a semi-annual remittance option for employers with consistently fewer than ten employees, on application and approval, which consolidates the remittance into two payments while monthly deduction from salary continues as normal. One quirk to brief employees on every year: the annual amount is divided by twelve with the remainder loaded into June, so the June instalment is always larger than the other eleven and the June payslip shows a step change that has to be explained.

Leavers are where this becomes a dispute. Where an employee leaves between 1 June and 31 December, lump-sum collection of the remaining balance is optional and happens only if the employee asks – otherwise the balance reverts to the employee to pay personally. But where an employee leaves between 1 January and 30 April, lump-sum collection is mandatory on the employer: the entire unpaid balance for the year must be withheld from final wages or retirement allowance without any request from the employee, and remitted by 31 May. So somebody resigning in February has up to four months of resident tax compulsorily deducted from a single final payslip, which on a mid-senior salary is a large and unexpected reduction in final take-home. If the final pay is insufficient to cover it the employer is left short and must resolve it with the municipality. Japanese employers brief leavers on this routinely; foreign employers routinely do not, and it becomes a problem at the worst possible moment. Practice varies for May leavers and is worth checking with the specific municipality. And because of the 1 January assessment date, someone leaving Japan in March 2026 remains liable for the full year’s resident tax assessed on 2025 income, and must appoint a tax agent where a balance remains.

The statutory working week is 40 hours and the day is eight. Any overtime or holiday work at all requires an Article 36 agreement (36協定) concluded with the employee representative and filed with the Labour Standards Inspection Office before the work happens. Overtime is capped at 45 hours a month and 360 a year, with a special clause permitting up to 100 hours in a single month, 720 a year, and an average of 80 hours over any two to six months – and breaching the cap is a criminal offence carrying up to six months’ imprisonment or a fine of up to ¥300,000, with serious offenders publicly named. Premium rates are 25% for overtime, 35% for statutory holiday work and 25% for late-night hours, with 50% for hours beyond 60 in a month now applying to small and medium employers as well since April 2023. Employers must record working hours objectively rather than by self-declaration.

Annual paid leave starts at 10 days after six months of continuous service with 80% attendance and rises by service year – note that the table includes an 18-day step at five years and six months before reaching 20 days at six years and six months, which many summaries collapse. Unused leave carries forward two years. Since April 2019 the employer has an active obligation to ensure that at least five days are actually taken each year, and failure carries a fine of up to ¥300,000 per employee. Hourly leave is available but does not count toward the mandatory five days, which is a trap for employers who have introduced it as a flexibility measure.

Family leave saw substantial reform in 2025 and the employer economics are better than most people assume. Childcare leave benefit runs at 67% then 50% through employment insurance, and a post-birth leave support benefit adds 13% where both parents take leave – taking it to 80% of gross, which the ministry describes as approximately 100% of net. A childcare shorter-hours benefit began in April 2025. From October 2025 employers acquired obligations around flexible working for parents of children under three and further measures for children up to school age, plus a duty to ascertain and respect employee intentions. Critically for cost modelling, both employer and employee social insurance contributions are exempt during childcare leave, which makes it broadly cost-neutral to the employer.

Termination is the area where foreign employers most consistently underestimate Japan. There is no at-will employment. Dismissal requires 30 days’ notice or payment in lieu, but that is the procedural minimum, not the substantive test: dismissal must be on objectively reasonable grounds and socially acceptable, and the abuse-of-dismissal-right doctrine makes unilateral termination genuinely difficult. Fixed-term contracts convert to indefinite on employee request after five years. Retirement allowance is customary rather than statutory – there is no legal obligation to provide it – but where the work rules provide for one it becomes contractually binding, and it is taxed favourably. The practical consequence is that exits in Japan are negotiated rather than executed, and the unpaid overtime claim, with a three-year limitation period since April 2020, is the single largest financial employment exposure in the country.