Guide to Taxes in Japan for Freelancers and Sole Proprietors

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If you live and work in Japan, in almost all cases, you have to pay Japanese income tax, but the rules for filing a tax return as a freelancer or sole proprietor are more complicated than for those working as company employees.

We explain below exactly what a tax return is, who needs to file one and the process for actually filing, focusing on the requirements for freelancers and sole proprietors. Our article sponsor, Plaza Homes is a bilingual real estate brokerage with over 50 years experience in the greater Tokyo area.

Do you need to file a tax return?

According to this document published by the Ministry of Justice, the majority of people who receive salaries and wages in Japan do not need to file a tax return because their tax obligations are met by their employers, who withhold their income tax and adjust the amount at the end of the calendar year.

However, in principle, you have to file a tax return in these main cases:

Your total earnings from employment exceeds 20 million yen
Your annual income as a freelancer or sole proprietor is ¥480,000 or more
You are a company employee and earn ¥200,000 or more business income in a side job

Even if your income from a side job is less than ¥200,000, it is recommended that you file a tax return because in some cases you might be paying too much and may actually qualify for a refund. If you are filing a final tax return to receive a mortgage deduction or medical expense deduction, you also have to declare your income from a side job, even if it is less than 200,000 yen.

What is the Final Tax Return?

The final tax return (kakutei shinkoku, 確定申告) or tax return is an annual self-assessment and reporting of income done by freelancers or sole proprietors (kojin jigyou nushi, 個人事業主,) in Japan.

Since sole proprietors typically do not have taxes automatically withheld from their income, they need to meet their tax obligations by filing taxes themselves.

Freelancers and sole proprietors must report their income from the previous year (January 1st to December 31st) to the tax authorities between February 16th and March 15th. This process involves calculating how much tax you owe (or are owed). You will receive a refund if you’re eligible. This process settles the difference if there are taxes withheld at the source of payment.

What is the difference between tax returns and end-of-year adjustments?

It is important not to confuse tax returns with end-of-year adjustments. Both tax returns and year-end adjustments are processes for calculating, declaring, and paying taxes owed to the government.

End-of-year adjustments (nenmatsu chosei, 年末調整,) involve calculating the amount of income tax withheld from salaries and need to be filed by employers on behalf of their employees. On the other hand, tax returns are generally completed individually by freelancers and sole proprietors.

How individual income tax is defined

Individual Income Tax is a tax imposed on personal income (including salary, and business income) earned in a year starting from January 1 through December 31. It’s calculated as follows:

Gross Income − Expenses, etc. = Net Income (A)
Net Income (A) − Deductions = Taxable Income (B)
Taxable Income (B) × Tax Rate = Income Tax Amount (The tax rate gradually rises along with the increased taxable income (B))
Income Tax Amount – Tax Credit Amount = Tax Payment Amount

Source: Ministry of Finance, Learn about Income Tax

Which tax return should you file? Blue or White?

There are two main types of tax returns that sole proprietors and freelancers in Japan can file: the White Return and the Blue Return. Despite their names, these returns aren’t actually colored forms, so it’s unclear why they were named this way!

The key difference is in the bookkeeping method used. The White Return (shiro-iro shinkoku, 白色申告) is prepared based on a simple breakdown of income and expenses, whereas the Blue Return (ao-iro shinkoku, 青色申告) is prepared based on detailed financial statements.

The White Return is simpler but the Blue Return is generally recommended because it offers the potential for an income tax deduction of up to 650,000 yen.

Preparing your tax return

You can either prepare your tax return yourself or hire a tax agent, such as a tax accountant, to do it for you. The three main preparation methods are:

National Tax Agency website: Create your return online
Accounting software: Recommended for ease and speed
Pen and paper: Manually create your return

If you use accounting software, your tax agent can review your data and file your return online. If you are preparing it yourself, use this link (in Japanese) to start.

How to file your tax return

There are five main steps to filing a return:

Keep records of annual transactions and prepare necessary documents
Calculate your net income and taxable income
Calculate the income tax amount and tax payment amount
Prepare your tax return
Submit your prepared tax return

When preparing your income tax return, you will need two key pieces of identification:

Your My Number card (mainannba マイナンバー)
Your Resident card (zairyuu kaa do, 在留カード)

A stamp or seal is no longer required to file a tax return.

You can submit your tax return in person at your local tax office counter, in an after-hours collection box, by mail or by electronic filing (e-Tax).

It is beyond the scope of this article to explain each step in detail. For specifics on each step, please refer to this article on Plaza Homes’s website.

How much do I have to pay?

After you calculate your Taxable Income (B, in the formula explained above), multiply it by the Tax Rate to get the Income Tax Amount. The tax rate gradually rises along with the increased Taxable Income.

The Tax Payment Amount is the Income Tax Amount minus the Tax Credit Amount.

The table below shows the tax rates:

Are you eligible for a refund?

If you’re eligible for a refund, the amount will be remitted to your account. You may be eligible for a refund if the amount of income tax determined in the final tax return is less than the amount of tax withheld or less than the estimated tax payment.

Your taxes may be reduced if:

You suffered damage to assets due to disasters, theft, or accidents (miscellaneous loss deduction)
Medical expenses exceeded 100,000 yen
Applied for a mortgage loan deduction
You made contributions to the Furusato Nozei (hometown tax donation system)

What happens if you don’t file a tax return?

The consequences for not filing your taxes on time can vary. If you’ve paid more tax than you actually owe, there are no penalties for not filing a tax return. You can claim a refund on overpayments (from January 1st of the following year up to five years later). If you owe tax and filed after the due date, you’ll likely be charged additional tax or ‘delinquent tax’.

For more information

For more detailed information, please refer to Plaza Homes’s 3-step guide to filing taxes as a freelancer or sole proprietor in Japan, on their website.

Disclaimer: This article is intended only as a basic guide to taxes in Japan. Please consult a tax accountant for professional advice specific to your situation.

Plaza Homes

Plaza Homes is one of the leading bilingual real estate brokerages in Tokyo, with over 50 years of experience helping foreigners buy and sell real estate in Japan. If you are considering buying a property in Tokyo, please contact them below to get started!

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