How to File Your Final Income Tax Return in Japan
Tax time has arrived, so "Game on!" for all self-employed and freelancers in Japan!
Remember you needed to leave a trail of breadcrumbs for every yen spent or earned?
'Cuz staying on top of your monthly bookkeeping, maintaining copies of every invoice and receipt, as well as other essential business records (yes, you need them, too!) - is the key to acing your Final Income Tax Return in Japan.
And if you're not organized, it can be a lengthy process which may eventually result in a whitewash as you won't be able to reduce your tax liability & bill due to poorly organized processes.
So, hopefully, with the information in this article, preparing your Final Income Tax Return in Japan won't be as much of a hassle as it's cracked up to be.
Kakutei Shinkoku | Final Income Tax Return in Japan
Suppose you're a resident in Japan for tax purposes* and have registered your sole proprietorship or work as a freelancer in Japan. In that case, you are the one who has to bear the responsibility of paying the taxes you owe (unlike Japanese company employees).
Usually, you would receive a set of documents from the Japanese National Tax Agency in early January unless you file online. This set of documents is for the Final Income Tax Return - a procedure to report the amount of income tax levied on total net business income earned between January 1st and December 31st each year.
Filing types for final tax return in Japan
When registering your business with the tax office, you can select one of the two filing types for final income tax return in Japan: White Return (Shiro-iro shinkoku, 白色申告) and Blue Return (ao-iro shinkoku, 青色申告). However, we usually recommend opting for Blue Return filing systems as it offers greater benefits, including special deductions.
Those who opted for the White Return filing system when opening their business and wish to switch to Blue Return can theoretically do so by applying at the tax office. However, the criteria to satisfy are complex, so it's better to check with a professional if you're eligible for a switch.
So, what is the difference between White Return (Shiro-iro shinkoku, 白色申告) and Blue Return (Ao-iro shinkoku, 青色申告)?
The most significant difference between the 2 types is the set of documents you need to submit within the statutory tax return deadline. If you wish to enjoy the benefits of the Blue Return system, you should be ready to create a "Blue-Form Return Financial Statement."
In addition, you'll need to keep your bookkeeping updated on a daily (yes, daily!) basis, meaning you need to have at least basic accounting knowledge. Perhaps, you could also take advantage of some bookkeeping apps - like MoneyForward or freee.jp- if you're comfortable with Japanese.
Who needs to file a Final Income Tax Return in Japan?
Usually, all sole proprietors and freelancers in Japan must report their income or loss to the Japanese government every year by filing a Final Income Tax Return in Japan.
Another category is the salary income earners who do not fall under the scope of Year-End Tax Adjustment provided by their companies. This category includes:
✔️people who leave Japan before the end of the year;
✔️people who work for a non-Japan based employer;
✔️people who have multiple types of income (i.e., multiple part-time jobs, side business income, stocks/cryptocurrency income, capital gains income, etc.) and didn't submit an Application for (Change in) Exemption for Dependents of Employment Income Earner
✔️people whose yearly income exceeds ¥20 million;
Please be careful: there are cases when you believe you receive salary income and your company is deducting your taxes, but in reality, your employer asks for an invoice every month. In such situations, your income may actually be classified as business income, and you'll need to file a tax return by yourself.
To give you an idea, we've handled many cases where foreigners have not been filing their tax returns for several years because they assumed they had an employment contract. But in reality, the companies they worked for didn't deduct the Withholding Tax. If we analyze some other facts (not the contract itself), it turns out that they should have been treated as self-employed (on a professional contract) rather than company employees. Unfortunately, this is a widespread misinterpretation of the tax liability in the design or system engineering industry.
Last but not least, people who overpaid the tax can settle the difference by filing a tax return to get a refund.
How to prepare your Final Income Tax Return in Japan
There are 2 obvious ways to proceed with your declaration procedure: you can either hire a tax accounting office or prepare and file the tax return by yourself.
Suppose you're working with a tax accounting office. In that case, you're going to breeze through the start and end of your business year, including the declaration procedure - simply because all these tax forms, accounting, and tax-related documents won't be your headache. All you need to do is to "gather as you go" and send all your financial records to your tax accountant.
If, for some reason, you decide to fill it out and file it by yourself, you'll need to organize the whole process. It may be quite a challenge for the first-timers.
Types of tax forms
There are 2 types of tax forms, A and B, depending on the income type.
Form A is mainly used by salary income earners who need to file Final Income Tax Return.
Declaration Form B, on the other hand, can be used by any business owner, including sole proprietors and freelancers, regardless of the income type. However, this tax form is more complicated than form A, so people who use it for the first time may get confused.
You can either get the form you need at the nearest tax office or download it from the National Tax Agency (NTA) website.
Documents to prepare for Form B
The documents you need to attach differ depending on the return type (White or Blue) and filing method. But here’s a solid start to the primary documents self-employed and freelancers need to gather and prepare. Please note this list is not all-inclusive. You may need to prepare other documents as well, depending on your tax situation.
Key tabs of Form B
Now that we can see the approximate landscape of what to gather, let's get a general idea of the tax form itself. This way, you can understand what information you need to fill out.
Just a quick sneak peek before we proceed - sole proprietors and freelancers who selected Blue-Return filing type should also submit Blue-Return Financial Statement when filing the Final Income Tax Return.
Alright, now let’s dive in and discuss some details.
So, there are 2 schedules in form B of the Final Income Tax Return: Schedule 1 and Schedule 2.
Schedule 1 of the Final Income Tax Return (Form B)
Schedule 1 of Form B is divided into 8 tabs.
TAB 1: It is mainly related to your personal information.
TAB 2: It’s about your gross yearly sales amount.
TAB 3: In this part, you should enter the income amount after deducting necessary expenses (aka business expenses) and Blue-Form deduction if applicable. The calculations are done in a separate document called “Blue-Form Return Financial Statement.”
Quick information on the “Blue-Form Return Financial Statement.”
Blue-Form Return Financial Statement (所得税青色申告決算書) is a document that represents the results of your daily bookkeeping grinds. It consists of Income Statement, 2 Profit&Loss Statements, and a Balance Sheet - so a total of 4 pages.
If you maintain clean books and your Blue Form Return Financial Statement is well-prepared and organized, then the amount of Blue-Return deduction you can indicate is 650,000 yen for online filers (another reason to file with an accounting office!) and 550,000 yen for paper filers.
If your books are messy and the Blue-Form Return Financial Statement is not appropriately prepared at the time of filing, the maximum amount of Blue-Return deduction you can indicate is 100,000 yen. In that case, you won’t need to prepare a Balance Sheet (page 4).
TAB 4: In this tab, you indicate the calculated amounts of deductions you’re eligible for (e.g., medical expenses, life insurance premiums, spouse deduction, etc.)
Please note: from 2020 and onwards, if your income is 24 million or less, the amount of the “Basic Exemption” deduction is 480,000 yen.
TAB 5: In this part, you’ll be able to identify the tax amount you need to pay after carrying out specific calculations.
TAB 6: If you’re subject to any other deductions, you’ll need to indicate them accordingly in this section. They are all calculated in separate documents, depending on the type of deduction.
For example, blue filers with family employees who are exclusively engaged in their business can include salary payments to those family employees as necessary expenses. They can indicate the amount in this tab, but the calculation should be done in the Blue-Return Financial Statement document.
If you’re not sure how to calculate the amounts and where, it’s better seek professional assistance.
TAB 7: This is the tab for the deferred payments.
TAB 8: This tab shows the information for a refund. If you’re subject to a tax refund, you’ll need to indicate where you’d like the refund to be deposited. Depending on how busy the tax office is, it may take up to 2 months to have the amount deposited into your account. If you wish to receive your refund faster, it’s better to do e-filing. In that case, you’ll be able to get a refund in about 2-3 weeks.
Schedule 2 of the Final Income Tax Return (Form B)
Alright, so Schedule 2 of the Final Income Tax Form B is pretty straightforward. It’s the place where you indicate various types of deductions you’re subject to, like medical expenses, life insurance premiums, spouse exemption, etc.
Below is the list of tabs that correspond to a particular type of deduction. You’ll need to calculate them here, referring to the receipt/deduction certificates and other documents you have. After that, you’ll need to indicate the final amounts in the appropriate tab of Schedule 1.
TAB 9: Address and name
TAB 10: Deduction for social insurance premiums
TAB 11: Deduction for premiums of small-scale enterprises
TAB 12: Deduction for life insurance premiums
TAB 13: Special exemption for spouses
TAB 14: Exemption for dependents
TAB 15: Deduction for miscellaneous losses
TAB 16: Deduction for medical expenses
TAB 17: Deduction for donations
TAB 18: Deduction for salaries of full-time family employees.
Specific categories of individuals may need to be careful with TAB 18 and TAB 19.
Please note if you're eligible, you'll need to indicate information (do calculations as well) regarding this deduction twice. First, you'll show the total gross amount of salaries you pay to your family member employees in the Income Statement of the Blue-Return Financial Statement. Then, after that, you need to indicate the personal information and salary amounts of those family members in Schedule 2 Tab 15 of the Tax Form B. The amount you show in the two documents should coincide.
TAB 19: Resident and business tax.
Resident Tax Section: those who have kids under 16 years old should make sure to enter children’s details to receive child allowance.
Business Tax Section: sole proprietors and freelancers from specific industries whose yearly taxable income is 3.2 M are subject to Business Tax (Enterprise Tax).
How can I file my return?
Luckily, different filing options are available:
You can bring the documents to the tax office directly... providing that you have the time to do so and the epidemiological situation in the country is favorable enough
You can mail the documents to the tax office by post. Attention here: courier services are not allowed. The safest way is to send them via either ordinary registered mail or simplified registered mail.
You can also take advantage of the technology and do an e-filing via the e-Tax system. Seriously, this is the easiest and highly recommended way to file your Final Income Tax Return - available 24/7, which is very convenient for busy people!
Or else you can leave your documents in the collection mailbox at the tax office (which is a little different from bringing them directly!)
Anyway, it’s great you have the options to choose from depending on your schedule or preferences.
When is the filing deadline?
Self-employed individuals and freelancers must file the tax return between February 16th - March 15th every year, so the deadline for filing is March 15th if the Japanese government has announced no particular extension.
If you do not file your return by the due date, you will be subject to certain penalties in addition to the individual tax amount depending on the situation. The penalty type (and amount) depends on different factors - for example, the reason behind non-filing (you didn’t file on purpose because you wanted to hide your income or for other reasons, etc.).
How do I pay my tax?
Recently Japan showed positive signs of the digitalization process (fingers crossed!), so they developed various payment options.
You can pay by cash. At a tax office, convenience store, via ATM, etc.
You can do a bank transfer.
You can also pay by credit card. There is a particular national website for such payments, but it involves a settlement fee.
And after 2022, you will be able to pay by smartphone (YAY!) Some local governments have already implemented this payment method for local taxes.
The upshot? Running your business is not always roses and unicorns. Yes, you need to do a lot of multitasking. Yes, you have to develop business growth strategies and always catch up with the latest trends to stay ahead of your competitors. Yes, everything is new and unfamiliar in a foreign country. Hence, you feel like running back and forth fighting for every single piece of information that might be crucial for your business decisions - we get it.
But please remember one thing: healthy bookkeeping and tax optimization strategy are vital for your business growth as sales increase.
Do not breeze over daily bookkeeping or organizing and storing all your financial and business documents. Remember the criteria for the maximum amount of Blue-Return deduction? - That’s what it is all about!
You have to be a stickler for paperwork all year round so that when the tax season comes, you don’t need to go above and beyond to maximize your tax return.
A lot of legwork? Indeed. But it will significantly reduce your time, effort, and nail-biting when the tax time comes.
Looking for a bilingual accounting office for an easier tax season? Check out TokyoMate’s partner, Otani Accounting Office!