How to hire and pay remote workers in Japan

Looking to hire and pay remote workers in Japan? This guide will tell you all you need to know.

Japan is a great place to find top remote talent. Nevertheless, hiring, paying, and managing a remote workforce in Japan does have its challenges. Mismanaging taxation requirements can be disastrous, and misclassification penalties are severe. If your company doesn’t comply with Japanese labor laws, which can be highly complex, the results can be catastrophic.

Expanding your team into Japan does not need to be complicated, though. In fact, working with remote team members in Japan can actually be easy and affordable, provided you follow the right steps. There is a straightforward, scalable way to manage this process and stay compliant with all local labor laws.

This detailed guide will answer all your questions and walk you through the most straightforward, safest, and most efficient way to hire, pay, and manage remote workers in Japan while taking the risk and hassle out of the process.

How do foreign businesses pay remote workers in Japan?

There are three main options your business can use to pay remote workers in Japan:

Open a legal entity in Japan

Opening a legal entity offers flexibility, lowers compliance risks, and can save you money in the long term. However, opening a new arm of your business in Japan requires you to comply with a number of Japanese laws and customs, and the process is usually a long and difficult one.

Opening a legal entity in Japan is mostly reserved for businesses with a substantial budget, large teams, and existing international hiring expertise. If you only have a few Japanese remote workers to employ, opening an entirely new entity is likely not your most cost-effective option. Consider this path only if you are planning a full-scale expansion into the country and have the resources necessary to weather the early expenses.

Work with an employer of record

Working with an employer of record is the easiest and fastest way to hire and pay remote workers in Japan. Your employer of record acts as the local employer on paperwork, allowing you to employ local full-time workers immediately without opening your own entity. In addition, an employer of record handles things like payroll, benefits, and Japanese taxes on your behalf.

The decision to work with a global employment partner is a big one. It’s essential to do your research and pick the employer of record that is best for you. Consider factors such as fully owned entities, flat pricing, and technology integrations when selecting any global employment partner.

Remote offers employer of record services with dedicated HR and legal experts who can help you navigate the nuances of hiring in Japan, including cultural norms, employee expectations, and tax and labor laws.

Pay workers in Japan as contractors

If you do not wish to hire full-time remote employees in Japan, you can still work with Japanese contractors. However, you must be careful to ensure that your Japanese workers are genuinely contractors and not misclassified employees.

Contractors must generally be free from restrictions about:

• When they work

• How they receive payments

• The rates they charge

• Whether they can work for multiple companies

The misclassification of contract employees in Japan can lead to massive penalties. To mitigate risk, your company and your contractors should sign a contractor agreement that clearly outlines the nature of the relationship and regularly evaluate that relationship to ensure that nothing has changed. Remote offers global contractor management services to help companies pay and manage contractors compliantly in other countries.

In what currency do companies pay remote workers in Japan?

The easiest way to pay remote workers in Japan is through the local currency, the Japanese yen. Businesses typically cannot pay full-time employees in currencies other than the local currency, although you may be able to pay contractors in other currencies, such as the US dollar. If you choose to pay remote contractors in Japan with a currency other than the yen, remember that currency rates tend to fluctuate, so your contracts should specify which currency is the final word on how much to pay.

What are the tax rates for tax brackets in Japan?

Every country in the world operates under its tax code, and Japan is no different. To stay compliant, it’s essential you understand where remote employees pay taxes, how local tax brackets work, and how employment taxes affect payroll.

There are seven different tax brackets in Japan based on annual income. Rates shown include approximate conversions to the US dollar as of January 2022.

• 5% — Up to ¥1.95M

• 10% — ¥1.95M to ¥3.3M ($17,629.67 to $29,834.82)

• 20% — ¥3.3M to ¥6.95M ($29,834.82 to $59,579.24)

• 23% — ¥6.95M to ¥9M ($59,579.24 to $81,367.70)

• 33% — ¥9M to ¥18M ($81,367.70 to 162,735.41)

• 40% — ¥18M to ¥40M ($162,735.41 to $361,634.24)

• 45% — Over ¥40M (Over $361,634.24)

Which parts of salary in Japan are taxable?

In Japan, income tax is paid annually at national, prefectural, and municipal levels. Employees are split into three different categories to pay income taxes:

• Nonresident: A person who has lived in Japan for less than one year but does not primarily live there. They only pay taxes on income made in Japan.

• Non-permanent resident: A person who has lived in Japan for less than five years but does not plan to live in the country primarily. They pay taxes on all their income besides income made abroad.

• Permanent resident: A person who has lived in Japan for at least five years or intends to live in Japan permanently. They pay taxes on all income from Japan and abroad.

Non-permanent and permanent residents must pay a resident tax and pay for an insurance and pension plan if these are not included in a benefits package provided by their employer.

Japan places businesses in two categories for corporate tax: domestic companies, with their main offices in Japan, and foreign companies.

The main corporate taxes in Japan are:

• Corporation tax (national)

• Local corporate tax (local)

• Capital inhabitant tax (prefectural and municipal)

• Enterprise tax (local)

• Special local corporate tax (national)

Like employees, foreign corporations only pay income tax made in Japan.

Is per diem taxable in Japan?

Per diem refers to money a company gives an employee to cover living expenses when traveling on business. In Japan, per diem payments are taxable if payments are above the per diem rate or the employee does not provide an expense report. Per diem payments in Japan include:

• Lodging

• Meals

• Incidental expenses

Is there a difference between allowance and reimbursement in Japan?

When hiring remote workers in Japan, it’s essential to understand the difference between allowance and reimbursement.

An allowance is an amount of money given to an employee regularly for a specific purpose. In Japan, allowances include:

• Transportation

• Housing

• Retirement

• Family

• Self-development

In Japan, employees don't have to provide documentation for the use of an allowance. Employers may freely pay allowances to Japanese employees, but these allowances are treated as regular income for tax purposes.

Reimbursements, unlike allowances, are for specific items already purchased by employees. Employees typically do need to provide documentation in Japan to be reimbursed for their expenses.

What payroll deductions are employers required to make in Japan?

When employing remote workers in Japan, it’s imperative to understand payroll rules and regulations, including payroll deductions.

Payroll deductions in Japan include two main taxes: social insurance and labor insurance contributions. These two taxes include pension, health insurance, unemployment, workplace injury insurance, and family contributions and allowances.

Employers are responsible for contributing:

• 9.15% toward a pension scheme

• 4.935% (or 5.83% for employees 40 years or older) toward a health insurance plan

• 0.6% for unemployment insurance

• 0.25% to 8.8% for workplace injury insurance

• About 0.36% toward the family allowance

Even experienced businesses can find managing Japanese payroll challenging. There are some best practices that your business can follow to stay ahead of the curve:

• Choose your global payroll partner carefully

• Prioritize the employee experience

• Understand the difference between an employee and a contractor

• Pay the right salary for the person, role, and location

• Consider whether you need your own entity

• Guard your intellectual property closely

What is the minimum wage in Japan?

In Japan, the minimum hourly wage ranges from ¥714 ($6.46) to ¥932 ($8.43), depending on the region, and is set in line with local living costs.

How much is overtime pay in Japan?

Workers in Japan are entitled to overtime pay unless they hold a managerial position. If an employee works over 40 hours a week, over eight hours, or at night, from 10 AM to 5 PM, they receive an additional 25% of their hourly pay for those hours. During holidays, workers receive 35% overtime pay.

What are the local labor laws in Japan?

Under the Japanese Civil Code and the Labor Standards Act of 1947, employees in Japan enjoy several worker's protections, including:

• Protections against discrimination based on age, religion, sexual orientation, gender expression, and race

• Overtime pay and minimum wage

• Paid time off

• Paternal, bereavement, menstruation, and civil duty leave

• Employment termination rights, including notice period and severance pay

How to pay contractors in Japan?

Japan treats self-employed individuals, also known as contractors, differently from full-time employees. There are risks associated with misclassification. Some of these risks include:

• Penalties and fines: You may be liable for back taxes and associated penalties for paying late.

• Back wages and benefits: You may be required to compensate workers for lost wages or benefits resulting from the misclassification.

• Legal issues: You may be vulnerable to lawsuits from groups or individuals harmed by misclassification.

• Unfavorable PR: You may scare off qualified, top talent from wanting to work for your business.

Converting a contractor to an employee can protect the employer from penalties, provide a better experience for the employee, and make it simpler for both parties to collaborate.

Remote helps companies convert contractors to employees in Japan and across the world.

How to pay remote employees in Japan?

The safest, simplest, and most scalable way to pay remote workers in Japan is to work with an employer of record, or EOR. An EOR allows your business to employ legal, full-time workers in Japan, taking on the burden of local legal requirements and managing hiring, compliance, payroll, benefits, and more for your remote workers. EORs have the knowledge and resources to help you pay and hire remote employees in Japan while staying compliant with local labor laws.

Remote is the expert in global payroll and can help your business make the most intelligent financial decisions as you grow your team in Japan. We're working hard on setting up our own legal entity in Japan to enable us to act as your employer of record for Japanese employees and you can visit our Country Explorer to stay updated on our progress (and see all of the other countries around the world where we can support you with our EOR services). In the meantime, we can help you pay contractors in Japan right away!

Pay remote workers in Japan with Remote

Hiring remote workers in Japan can bring your company tremendous opportunities, but the process can also be highly complex.

Opening local entities, setting up payroll and benefits, and keeping up with local employment laws takes time, costs money, and can delay your journey to success. But we're here to tell you — hiring remote workers in Japan doesn't have to be stressful.

Remote can help your company by taking care of international payroll, benefits, taxes, stock options, and compliance in many other countries right around the globe, and we hope to be able to help you with your Japanese employees very soon. No matter where your team lives and works, Remote's best-in-class global employment solutions provide the best experience for your workers.

Contact us today to learn more, or if you’re ready, sign up now and begin onboarding employees and contractors in minutes.