Sole Proprietorship and Withholding Tax (Japan)
Suppose you are a freelance, sole proprietor in Japan. You operate as an interpreter without forming a company, and you receive remuneration from your clients.
In this case, withholding tax （源泉徴収＝Gensenchoshu）is required when the client pays you.
The invoice you issue must also indicate the amount of withholding tax （源泉徴収税額）to be withheld.
For example, suppose you charge your client 100,000 yen as compensation for interpreting. In that case, you would clearly state on the invoice about 10,000 yen as withholding tax.
Let’s say the amount of remuneration charged by you to the client is 100,000 yen. However, the client pays you 90,000 yen and the client pays 10,000 yen to the tax office.
Normally, when a business owner receives remuneration from a client, he/she is required to pay taxes to the tax office in the following year’s tax return. However, in the case of withholding tax, the client pays the tax to the tax office on your behalf. That means you have already paid the tax of 10,000 yen.
If it turns out that your business is in the red and you do not have to pay taxes, the 10,000 yen you have already paid will be returned to you by the tax office.
If your tax return reveals that you owe 15,000 yen in taxes, you will have to pay an additional 5,000 yen.
Types of Customers and withholding tax
However, if the client is an ordinary individual, i.e., not a corporation, no withholding tax is required when the client pays you for your services. This is because ordinary individuals are not accustomed to paying tax withheld money (¥10,000) to the tax office.
If your client (Mr. Yamada) is an individual who employs employees, then withholding tax is required when Mr. Yamada pays you your remuneration. This is because Mr. Yamada withholds tax when he pays his employees. So, Mr. Yamada is accustomed to withholding tax and paying money to the tax office. Therefore, when Mr. Yamada pays you remuneration, withholding tax is required.
If your client is a corporation (Hayashi Corporation), Hayashi Corporation is required to withhold tax when it pays you remuneration. Because in the case of a corporation, they will have some knowledge of accounting and taxation.
Your type of business and withholding tax
1 Withholding tax is required if you are a lawyer, tax accountant, judicial scrivener, etc.
2 Withholding tax is required when you receive manuscript fees, design fees (like website design), speaking fees, fees for teaching sports or knowledge, or translation fees from your clients.
Withholding tax is required for management consulting fees. No withholding tax is required for consulting services related to website operation. No withholding tax is required for system development.
In fact, it is difficult to know the boundary.
3 Withholding tax is also required when you are an entertainer and receive a fee for an appearance.
In the case of 2 and 3, the tax calculation method is as follows.
Amount of remuneration x 10.21% = withholding tax
Example 200,000 yen x 10.21% = 20420 yen
However, if the amount of remuneration exceeds 1,000,000 yen, 20.42% shall apply to the portion exceeding 1,000,000 yen.
If you charge 110,000 yen (10,000 yen is consumption tax)
110,000 yen x 10.21% = 11,231 yen Or 100,000 yen x 10.21% = 10,210 yen.
Either is acceptable. （Sample of Invoice issed by freelance in Japan）