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Aoiro Jigyo Senjusha

Sole Proprietorship and Salary to a Family Member in Japan

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Sole Proprietorship and Salary to a Family Member

What is Income Tax of Japan ? 

Can you claim salaries to family members as a deductible expense?

How to use the blue tax filing benefits?

What is “full-time blue business employee salary”?

What is the amount of salary for a full-time blue business employee?

Examples of tax savings by a full-time blue business employee

Amount of Tax Savings in Japan

Cautions

Sole Proprietorship and Salary to a Family Member

Suppose you are a sole proprietor. Your spouse also helps you with your business. So you pay him or her a salary. If you can claim her salary as a deductible expense, your income tax will be lower. However, as a general rule, you cannot claim salaries to family members who live in the same wallet as a deductible expense. However, if you file a blue return (Aoiro Shinkoku), there is an exception.

(refer to “In the case a freelance receives fee from client, tax witholding is necessary“.)

What is income tax?

Income tax is a tax on individuals (Not a company). Suppose you run a business with your family. For example, you and your wife own a store together. And you file tax returns for the business as the representative and pay the taxes under your name.

Can you claim salaries to family members as a deductible expense?

As a general rule, if you pay salaries to family members who live in the same wallet (same source of income), you cannot account for those salaries as a deductible expense. But when the sole proprietor (you) files your income tax return, you can use your spouse to apply for the spousal deduction.

However, you can claim the salary to a family member as a deductible expense if your family member meets both of the following requirements and become a full-time blue business employee (Aoiro Jigyo Senjusha = 青色事業専従者).

(1) If they are clearly independent, separate living family members from you.

(2) The family member receiving the salary performs the same job duties as the non-family employee and is paid on the same basis.

How to use the blue tax filing benefits? 

Your spouse would not meet the above two requirements.
In that case, you will need to file a blue tax return (青色申告=Aoiro Shinkoku) and make your spouse a “full-time blue business employee (Aoiro Jigyo Senjusha = 青色事業専従者=あおいろじぎょうせんじゅうしゃ)”.

And even if your spouse lives on the same source of income (household income) as you, you can still claim the salary to your spouse as a deductible expense under the “full-time blue business employee salary 青色事業専従者給与” system.

What is “full-time blue business employee salary”? 

The “full-time blue business employee salary” scheme allows sole proprietors who file a blue tax return to claim the salary paid to a full-time blue business employee (a family member of yours) as a deductible expense.

However, in order to qualify a family member as a full-time blue employee, the following requirements must be met

(1) The full-time blue business employee must be a spouse or relative who makes a living with the blue filer (you).
(2) The full-time blue business employee must be at least 15 years old at the end of the year.
(3) The full-time blue business employee must work for your business for at least six months during the year.
(4) You must submit a “Notification Form Concerning the Salary of a full-time blue employee” (a document that notifies the tax office that a family member will be an exclusive, dedicated employee of your business and receive salary from you) to the tax office.

The “Notification Concerning Salary for full-time blue employee” form must include the amount of salary you will pay to your family members.

The amount you actually pay cannot exceed this amount.

Suppose your spouse has begun to work for your business from 1st April 2023. In that case, you need to submit “Notification Form Concerning the Salary of a full-time blue employee 青色事業専従者給与に関する届出書” by end of May 2023 (within 2 months from her work).

And during fiscal year, it is better not to increase the amount of her salary. 

What is the amount of salary for a full-time blue business employee? 

The salary to a full-time blue business employee must be a sensible salary amount. If you pay too high a salary, it will not be allowable as a deductible expense.

You can check job websites to see how much salaries are paid to people doing similar work.

You are also required to withhold taxes on salaries you pay to family members, such as deducting ¥8,000 when you pay a salary of ¥100,000.

Examples of tax savings by a full-time blue business employee 

Example: Business income :  5,000,000 yen
                  Salary to spouse : 1,000,000 yen

No other deductions are assumed.

If the spouse is NOT a full-time blue business employee

If your spouse is not full-time blue business employee, the salary paid to your spouse is not a deductible expense. Instead, you can use the spousal deduction (Haigusha Kojo=配偶者控除).

Taxable income = 5,000,000 yen of income – 380,000 yen of spousal deduction = 4,620,000 yen
 
The amount of income tax for a taxable income of 4,620,000 yen is “20% – the deduction of 427,500 yen”.

Income tax amount = taxable income of 4,620,000 yen × income tax rate of 20% – the deduction of 427,500 yen = 496,500 yen ♥
 

In the case of a spouse who is a full-time blue business employee

If your spouse is a full-time blue business employee, the salary to your spouse is a deductible expense. Instead, the spousal deduction is NOT available.

Taxable income = 5,000,000 yen of income – 1,000,000 yen of full-time blue business employee salary = 4,000,000 yen
 
The amount of income tax in the case of taxable income of 4,000,000 yen is 20% – the deduction amount of 427,500 yen.

Amount of income tax = taxable income of 4,000,000 yen  x  income tax rate of 20% – deduction amount of 427,500 yen = 372,500 yen

Amount of Tax Savings in Japan

496,500 yen – 372,500 yen = 124,000 yen

In this example, if spouse is a full-time blue business employee, the amount of tax savings is 124,000 yen compared to the case where the spouse is not a full-time blue business employee.

Cautions

Do not try to make your spouse a full-time blue business employee by paying him or her a salary even though he or she is not doing any work, just because it saves tax. That is shallow tax evasion.

Also, your spouse needs to be dedicated to your business. If she works full-time for another company and only helps you on weekends, your spouse cannot be a full-time blue business employee (If you also work only on weekends, it is fine).

Your spouse’s primary job must be your business, Not a housewife.

akiyama(a)japan-law-tax.com Tomo hiko  AKI YAMA