Menu for Year End Adjustment
Declaration of Exemption for Dependents for employment income earner
Let’s say it is January 2022 and you are a self employee.
When you pay your employee (let’s say Mr. Yamada) a salary, you must have deducted income tax.(Let’s say you deduct 100 yen every month.)
Amount of Yamada’s income tax will depend on amount of his income in 2022. When you pay Mr. Yamada a salary in January 2022, you do not know his income for the whole year of 2022. So when you pay him a salary in January 2022, annual amount of his income tax can not be calculated.
Therefore, the income tax you deducted in January 2022 (100 yen) is provisional. In December 2022, amount of Mr. Yamada’s income for the year 2022 can be known and you can calculate the correct income tax.
In December 2022, you can know annual amount of Mr. Yamada’s income for the year 2022. So you can calculate the correct income tax (assuming the correct income tax is 1300 yen).
Comparing this correct income tax (1,300 yen) with the income tax that was deducted every month (100 yen x 11 months), and making the necessary adjustments is called year-end adjustment (Nenmatsu Chosei). In Mr. Yamada’s case, you deducted 100 yen every month. If you continue to deduct 100 yen each month until December 2022, you will deduct 1200 yen in total (100 yen × 12 months).
However amount of correct income tax is 1300 yen. So, when you pay the salary for December 2022, you will deduct 200 yen from Yamada-san’s salary.
100 yen × 11 months = 1100 yen ①
200 yen × 1 months = 200 yen ②
① + ② = 1300 yen.
This amount is the same as the correct income tax.
Who is subject to the year-end adjustment (Nenmatsu Chosei) ?
If Mr. Yamada meets any of the following conditions, you are required to make the year-end adjustment for him.
If he has been a your employee for the entire year 2022 Or
If he has started working at your company in the middle of 2022 and works until the end of 2022 Or
If he has become a non-resident in the middle of 2022 due to working overseas, etc. Or
(Otherwise, there is no one to do the year-end adjustment for Mr. Yamada.)
If he resigns after receiving his salary for December 2022 Or
(Otherwise, there is no one to do the year-end adjustment for him.)
What if Mr. Yamada starts working at your office in the middle of 2022?
You will make a year-end adjustment to calculate Mr. Yamada’s income from January to December 2022 and determine his income tax amount. You will calculate the amount of income tax on behalf of Mr. Yamada, make the year-end adjustment, and pay the tax to the tax office.
Even if Mr. Yamada changes his job to your office in the middle of 2022, you are still required to make the year-end adjustment for him.
If Mr. Yamada worked for Company A until June 2022 and starts working for you in July 2022, you will make the year-end adjustment for him.
In this case, Mr. Yamada will be working for Company A and your office in 2022. So you will make the year-end adjustment by adding up the income Mr. Yamada received from the two employers.
In order to do this, you need to get a copy of the withholding tax certificate (源泉徴収票＝Gensen Choshu Hyo) that Mr. Yamada received from Company A. Because you need to know the amount of his income from Company A (his former employer).
In order to make the year-end adjustment, you need to calculate Mr. Yamada’s income based on the withholding tax certificate issued by Company A and the salary paid by you.
Withholding tax certificate (源泉徴収票＝Gensen Choshu Hyo)
When Mr. Yamada resigned from Company A, Company A is basically required to issue the Certificate of Withholding Tax to Mr. Yamada on the day of his resignation. However, due to circumstances of Company A, it may not be possible to issue the Certificate of Withholding Tax to Mr. Yamada on the day of his resignation. In such a case, the company is required to issue the Certificate of Withholding Tax to Mr. Yamada within one month after his retirement.
In the case of below, year-end adjustment is not required
Even if Mr. Yamada is a salaried employee, he is not subject to the year-end adjustment in the following cases.
1) If Mr. Yamada’s salary income for the year exceeds 20 million yen
2) If Mr. Yamada has two or more sources of income, such as a second job or multiple jobs.
（If he has more than one source of income, such as a second job or a part-time job, he is required to file a tax return by himself after the year-end adjustment at his main employer.)
3) If Mr. Yamada resigned in the middle of 2022 and did not find a new job by the end of December 2022
(Since there is no one to do the year-end adjustment for Mr. Yamada. So, he needs to file his own tax return.)
4) If Mr. Yamada has not been continuously employed for more than two months, or is a day laborer, etc.
In the following cases, Year-end adjustment is required in the middle of 2022
1) If Mr. Yamada dies in the middle of 2022
2 ) Mr. Yamada resigns after he receives his salary in December 2022.
In the case employee becomes a non-resident of Japan
If Mr. Yamada’s salary and other benefits for the year are less than 20 million yen and he will be living overseas for more than one year, you must make year-end adjustments before the date he leaves Japan.
In the case of retirement due to death
If Mr. Yamada retired due to death.
In this case, the year-end adjustment will be conducted based on the total amount of salary paid up to the date of death.
In the case of resignation after receiving salary in December
If Mr. Yamada resigned after receiving his salary and other payments in December 2022, he will not be expected to receive any new salary within 2022. In this case, regardless of whether or not he is reemployed, you should make the year-end adjustment for Mr. Yamada in December 2022.
How to make year-end adjustments
If Mr. Yamada changed jobs from Company A in the middle of the 2022 fiscal year, you need to receive the Gensen Choshuhyo (withholding tax slip) issued by Company A from him. You should ask Mr. Yamada to do this around November 2022.
🍓① Declaration of Exemption for Dependents for employment income earner
This is a document to declare the family members supported by Mr.Yamada.
If Mr. Yamada will receive his January 2022 salary on January 25 2022, he must submit this document to you by January 25, 2022.
So, you should have already received the declaration of exemption for dependents for 2022. In December of year 2022, you will receive the dependent exemption form for 2023 from Mr. Yamada. Based on this document, you will be able to verify information about his spousal and dependent exemptions.
Dependent relatives are those who meet all of the following conditions.
1) Relatives other than your spouse
2) A person who lives on Mr. Yamada’s income.
3) Those whose total taxable income is less than 480,000 yen per year.
(If the income of the dependent relative is only salary, the salary amount is 1,030,000 yen or less. Because 1.03 million yen -550000 – 480000 = 0. 550000 yen is salaried income deduction, 480000 yen is basic deduction.
🍓②Application form for deduction of insurance premiums for employment income earner
🍓③Report of Basic Exclusion of Beneficiary and Report of Spouse Exclusion of Beneficiary and Report of Adjustment of Income Amount （給与所得者の基礎控除申告書 兼 給与所得者の配偶者控除等申告書 兼 所得金額調整控除申告書）
The “Application for basic deduction for employment income earner, Application for spousal exemption for employment income earner, and Application for deduction for adjustment of income amount” is a document for reporting the basic deduction, spousal (special) exemption, and deduction for adjustment of income amount in the year-end adjustment for the year.
When Mr. Yamada (your employee) uses the mortgage deduction
If Mr. Yamada bought a house with a bank loan in 2021, he filed his own tax return to use the housing loan deduction in March 2022.
(As for Housing Loan Deduction based on the latest information as of February 2023, you can see this page.)
From the next year (2023), Mr. Yamada does not need to file a tax return to use the housing loan deduction. Instead, you need to use the housing loan deduction for Mr. Yamada through the year-end adjustment.
You need to use the housing loan deduction for Mr. Yamada when you calculate his taxable income.
In order for you to use the housing loan deduction for Mr. Yamada, you need to receive from him a “Certificate of Special Exemption for Borrowings for Housing for Year-end Adjustment” and a “Certificate of Year-end Balance of Borrowings for Housing Acquisition”.
Calculation for year-end adjustment
Mr. Yamada, once you have received the necessary documents, you will need to calculate the correct amount of income tax and pay the tax.
(1) Calculate the total amount of salary, etc. paid during the year
First, we will calculate the total amount of salary paid to Mr. Yamada for the year 2022 (January to December).
(Let’s assume that it is December 2022 and you are preparing the year-end adjustment for Mr. Yamada.)
Assumed that it is 5 million yen.
(2) Calculate the amount of employment income deduction.
If you are self-employed, you are allowed to have various expenses. If you take the train for work, it is an expense and your taxable income will be reduced by that amount. Company employees are basically not allowed to have any expenses; instead, they are allowed to use employment income deduction.
For example, if Mr. Yamada’s employment income for 2022 is 5 million yen, his employment income deduction is calculated as follows
5 million yen x 20% + 440,000 yen = 1,440,000 yen
1,440,000 yen is the amount of employment income deduction.
5 million yen – 1.44 million yen = 3.56 million yen🍌
(3) Calculating the amount of income deductions
Calculate the amount of income deductions by looking at the “Application for Deduction of Dependents for employment income earner”, “Application for Deduction of Insurance Premiums for employment income earner”, and “Application for Basic Deduction for employment income earner, Application for Deduction of Spouse for employment income earner, and Application for Adjustment of Income Amount” received from Mr. Yamada.
For example, Mr. Yamada may be able to use the spousal exemption (380,000 yen), the exemption for dependents (380,000 yen), and the basic exemption (480,000 yen). If these three can be used, a total of 1,240,000 yen🍉 can be subtracted from 3,560,000 yen🍌.
(4) Calculate the amount of income tax to be imposed
The income tax rate depends on the taxable amount of income tax. You can use the “Income Tax Quick Calculation Table” to calculate Mr. Yamada’s income tax.
In the case of Mr. Yamada, his taxable salary income will be 3,560,000 yen🍌 – 1,240,000 yen🍉 = 2,320,000 yen🍈
So amount of his income tax is 2,320,000 yen🍈 × 10% – 97500 yen = 134,500 yen.
(5) If Mr. Yamada and the employee can use the mortgage deduction
If Mr. Yamada can use the housing loan deduction, the housing loan deduction will be deducted from the above 134,500 yen.
(6) Compare this 134,500 yen with the annual withholding tax
Let’s say you withheld 12,000 yen per month from Mr. Yamada’ salary from January to November 2022.
If you continue to withhold 12,000 yen in December 2022, too, you will withhold 144,000 yen in 2022.
(12,000 yen x 12 months = 144,000 yen)
Then you will be withholding too much from Mr. Yamada. Because amount of his correct income tax is 134500 yen.
So, you add 9,500 yen to the salary for December 2022 and pay it to Mr. Yamada.
(The amount you withheld during the year: ¥144,000 – correct income tax amount ¥134,500 = ¥9500)
Prepare and submit the necessary documents to tax office, ward office
You have already completed your year-end adjustment calculations. Then fill in the following documents with the correct income tax amount and submit them. These documents must be submitted to your tax office or municipality by the end of January 2023.
Gensen Choshuhyo (Certificate of Withholding Tax)
You write down the amount of salary paid to Mr. Yamada this year (year of 2022, 5 million yen) and the amount of tax withheld (144,000 yen) on the withholding slip.
What are certain cases ?
In the following cases, the withholding tax certificate must also be submitted to the tax office
If Mr. Yamada is a director of your company, and his salary in 2022 exceeds 1.5 million yen.
If Mr. Yamada is an ordinary employee who was not an officer of your company, and his salary in 2022 exceeds 5 million yen.
In the case that Mr. Yamada submitted the “Application for Deduction for Dependents of employment income earner” but retired during 2022, and the amount of salary, etc. paid during 2022 exceeds 2.5 million yen
(That is, if you did not make the year-end adjustment for Mr. Yamada.)
If Mr. Yamada was an officer of your company, the amount is 500,000 yen instead of 2,500,000 yen.
Or, if Mr. Yamada submitted a “Declaration of Exemption for Dependents for employment income earner” but the amount of his salary, etc. during 2022 exceeded 20 million yen.
(In other words, if you did not do the year-end adjustment for Mr. Yamada)
法定調書合計表 = Hotei Chosho Gokeihyo=Total Statutory Report
The Total Statutory Report is a summary of the contents of the withholding tax certificates for Mr. Yamada and Mr. Hayashi (both of whom are your employees). In principle, it must be submitted to the tax office by January 31, 2023.
Statement of Payments of Remuneration=報酬、料金、契約金及び賞金の支払調書
This form is prepared when you request work from a lawyer, tax accountant, or other professional or freelancer who is a sole proprietor, and you have paid him/her a certain amount of remuneration or more (more than 50,000 yen per year).
So if you have paid me (judicial scrivener) remuneration of more than 50,000 yen per a year, you need to submit this document to the tax office.
On the other hand, if you have paid me (judicial scrivener) remuneration of 30,000 yen per a year and paid a tax accountant a fee of 30,000 yen, you DO NOT need to submit this document to the tax office.
If you do not submit this document to the tax office, the tax office will not know that I have received remuneration from you. And I may not report your remuneration to the tax office as my income. (*^_^*)
Payroll Payment Report＝給与支払報告書
The Report of Payroll Payment is a document that is necessary for the city office to calculate the amount of Mr. Yamada’s (a resident of Chuo-ku, Tokyo) inhabitant tax.
Please fill in the necessary information, including Mr. Yamada’s salary income for 2022, and submit it to the Tokyo Chuo Ward Office by January 31, 2023.
If you have any difficulty to conduct year end adjustment (Nenmatsu Chosei = ねんまつちょうせい) by yourself, you can contact with me. akiyama(a)japan-law-tax.com