“Give a poor man a fish and you feed him for a day. Teach him to fish and you give him an occupation that will feed him for a lifetime.”
-- A very smart Chinese person.
Disclaimer:
I'm not a tax accountant, I'm a software engineer. You don't have to trust me on anything though.
I'll source everything I say as much as possible. Don't trust anything anyone is saying without a credible source.
My goal is to reference what I know about taxes as a freelancer in Japan (個人事業).
If you don't care about knowing how things work and just want to be done with it, ask a tax accountant to do the job for you instead. If you agree with the quote above instead, and want to learn so that you don't have to trust anyone and be dependent on a tax accountant continue to read.
First you need to send the notice of opening of your business (個人事業の開廃業等届出書).
It's a simple form you simply have to send and you are done. You also need to send another form telling the tax office that you'll fill the Blue form tax declaration this year.
There are 2 types of final tax return declaration, the white form and the blue form. The white form is super easy and anyone can do that one without sending any document prior to the tax office.
But as a freelancer you should file the blue one, because it has better tax reducing schemes.
I'm not going to explain how to the 個人事業の開廃業等届出書 form, and you don't even have to understand fully how to either.
Just use freee.co.jp. It's a tax accounting SAAS. They have a step-by-step process to fill that form and it's super easy. And at the end you just have to print it and send it. They also prepare for you the form telling the tax office that you'll fill the blue form this year.
Then create your kojin jigyo account on freee.
I highly recommend you to open a business bank account too. You'll synchronize that bank account on free. It's much easier than using your personal bank account trust me. You don't want to mix expenses with personal stuff.
For the business bank accounts, I highly recommend you to use Japan Net Bank. Opening a business account with them takes a few minutes, you can even send the required IDs with your mobile phone.
I also highly recommend you to get the Freee visa card. You'll be able to sync that card to your freee account so that everything you buy with it magically appears in your books.
This will take a week or so to get both the credit card and the bank account opened.
As soon as your get these, add them to freee, so they stay in sync from the beginning.
Freee has an invoicing system, use it, everything is automatically handled by freee afterwards. Simply create a new invoice. Don't forget to add the VAT to your invoices. The VAT should be paid by the customer, don't trust anyone telling you the opposite, they are trying to pay you less than they should.
And you have to be careful not to use that VAT money as you have to give it back to the government later. There is a trick though, at the beginning, if your base period (last 2 years) sales are less than 10M yens, you don't have to give it back. If your base period (last 2 years) is > 10M sales, then your business is now a VAT taxable business, and you'll have to give back the VAT of the year after that base period and file VAT tax return forms (in counterparty you'll be refunded from VAT on everything you mark as expense).
This is used to determine what is the type of the income/expense you are putting in the book (e.g, travel expense? Meeting Fee?). All entries in your book need to refer to a specific "account" . freee already helps you by having a long list of different accounts you can use. This is a whole new can of worms though, check Accounts section to learn more.
This one is super important. These are 2 types of "accounts" (勘定科目) you can use in your books.
- 事業主貸 is used when you want to TAKE money from the company business account.
For instance when you pay yourself at the end of the month, this is what you should use. - 事業主借 is used when you GIVE money from your personal money (can even be cash, source doesn't matter) to your business.
Every month you'll receive your money on your business account. But as a sole proprietorship you don't really have a "salary" per se. But you still want to get that money back on your personal bank account right?
Here is how it works.
Do NOT sync your personal bank account on freee. That will make everything more complicated.
First do the bank transfer from your business account to your personal one.
Then, let freee sync your business bank account so the new transaction appears.
All you have to do is now to register this as an expense with 事業主貸 as account type, 対象外 (out of scope) as tax rate (because there is no tax involved), you can put living expenses (生活費) as item name to help find these "salary" transactions easily. It should basically look like that:
That's all you need to do. By doing that, now your balance on freee and in real life should be exactly the same. Nothing has been lost because you mentioned you moved money out of the business for your living expenses.
That happens to me too. Free has some documentation on it. In my case that happens because my freee business card takes money every month from my personal bank account instead of my business one (I wanted to open everything at once and not wait for the business bank account to be open to get the freee credit card, so I had to set it up to my personal account).
So every month when I pay my credit card balance that amount of money is not registered automatically and the balance will then be shown as negative.
This is easy to fix by using the 事業主借 account type. Remember, 事業主借 is used when you GIVE money to the company.
So you simply have to create a new entry in the book, this time set it up as income (収入) instead of expenditure (支出), select your synced credit card as account (口座), the date when the credit card balance was paid, and put 事業主借 as account type.
This one is super complex, because the change rate matters, and the VAT too.
You can in theory register earnings / loss with change rate etc. But that's extremely complicated and I doubt you'll gain anything.
To make it simple, here is what I do:
- I create a new expense and set the tax rate at "tax free" (不課税).
- I set the amount in yens by looking at what my credit card charged. They should show you what was the rate being used.
- I put the rate in the "remarks" field so that it looks like:
PRODUCT / 21.43 USD @ 108.8194円
Yes the change rate on my credit card statement is incredibly precise, 4 decimals.
Let's say you buy a phone for 5 mans with your personal credit card. Nothing will magically appear on freee. So you have to manually enter that transaction.
This one is pretty simple. Just create a new entry, set it as expense (支出), then set the 口座 as "Private funds" (プライベート資金), and finish the expense details as usual. By doing this freee is automatically doing the whole thing of setting this up as you were giving money to the company etc (事業主借). It's all done for you. So feel free to use that private fund option anytime you forget to use the business credit card or use cash.
What are accounts? They are simply used to determine the tax category of everything you put in the book, so that the taxman can apply the government taxes framework easily and catch inconsistencies.
So it's pretty important to not make mistakes here. You want to choose the correct account for your everything you enter on freee. But at the same time it's not always clear cut which one you should choose and multiple accounts can be valid. It's only important to stay consistent. Don't declare multiple times the same thing with different accounts.
The most common accounts you are gonna use are listed below.
These are 2 separate distinct accounts. But they can be confusing because they are used in similar ways.
The Meeting fee is used when you want to expense a business lunch/dinner with someone, it needs to be a meeting related to work. You are discussing work etc. A basic rule is that it's usually under 5000 yens per person. But don't focus too much on the actual price as it's not really what matters, what matters is the reason for the gathering. You can expense something as a meeting fee even if it costs more than 5000 yens / person if it's really for a meeting. It's just that usually entertainment fee expenses tend to go higher. You can have a meeting with yourself. That happens when you are working from a café basically. So that's the account you should use when you have an americano at starbucks.
The Entertainment fee is different, it's to entertain, it's not really about work per se. It's pretty close to a bribe actually but that's accepted. You can use it for gifts to someone you think will bring you business, you can use it for big dinners with someone you think will bring you business, it even works with a friend, the only condition is that you entertain him because you think he's able to bring you contacts/business in the future.
So if that friend is a farmer and you work in IT.. It's going to be hard to justify (but who knows? if you are selling hydroponics systems that works!)
So this is again something really blurry so be careful. You can even expense a golf session with that friend.
Note that as a Kojin Jigyo you have no upper limit on the entertainment fee.
Important: When accounting for food and drink expenses as entertainment expenses, it is necessary to specify the date and time, place, with whom you ate food and drink, and how much you spent, especially you have to clarify who you ate food with.
A typical entertainment expense with 2 people can be declared like this:
年月日 借方 貸方 摘要
2019年10月1日 交際費 20,000円 現金 20,000円 〇〇会社代表〇〇様と2人で会食
You have to specify the number of people.
Another way:
関係：得意先、○○会社、△△部、□□□□さん（フルネーム） 以下２名
As mentioned before, the entertainment fee also applies to gifts. You can simply expense something you will use as a gift to "bribe" a future business partner.
The VAT is applied for goods, but if you buy a gift certificate, coupons, condolence money etc, then it should be entered as VAT-free in the books.
Source: https://ashiyakaikei.com/consumption-tax-gift-certificates/
There is no clear limit for the price of the gifts. It's again mentioned to use "common sense" (whatever that means). It seems it's common to have gifts around 10,000 yens, and flowers around 5000 yens.
Never go over 50,000 yens. Generally it looks like the taxman is looking closely at these gifts because there is a lot of fraud involved. The gift certificates, gift cards, are also not particularly recommended.
You can also buy souvenirs while you travel that you can give to a business partner/customer and mark it as a gift (but not for friends/relatives).
They also mention New Year gifts and Congratulatory gifts as something that can be expensed for partners/customers (not for friends/relatives).
Source: https://wtw-con.co.jp/articles784
Note:
According to the data in 2017, for example, in the case of a company with a sales of 10 million yen to 30 million yen in the construction industry, 1.8% of the sales is the average value of entertainment expenses.
So try to stay around 1.8% of your sales.
That includes things like internet and mobile phone plans.
If you are not using those 100% for your business you are supposed to only expense a percentage of these.
There is a specific page on Freee where you can set up what is called "housework allocation" (家事按分)
Freee housework allocation setup
You simply have to choose the account you want, create a new custom item (like "cellphone charges") and set the % allocated for business use. And freee will do the job at the end of the year when you do your tax returns.
There is no clear calculation method approved by the government. You simply have to be able to show how you calculated it and of course it has to make sense.
The communication fees also includes things like regular internet services. Freee membership itself is using that account for instance. If you have a VPN subscription too can use the communication fee account.
This is used for things like water, gas, electricity.
As usual, don't forget to set the business allocation percentage in freee if you are working from home, you can't deduct 100% because you live in there.
That's for flyers, t-shirts, posters, Google Ads, etc
WIP
Let's say you go to a seminar for instance, or anything related to learning new stuff, you can put it as 採用教育費.
It's pretty blurry as always.
This is for anything consumable, like paper, ink, notebooks, pens.
But not only, it's again quite blurry and you can put a lot of things there.
It's basically used for every small thing you are gonna buy, electronics included if they are less than 10 mans.
As mentioned just before, you are gonna use "Consumables" (消耗品費) for most of the stuff you are gonna buy as long as it's under 10 mans.
For everything higher than that, you may have to register it as a depreciable asset. The full cost can't be registered as expense for the current year. It'll be depreciated over many years.
It's fairly easy to do with freee again. Let's say you bought a laptop for 20 mans. Just register the expense as 20 mans with 減価償却費 as account type. Then freee will automatically ask you to enter the number of years this asset should be depreciated.
It really depends on the asset.
The national tax agency gives a list for different assets:
https://www.keisan.nta.go.jp/h30yokuaru/aoiroshinkoku/hitsuyokeihi/genkashokyakuhi/taiyonensuhyo.html
A personal computer for instance is 4 years.
For some assets, up to 30 mans, you can register as a depreciable asset with 少額償却 (small depreciation). Which let you depreciate the entire amount in the current year (up to 3M/year). If you can, you should do that.
This is valid in the case of a "small business", check 中小企業者等の少額減価償却資産の取得価額の損金算入の特例 for more info.
For instance if you buy an office chair for 20 mans. You have to register the transaction first in your ledger, with 工具器具備品 as account. Then you add it to your fixed asset register, with 少額償却 as depreciation method.
Sources: Depreciable assets on freee
旅費交通費 will be used for a flight ticket for instance. Or to pay for your hotel during a trip, but that also works for a taxi.
The reason for the travel matters for choosing the proper account which makes it very complex.
A same taxi fee can be a travel expense, a training expense, or an entertainment expense depending on the reason for taking that taxi.
If you go to a remote area for training for instance, your shinkansen expense should be registered with the Training account (研修費) instead.
If you travel (like an actual business trip, can be domestic), the accomodation and the transportation should use this account.
Careful, you can't expense your lunch/dinners at the destination, unless of course these are business related. It seems though they should be expensed as Meeting fee or entertainment fee depending on the situation instead of travel expenses.
If you happen to have breakfast included in your hotel, then it's fine to expense it in the travel expenses!
Travel expenses are VAT taxed if domestic, and VAT-free if done abroad as usual.
Note: If you take the shinkansen, the green seats charges can't be expensed, unless there is a good business reason for you to ride 1st class.
Sources: https://meetsmore.com/services/tax-return-accountant/media/48099#i-3
This one is a "misc", I recommend not using it unless really necessary because that attracts attention.
This one is used when you want to put some tax payments as expense.
Warning, that is not valid with most tax payments (like, don't put your juminzei for instance, that's not a business expense).
This is only valid for:
- property taxes
- revenue stamps
- Registration license tax (登録免許税)
- Real estate acquisition tax (不動産取得税)
- Car tax (自動車税)
- Membership fees and union fees (会費・組合費など)
This one can be used for any renting of office space (that can include your home with the proper apportionment), renting a private room, etc.
source: https://www.aifuji.com/blog/849/
Foreign sales are VAT-free so you can use "external sales" (対外売上) or "Not applicable" (対象外).
Source: free
It's easy, first you have to set up the housework allocation for that property tax in freee.
Create a new item 固定資産税 and set the % on the Freee housework allocation setup page.
To calculate it, take your floor plan, and do working area in sqm / total floor plan sqm.
Note that you can include your working area AND your kitchen. I also heard you can include the toilets but that seemmed to be of a grey area so don't take my word for it.
Then each time you pay your property taxes you register these as expenses and put 固定資産税 as item and comments so that it's clear what it is.
Freee will do the calculation with the housework allocation % at the end of the year.
Note: There is a catch. Be sure not to have more than 50% of the floor area allocated for work, if you do, you'll lose your 1% home loan tax deduction. If you set it higher than 10%, then you have to remove the proportion allocated to your work area from your home loan tax deducation. As you can imagine it gets complicated. So it's better to not go higher than 10%.
Yes you can. You need to attach proof of payment when filling your tax return (unless you are using e-tax).
You shouldn't register each payment as expense directly in free (unless you are using the business account, but then you have to use the 事業主貸 account as you are taking money from the company for personal use), as it's not a business expense.
When you prepare your documents with free at tax return time there is a special form to add your pension payments. That's all you need to do.
Sources:
Freee Fill in the details of the social insurance deduction
https://www.sumoviva.jp/trend-tips/20150820_358.html
If you are working from home you can indeed expense part of your mortgage interest. You should definitely do it as it's quite a good amount of money saved.
Your bank must be sending you regularly a document with the next payment amounts and how much interest is included. Get that paper and then you can simply add an expense in freee, use the account "Interest Expense" (支払利息) and I recommend creating an associated item 住宅ローンの利子の支払い, Tax rate should be marked as Not applicable (対象外) and the source should be "private funds" (プライベート資金) (unless you are paying this interest directly with your business account which seems wrong).
Then go to the Housework apportionment page / 家事按分一覧, and register a new housework apportionment for the account 支払利息 with item name 住宅ローンの利子の支払い. Set the percentage of your home you are using for business and you are set.
NOTE: If you are doing the 1% home loan tax deduction, I believe you should not be doing this. At the moment getting conflicting answers from accountants.
Sources:
https://freelance.kantan-aoiro.net/faq/faq04_05.html
Use your business credit card as much as possible, it makes it easier because the foreign currency -> JPY rate will be chosen for you.
That also serves as proof of payment as it may be difficult to get receipts abroad in english.
If you can't use your credit card, you'll have to make the conversion yourself. There is no clear rule it seems (source https://ps.icedog-works.com/overseas-spending/), it just need to make sense. So taking the rate at the day of payment sounds logical to me, but the average rate for the month can be okay too they say.
If your expenses ratio goes over 60% and you are a software engineer you'll get audited.
Some average expense ratios:
・Wholesale business… 90%
・Retail business: 80%
・Manufacturing...70%
・Restaurant...60%
・Service industry: 50%
Source: https://mamaworks.jp/column/?p=6330
Yes you can. If you keep their salary at less than 88,000 yens a month (1.05 M/year) you'll not even have to leviate income tax.
Note that if you hire your spouse, you'll lose the spouse deduction (38 mans). So if you currently have the spouse deduction it's only worthwhile to do this if you plan to pay your spouse more than 380,000 yen a year.
It has to be a real job etc, if you cheat and get caught this is on you.
Source: https://www.freee.co.jp/kb/kb-blue-return/family/ Freee - Bookkeeping the salary expenses
General Sources:
Freee nice page about accounts
Taxes payments accounts
The calculation details are here.
taxable income x 0.02 / (90% - marginal income tax rate) = furusato max amount
The margin income tax rate being 33% if your taxable income is between 9M and 18M, just do the math to get the maximum you can spend in furusato nozei donations.
In order to compute my taxable income perfectly I usually wait to be in the last month of the year, pre-fill my tax return form on freee, and it will show you the taxable income amount.
I recommend Rakuten Furusato for doing furusato donations as you get many rakuten points easily with it.
Example of calculation for a 10M taxable income:
10000000 * 0.02 / ((90 - 33) / 100.0) = 35 0877 yens limit
Interesting Article about tax accountants deliberately overestimating people's inheritance tax liability to protect themselves in the event of an audit.
If you need a travel insurance:
https://safetywing.com/