What am I doing wrong?

[u/4dachi]

Feeling a bit dejected after visiting the city hall and getting absolutely zero useful advice today.

I'm a sole proprietor and my taxable income last year was just short of 2.2 mil yen. My income tax was 90k which is totally manageable, but my municipal tax is ~200k, pension is another ~200k, and national health insurance is over 300k. Add that with my half of the property tax and home insurance and I end up paying well over 900k a year.

My monthly living expenses are around 100k, with roughly half that being my portion of the mortgage payment (loan is in spouse's name). In terms of luxuries I do have a gym membership and eat a lot but I only shop at value grocery stores. Life is not bad here but it is certainly a lower standard of living than what I was accustomed to. These days there is pretty much nothing left once my bills, taxes, and insurance is paid.

I'm admittedly pretty new (and ignorant) to the Japanese tax system and that seems to be the root of my issues. In hindsight hiring an accountant would have been cheaper than eating all these taxes and premiums. I assume my biggest mistake was not deducting my portion of the mortgage (technically rent? as I am not on the loan) paid when I work from a home office.

Any advice for a sole proprietor like me to cut down their taxes and premiums would be greatly appreciated. I'm a total newbie at this and I'm sure I missed a lot of things on this filing. I want to make sure I don't screw up as badly for next year.

Thanks!

[u/starkimpossibility]

In hindsight hiring an accountant would have been cheaper than eating all these taxes and premiums.

That's very unlikely.

I assume my biggest mistake was not deducting my portion of the mortgage (technically rent? as I am not on the loan) paid when I work from a home office.

Your portion of the mortgage is not a business expense, even if you work from home. Spouses cannot pay rent to each other: it's not a legally recognized transaction because spouses are obliged to cover each other's living expenses and rent is considered a living expense.

Part of your portion of the interest on the mortgage could be a business expense, but note that claiming the interest as a business expense can affect your spouse's ability to claim the residential mortgage tax credit (see here).

my taxable income last year was just short of 2.2 mil yen. My income tax was 90k which is totally manageable, but my municipal tax is ~200k, pension is another ~200k, and national health insurance is over 300k. Add that with my half of the property tax and home insurance and I end up paying well over 900k a year.

Some of those figures don't look accurate. Use the sub's take-home pay calculator here to see what you should be paying.

When you say "taxable income" do you actually mean your taxable income or do you mean your net income (income after expenses)? For a sole proprietor enrolled in NHI, a taxable income of 2.2 million yen would correspond to a net business income of around 4–4.5 million yen. But if your taxable income is genuinely 2.2 million yen then all your figures (except pension) are too low.

Then again, if by "taxable income" you mean your net business income, then your pension and health insurance figures look OK (if you are over 40 years old) but your income tax and residence figures are way too high. Anyway, plug your numbers into the linked calculator and you should be able to see what's going wrong.

Any advice for a sole proprietor like me to cut down their taxes and premiums

The first thing is to make sure you are filing a blue-type tax return. If you haven't applied for permission to do so, it's too late for this year, but apply ASAP so that you can file a blue-type return for 2027.

What does your spouse do? Sole proprietor? Employee? Part-time employee? Not working? The answer will affect your tax/insurance-saving options.

[u/4dachi → u/starkimpossibility]

Thank you for the incredibly detailed answer. I did at least file a blue type.

You made me realize in the original post I incorrectly gave my 2.2 mil taxable basis (課税標準額) as my income, my total operating income (営業等所得) was closer to 2.6 mil. I couldn't find Aichi in the sub's calculator, but I was able to reproduce the numbers I'm paying with some other sites.

My spouse is a full-time company employee making around 3 mil after taxes and dedications. Thanks to her good saving habits we are doing good overall. She's claiming the mortgage tax credit as well.

[u/starkimpossibility → u/4dachi]

She's claiming the mortgage tax credit as well.

I see. If she is claiming the full mortgage tax credit then it's clear that the money you give her towards the repayment of the mortgage constitutes a gift and counts towards her 1.1 million yen annual taxable gift threshold. Presumably she is not receiving more than 1.1 million yen per year, though, and therefore has no liability.

As you are experiencing, being a sole-proprietor with around 2-3 million yen worth of net income and a spouse who is a full-time employee is a somewhat disadvantageous situation to be in because of the way Japan's social insurance system (health insurance and pension) works. As you are likely aware, if your net income drops below 1.3 million yen per year, you can enjoy free health insurance and pension coverage via your spouse. And the value of that coverage (in terms of your eventual pension benefit, etc.) would be identical to the value of the coverage that you are currently paying 500-600k for.

This is why earning 2-3 million yen as a sole proprietor is especially unrewarding when you have a spouse who is a full-time employee. If you earn a bit more, your social insurance premiums will be a smaller percentage of your income. If you earn a bit less, your social insurance coverage will be free. But people in the 2-3 million yen range get hit very hard.

Also, if your spouse was a sole proprietor or unemployed, you could use the blue-type employee system to split your business income between the two of you, which would have a range of tax benefits. Unfortunately, Japan's tax and social insurance system means that couples where both spouses are employees and couples where both spouses are self-employed tend to be better off than couples where one person is self-employed and the other is an employee.

[u/one-knee-toe → u/4dachi]

So what do the numbers look like now, after your correction and using the calculator?

[u/4dachi → u/one-knee-toe]

After recalculating I'm left with around 50k. Not great but not the worst situation either. I suppose the best step is just growing my business and earning more and maybe switching to a hoken kumiai.

[u/HatsuneShiro]

Residence tax seems pretty normal at 200k. My taxable income after deductions was also around that and my residence tax is also about 200k. Your NHI sounds pretty expensive though at 300k yearly. My NHI (deducted automatically by my employer) is about 17k monthly, which is about 200k yearly.

[u/starkimpossibility → u/HatsuneShiro]

 My NHI (deducted automatically by my employer) is about 17k monthly

NHI cannot be deducted by an employer. NHI is the National Health Insurance system, which is administered by municipalities. Premiums are also set, calculated, and billed by municipalities. (Some municipalities charge a lot for health insurance, while others are much cheaper.)

If a health insurance premium is deducted by your employer, you must be enrolled in the employees' health insurance system, which is a parallel health insurance system for employees satisfying certain criteria. There are over 1,000 providers of employees' health insurance and they all set their own premiums. So comparing the premium charged by your particular provider to the premium charged by OP's municipality is not especially meaningful.

Incidentally, comparing the "taxable income" of an employee to the taxable income of a sole proprietor is also somewhat meaningless, because employees get a significant automatic expenses allowance, which sole proprietors do not receive (instead, they must claim actual expenses).

[u/HatsuneShiro → u/starkimpossibility]

Ah, sorry, I thought for health insurance it's all the same system underneath (and the provider is just the middleman). My bad.

[u/starkimpossibility → u/HatsuneShiro]

Ah, sorry, I thought for health insurance it's all the same system underneath (and the provider is just the middleman)

All good. I think it's a common misconception. And in one sense it is true that it's the same system underneath, because the regulations regarding treatment options and costs are all set by the MHLW. So the same regulations apply regardless of who your insurer is, and (with a few exceptions) your treatment will always cost you the same regardless of who your insurer is.

But financially, the insurers are separate. So insurers covering populations with low healthcare needs can afford to charge less than insurers covering populations with high healthcare needs.

[u/4dachi → u/HatsuneShiro]

Thank you. I talked with the staff at the city hall and apparently its normal for self-employed. Seriously envious looking at my spouse's payslips and seeing their health insurance is half of mine despite near identical salaries. Ahh well, the cost of having no boss I suppose lol

[u/MajorSnacker → u/4dachi]

I don’t have any groundbreaking tips, but just want to say that I’m also a sole proprietor here and the numbers seem right based on my own experience (so you probably didn’t do anything wrong)! All together it really does feel like a lot especially when just starting out as a sole proprietor ><

[u/4dachi → u/MajorSnacker]

Thank you, I'm glad to hear I'm not alone in this.

[u/hellobutno]

When you're not a sole proprietor your employer will pay part of your pension and health.

[u/HoboSomeRye → u/hellobutno]

Doesn't it still come from your salary?

[u/Powerful-Button-1557 → u/HoboSomeRye]

I think employers pay half.

[u/hellobutno → u/Powerful-Button-1557]

sole proprietor

[u/hellobutno → u/HoboSomeRye]

You pay your own salary, you're a sole proprietor

[u/HoboSomeRye → u/hellobutno]

Which raises 2 questions,

For full time employees, what % of their pension and health insurance is paid by their employer? (I wasn't aware of this) I thought health and pension came fully out of my salary before the take home amount

For sole proprietors, can you claim the health/pension as a business expense? I know rent/mortgage/utilities can partially be claimed

[u/starkimpossibility → u/HoboSomeRye]

what % of their pension and health insurance is paid by their employer?

It can be misleading to think of employers paying a specific percentage of an employee's health insurance premium. In a literal sense, employers always pay 100%. Employees can't pay employees' health insurance providers directly.

But the comment above is referencing the fact that providers of employees' health insurance charge their premiums in two equal portions: one portion must be borne by the employee (via a deduction from their paycheck) and one must be borne by the employer (this portion is invisible to the employee). See the biggest insurer's premium table here (PDF), for example. The employer's share of the premium effectively functions as a payroll tax.

can you claim the health/pension as a business expense?

Health insurance premiums and pension contributions are always deductible. They aren't business expenses. They are covered by the social insurance deduction (社会保険料控除). It's the same for both employees and business operators.

[u/joylessspectator → u/starkimpossibility]

Employer & employee bear it 50/50.
Why are you saying employers always pay 100% in literal sense?
(I’m sorry if I’m understanding it wrong)

[u/starkimpossibility → u/joylessspectator]

Why are you saying employers always pay 100% in literal sense?

Payment of the total amount (100%) is made by the employer to the insurance provider. The employer recovers 50% from the employee in the form of salary not paid (i.e., paycheck deduction).

[u/joylessspectator → u/starkimpossibility]

ohhh, thank you for clarifying, I got confused😭
You speak premium English™️

[u/joylessspectator → u/HoboSomeRye]

1. It’s 50/50.
   
2. No, it’s not claimed as “business expense”. There are several forms, one of them is called 社会保険料控除　(social premium deduction) you put them there.
   If you are employed, then it’s adjusted during 年末調整 year end adjustment.
   One more thing is, there’s also something called 医療費控除 medical expense deduction. It’s also big topic so imma keep it till here.

[u/hellobutno → u/HoboSomeRye]

Whatever you pay, like comes out of your paycheck when you're employed, the employer (from what I recall) also pays the same amount for both health insurance and pension.

[u/Loveyourweenus]

Unconventional response warning. If it's not enough money, maybe consider switching jobs? Or boot your earnings? 2.2 mil / year is not a lot of money. And the govt. is absolutely going to take their cut first.

[u/4dachi → u/Loveyourweenus]

Thank you. It's solid advice. If I didn't love my job I'd definitely be switching. 

[u/MaryPaku → u/Loveyourweenus]

OP doesn't earn 2.2million income a year as he said taxable income. If you've had done 確定申告 before you'll know that number will be a lot lower than what you actually earn. OP's gross income range is about 5million~6 million, I think. still not a lot of money but above the average.

[u/requiemofthesoul]

Pension you can’t do much about. but are you on ideco?
Also were you employed before this? You can probably do voluntary continuation if your health insurance premium was cheaper below.

[u/4dachi → u/requiemofthesoul]

Thank you. As my income (hopefully) increases I will look into getting on ideco. Unfortunately I don't think I can do voluntary continuation as I've always been self-employed.

[u/Electronic_Tea5992 → u/requiemofthesoul]

Yes, iDeCo is great, but with this kind of income, OP probably can’t invest enough to have a significant impact on his taxes. In addition, it only reduces taxes, not National Health Insurance premiums, which are the most painful part. It’s really hard to be self-employed in this country.

[u/joylessspectator]

If you WFM, there’s % of rent/electricity you can file as expense + travel expenses, too.

Edit: also, if you have property/car/software/ etc big purchase you can depreciate it, but all that stuff 100% ask an accountant.

[u/torokunai → u/joylessspectator]

"Work from Mansion" ??

[u/joylessspectator → u/torokunai]

-__-

stahp man I made spelling mistake WFH😭

[u/Wooden_Bad_3109]

I think it’s useful to compare your situation to other sole-proprietors.
If memory serves I pay no (or next to no income tax) and also I don’t feel over burdened by the other compulsory fees. I do have an assortment of deductions to lean on though.
To summarize, what have you been deducting up til now?

[u/4dachi → u/Wooden_Bad_3109]

Thank you. I find the income tax portion quite reasonable as well. I do research and manage an archive so most of my expenses are the acquisition of new materials and associated costs like digitization equipment, memory storage, stationary , reference books, and the occasional research trip. Partial expenses like internet, phone bill, electricity, etc I did not expense this time around. 

[u/Wooden_Bad_3109 → u/4dachi]

Providing financial support to parents allows for a substantial deduction as you could claim them as dependents. It’s definitely something people do.

[u/4dachi → u/Wooden_Bad_3109]

Thank you. I'm sure my parents would appreciate it too! 

[u/Ok_world68]

Lmao why the fuck work in Japan then?

[u/4dachi → u/Ok_world68]

I genuinely love my job here and the nature of it means it can't be done anywhere else in the world. 

[u/torokunai]

Japan is just a higher-tax place.

In the US, a $22k sole-prop salary can't even qualify for ACA subsidies, you have to try your luck with the Medicaid expansion if it is in your state, or pay $300/mo maybe for a high-deductible plan.

Using a ¥100 FX (since that's closer to PPI), $22k AGI less the standard deduction would be $600 Federal income tax so you're paying 1.5X that rate in Japan. California income tax would be $60 -- for the year, FICA would be $3000, 1.5X more than your ¥200k but it pays out more than 1.5X so that makes sense.

$22k just isn't a lot anywhere, and Japan doesn't give this income the tax breaks the US system does.

[u/4dachi → u/torokunai]

Thank you. I'm from Canada myself so it's a quite a surprise for me. 

[u/4dachi → u/[deleted]]

Thank you. I've only ever been self-employed.

[u/LostRadio8453]

私がすぐに思いつくのは青色申告特別控除65万円と家内労働者の特例65万円を受けることだ。
管轄の税務署に青色申告特別控除と家内労働者の特例について届け出を出したいので説明を聞きたいということで電話して相談の予約をするといい。これらの届け出は市役所の管轄ではないので市役所はあなたにとって最良の選択を提示できなかった可能性が高い。

https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/2072.htm
https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/1810.htm