Tax for company and individual in Japan
When you start business in Japan, you will deliberate whether to manage your business by company or sole proprietor (Kojin Jigyo).
So, in this page I will compare these situation from the point of view of taxation.
I will take up this family as sample.
When Mr Husband’s business is going well, he will consider whether to incorporate or not.
As for employment income deduction (Kyuyo shotoku kojo 給与所得控除)
Income tax（tax for individual） or corporation tax （tax for company ） is calculated as below.
1 )Sales － Expense = Profit
2) Profit × Tax rate = Tax amount
In the case of corporate, Mr Husband is presumed to be a representative director.
In the case of sole proprietor (Kojin jigyo), in order to make sales, he spends money to advertise his business, rent his office . The amount is assumed to be 22,000,000 yen. So, his profit is 8,000,000 yen.
30 million yen – 22 million yen = 8 million yen (profit before salary)
In the case he incorporates a company and he receives salary from his company, the amount of his salary is assumed to be 8,000,000 yen. He spends some money to buy suits, shoes, learn necessary knowledge.
In the case of 8,000,000 yen, employment income deduction (again, you can not use employment income deduction) will be
8,000,000 yen × 10％+1,200,000 yen = 2,000,000 yen (employment income deduction).
Now, I calculate tax amount of both cases.
When he incorporates a company, his salary is 8,000,000 yen.
( 8,000,000 yen – 2,000,000 yen ) × 20% – 427,500 yen（deduction. please refer to below table） =772,500 yen (income tax in the case he incorporates a company)
You can find income tax rate at below table. “税率” means tax rate.
Regarding break up of taxable income
As I wrote above, when the amount of taxable income becomes higher, tax rate becomes higher ( Progressive taxation = Ruishin kazei= 累進課税).
So, it is better to receive 8,000,000 of salary by several persons than by one person.
But, when Mr Husband is director and Ms Wife is employee of the company, and they receive salary of 4,000,000 yen each.
Mr Husband’s income tax is
So, by breaking up the income, this household can reduce amount tax by 435,500 yen.
And compared with sole proprietor, this household can reduce tax of 867,000 yen per a year.
( In the case of sole proprietor, Mr Husband can pay salary to Ms Wife and can reduce taxable income. But, there is limit of Mr Wife’s salary. )
Deduction from Income
Income tax (所得税,shotoku zei), resident’s tax is not calculated by profit × tax rate.
There are some kind of Deduction from Income. When Mr Husband sustains his wife, 2 children, Mr Husband can use spousal deduction and dependents deduction.
These amount is in general 380,000 yen each. So, when Mr husband’s salary is 8,000,000 yen, income tax is
（https://www.nta.go.jp/taxanswer/shotoku/1180.htm Quoted from Japan National Tax agency = Kokuzei cho = 国税庁)
So, Mr Husband can apply spousal deduction and dependents deduction for 2 children, he can reduce tax amount.
If Mr Husband of sole proprietor pays salary for his wife and his children, he can not use spousal deduction and dependents deduction for 2 children.
But, in the case of incorporate, you can use this method. When Mr Husband pays salary to his wife and 2 children (Of course, his wife and 2 children have to work for the company actually in some ways. )
Deduction for Retirement Income
When you resign from the company and receive money as retirement allowance (Taishoku kin 退職金), you can adopt “Deduction for Retirement Income”.
On the other hand when Mr. husband has worked at the company for 25 years and received retirement allowance of 20,000,000 yen, the amount of deduction for retirement income will be
8 million yen ＋ 700,000 yen × ( 25 -20 )＝ 8 million yen ＋ 3,500,000 yen = 11,500,000 yen. 😆
So, the amount of income tax will be
So, the difference between the amount of income tax of salary and retirement income is
But, in the case of sole proprietor, Mr. Husband can not apply deduction for retirement income. Because, it is not admitted that Mr. Husband pays retirement allowance to himself. And Mr. Husband can not apply deduction for retirement income for his wife and children even if he pays money ( wages for family employees of blue return taxpayer ) for them.