What is Year-End Adjustment? - Employee Edition -

Thank you for your continued support. This is Sasakura from AWA CONSULTING.

Having worked at a tax accountant corporation for a long time, I am still frequently asked about year-end adjustments even now that I am a labor and social security attorney. In this article, I would like to provide a general overview of year-end adjustments from the employee's perspective.

In short, it is a tax calculation

Like most countries around the world, people living in Japan have an obligation to pay taxes. A typical method is the 'final tax return' (kakutei shinkoku), which can be compared to a special edition of income tax, as it is a system that can calculate all types of income (earnings).

However, for salary earners, who make up the majority of the Japanese population, this final tax return is a complicated process with too many options. Therefore, the year-end adjustment serves as a 'simplified final tax return' exclusively for salary earners.

Therefore, even if you are a salary earner, you still need to file a final tax return if you have optional income or income deductions. Just because you have done a year-end adjustment does not mean you are absolutely exempt from filing a final tax return.

What are those 3 to 4 sheets of paper handed out by the company?

While you can check the details on the National Tax Agency website, I will explain it loosely here.

Those are all 'documents to reduce your taxes.' Therefore, thinking it is too much trouble and not filling them out is a bad move. I believe income tax is deducted from your monthly salary, but that is merely a provisional income tax deduction. By properly completing these papers, the 'refunded income tax' on your December or January pay slip may increase.

The reason why taxes are reduced is due to two factors: (1) reflecting the burden of dependents, etc., in the tax amount, and (2) government policy.

Regarding (1), if you have dependents, the nuance is that 'since you are bearing their living expenses, we will treat that portion of your salary as if it were not received from the company.' (Strictly speaking, this is different, but I am writing from the perspective of a salary earner.) The equivalent burden amount is calculated uniformly.

Furthermore, if you or your dependents have a disability, or if you are a divorced woman, special reduction calculations are applied. Since this can be difficult for a company to ask an employee about, make sure to write it on those papers and declare it yourself.

Regarding (2), for social insurance and life insurance, etc., there are established systems that treat them as 'not salary' depending on the type. Since 'deduction certificates' are always sent from the place where you paid, keep them carefully and submit them to the company along with the 'Insurance Premium Deduction Statement for Salary Earners.'

A common question here is whether it is okay to submit deduction certificates for national health insurance or national pension premiums paid temporarily when changing jobs; the answer is absolutely yes. However, insurance premiums that were later refunded (or are scheduled to be refunded) are not allowed. Please apply only for the amount you actually bore.

Deduction certificates in a family member's name can sometimes be used by relatives living in the same household. However, in the case of life insurance, depending on the contract details, it may be considered a gift, so please be careful about that point. Well, for general coverage, it is usually not a problem.

For social insurance, which is operated by the government or administrative agencies, the full amount paid can be deducted from your salary. In the case of private insurance companies, they treat a little less than half of what you paid, up to a limit of 40,000 yen x 3 categories = 120,000 yen, as 'not salary'.

The Big Picture of Year-End Adjustment

Once you submit the documents mentioned above, the company will handle the year-end adjustment for you. Let's take a quick look at how the company processes it afterward.

The company calculates the final income tax amount for all employees and reports this total to the tax office. At this time, individual withholding tax slips are sent to the tax office only for those who meet certain conditions. In other words, the tax office does not actually know the individual tax amounts for many salary earners. That is a bit surprising, isn't it?

However, the municipal government knows about your income status, right? That is because the company reports the withholding tax slips, which are the results of the year-end adjustment, to the municipal government for every employee.

The municipal office receives those withholding tax slips and spends from January to April calculating resident taxes. Then, they request the company to deduct the resident tax based on the previous year's income from the June salary and pay it to the municipal office.

Wait? Wouldn't it be better if the tax office just grasped individual income and told the municipal government??

Exactly!!

If only they got along...