[Increased Take-Home Pay] Is it true that overtime from April to June is a loss? The pitfall of the "Standard Monthly Remuneration" that determines social insurance premiums
Have you ever sighed while looking at your monthly pay stub, thinking, "My gross pay isn't bad, so why is so much being deducted by the time it becomes my take-home pay?" Health insurance, employees' pension, and employment insurance—so-called "social insurance premiums"—are reliably deducted from our salaries every month.
In fact, did you know that these social insurance premiums are not "calculated every time in proportion to your monthly salary"? The amount of social insurance premiums is determined by a somewhat unique rule where the deduction amount for the next year is fixed based on your salary during a specific "three-month period."
In this article, I will thoroughly explain, with concrete examples, the mechanism of "Standard Monthly Remuneration," which only those in the know secretly practice, and why it is said that "it is better not to work overtime in April, May, and June." If you read this article, your annual take-home pay could potentially change by tens of thousands of yen.
1. How are social insurance premiums determined? What is "Standard Monthly Remuneration"?
The concept that serves as the basis for calculating social insurance premiums (health insurance premiums, employees' pension insurance premiums, etc.) is called "Standard Monthly Remuneration."
If one were to calculate the exact percentage of insurance premiums for every monthly salary amount (which fluctuates due to overtime pay, etc.), it would become an enormous administrative burden for both company payroll staff and government agencies like the pension office.
Therefore, a rule was created: "Let's fit monthly salaries into several brackets (grades) of round numbers and calculate insurance premiums based on those." This classification system is called "Standard Monthly Remuneration."
Why are "April to June" important? (Periodic Determination)
So, on which "monthly salary" is that Standard Monthly Remuneration based? This is the most important point of this article.
In conclusion, it is determined by the "average salary paid during the three-month period of April, May, and June every year."In technical terms, this is called "Periodic Determination."
Target salary: Average of salary "paid" in April, May, and June
Applicable period: One year from September of that year to August of the following year
In other words,if you work a lot of overtime in April through June and your salary increases, you will have to continue paying higher social insurance premiums for the entire following year (September to August of the next year). Conversely, if you can keep overtime down during these three months, you can keep your social insurance premiums for the next year low (and your take-home pay higher).
*If your company has a "month-end closing, 25th of the following month payment" policy, the salary (overtime pay) for work done in March, April, and May will apply. Please check your company's salary regulations once.
2. An unexpected pitfall! What is included and what is not included in "Remuneration"
What you must be careful about here is what exactly is included in the "remuneration" that serves as the basis for calculating the Standard Monthly Remuneration. If you think only your base salary is subject to it, you will fall into an unexpected pitfall.
[What is included in remuneration (factors that increase social insurance premiums)]
Base salary
Overtime allowance (extra pay for overtime), late-night premium allowance
Position allowance, family allowance, housing allowance, etc.
Commuting expenses (commuter pass costs, etc.)
[Items not included in remuneration]
Business trip travel and accommodation expenses
Celebratory money and condolence money (wedding gifts, condolence payments, etc.)
Bonuses paid 3 times or less per year *Bonuses are calculated separately as 'Standard Bonus Amount' for insurance premiums
What surprises and frustrates many people in particular is the fact that 'commuting expenses' are included.
People who commute from far away using the Shinkansen or long-distance trains and receive tens of thousands of yen per month from their company for a commuter pass are considered to have 'high remuneration,' and their social insurance premiums are set one bracket higher.
3. [Concrete Example] How does take-home pay change between a gross salary of 250,000 yen and 300,000 yen?
Now, let's simulate how much difference there is in social insurance premiums (and take-home pay) between 'working overtime from April to June' and 'not working overtime'.
[Prerequisites]
Age: 20s (Does not fall under Category 2 insured person for long-term care insurance)
Work location: Tokyo (Kyokai Kenpo member)
Base salary: 240,000 yen
Commuting expenses: 10,000 yen (monthly)
Pattern A: No overtime (If you did not work any overtime from April to June)
Average salary from April to June: 250,000 yen (Base salary 240k + commuting expenses 10k)
Applicable standard monthly remuneration: 260,000 yen (Grade 20)
Pattern B: If you worked 50,000 yen worth of overtime every month
Average salary from April to June: 300,000 yen (Base salary 240k + commuting expenses 10k + overtime pay 50k)
Applicable standard monthly remuneration: 300,000 yen (Grade 22)
[Comparison Result] A Difference of Approximately 67,000 Yen Per Year!
Pattern B, where you worked hard on overtime, results in monthly social insurance premiums that are 5,656 yen higher. Since this new premium is applied from September to August of the following year, you will have approximately 67,872 yen more deducted from your social insurance premiums annually.
Since this new premium is applied from September to August of the following year, you will have approximately 67,872 yen more deducted from your social insurance premiums annually.
Of course, the 50,000 yen paid as overtime means your gross salary for that month has increased. However, the problem arises if you find yourself in a situation where 'you just happened to have a lot of overtime during the busy season from April to June, and then overtime stopped completely from July onwards.' Even though your monthly gross salary has returned to 250,000 yen, your social insurance premiums will continue to be deducted for a year based on the 'higher period standard (Pattern B),' leading to a phenomenon where your take-home pay drops significantly compared to normal times.
This is the biggest reason why it is said that 'overtime from April to June is a loss.'
4. Frank opinions and honest thoughts as a 25-year-old working professional
Up to this point, I have explained the mechanism of the system objectively, but from here on, I would like to write a little about my own frank opinions and what I feel towards my peers.
'Saving on overtime' is easier said than done
Even if you have the knowledge that 'it is more profitable not to work overtime from April to June,' the reality is that it is difficult to execute that perfectly in the actual workplace, isn't it?
Personally, when working in sales, April, the start of the new fiscal year, is inevitably busy, and unexpected responses or unavoidable overtime occur. Also, until now, I had been going along with entertainment and drinking parties every time, thinking 'this is part of the job,' and wasting time, but I have come to strongly feel that I want to review that way of working.
Besides, for young employees and those whose salaries are still low, overtime pay is often a major source of income that supports their living expenses. There must be a certain number of people who are in a situation where 'I need the immediate overtime pay for this month's credit card withdrawal' rather than having a long-term perspective of 'because social insurance premiums will go up.' It is a bit frustrating that there is a contradiction between the system's structure and the reality of working on the front lines.
The discomfort of including commuting expenses in the standard monthly remuneration
After all, the thing I feel is most strange is that commuting expenses are included in the remuneration.
Commuting expenses are company expenses, paid from one side to the other to the railway company, and are not personal profit or income that can be used freely. Yet, it is unreasonable by any standard that they are incorporated into the calculation of social insurance premiums, increasing the burden. I sincerely hope that this rule, at the very least, will be reviewed to match the times.
Know the rules of money and become someone who 'uses' the system
I think many people feel depressed every month when they look at their pay slips and see 'so much is being deducted.' Since social insurance premiums are forcibly deducted, I understand the feeling of becoming indifferent, thinking 'I can't resist it anyway.'
However, what I strongly felt after studying money through things like the FP Level 3 certification is that by properly facing the mechanisms of your own income and deductions, your awareness of life will definitely change.
Social insurance is not just a system where money is taken from you. It is also a powerful safety net for when you are in trouble, such as 'injury and sickness allowance' when you cannot work due to illness or injury, 'old-age employees' pension' for the future, and allowances during childbirth. (*There is also the benefit that if the standard monthly remuneration is high, the amount of pension and injury and sickness allowance you can receive in the future will also be larger.)
The biggest waste is 'not being able to utilize the system because you don't know about it.' I believe that understanding the mechanisms of taxes and social insurance without being bothered, so that you can make the most of them when you are in trouble and actually become the one using the system, will become a major weapon for protecting your future career and life.
5. Summary: Use knowledge as a weapon to control your own take-home pay
How was it? In this article, we explained the mechanism for determining social insurance premiums (Standard Monthly Remuneration and fixed-period determination). Here are the three key points:
Social insurance premiums for the next year are determined by the 'salary paid in April, May, and June'.
The remuneration used as the basis for calculation includes not only basic salary and overtime pay but also 'commuting expenses'.
If you work excessive overtime during these three months to increase your salary, your take-home pay for the following year may be squeezed.
As long as you work as a company employee, you cannot escape the rules of taxes and social insurance premiums. However, whether you know these rules or not can significantly change your choices regarding how you work and your awareness of the money you keep.
If you are able to adjust your work, it might be a good idea to be mindful and try to manage your work style in early spring. Above all, please use this as an opportunity to learn about the mechanism of the 'powerful social insurance system' that lies behind the money deducted from your pay.
I hope this article changes the way you look at your pay slips and serves as a hint for managing your money more wisely.