I went independent as a freelance engineer in September 2022, so I researched social insurance premiums and taxes quite a bit. As an employee you can leave all of it to the company. As a freelancer you cannot. This is the minimum I think you should have down.
Books
On top of searching the web, I learned from these books. I recommend both, so please read them.
The Textbook for Your First Year as a Freelancer
It covers the counter procedures and basic knowledge you need for tax and social insurance when you switch from employee to freelancer. If you are about to go independent, I think it is worth one pass so you know what you have to do, then you can search the details and build a systematic understanding. It also covers cash flow as a freelancer and how to behave when something goes wrong. It really is a first-year textbook.
The Book That Explains All of a Freelancer’s Money
Besides the basics of tax and social insurance, it covers tax-saving measures, various deductions, and investing quite widely. Compared with The Textbook for Your First Year as a Freelancer, you can learn with more of a money focus. The type is fairly large and the writing is concise, so it is a very easy book to read.
Social insurance premiums
Social insurance premiums are made of three kinds of insurance at a high level. There are further splits inside those. For freelancers, the relevant ones are National Health Insurance on the medical side and National Pension on the pension side.
| Broad category | Subcategory | Who it covers |
|---|---|---|
| Medical insurance | Health insurance | Employees |
| National Health Insurance | Freelancers | |
| Pension insurance | National Pension | Everyone |
| Employees’ Pension | Employees | |
| Corporate pension | Employees | |
| Labor insurance | Employment insurance | Employees |
| Workers’ compensation | Employees |
National Health Insurance
Japan has a universal health insurance system, and everyone is required to join a medical insurance plan. Joining medical insurance brings the hospital visit share down to 30%, and puts a monthly cap of around 100,000 yen on what you pay for expensive surgery — that kind of system.
You have to join either Health Insurance or National Health Insurance. As a freelancer you join National Health Insurance (the names are easy to mix up).
National Health Insurance premiums are higher for the individual than Health Insurance. For employees, the company pays half the premium. For freelancers, the premium is set from a rate the municipality decides against your income, and you have to pay the full amount.
National Pension
Pension insurance is what people mean by “pension.” As a freelancer, the only one that applies is National Pension. National Pension covers everyone in the country. People call it the first-floor pension. Employees also join Employees’ Pension (second-floor pension) and sometimes a corporate pension (third-floor pension). The monthly burden is larger, but the amount you can receive later is larger too. Freelancers have only the minimum National Pension, so the burden is the minimum and the payout is the minimum.
Unlike National Health Insurance, the monthly amount everyone pays is the same. It is reviewed every year. For fiscal year Reiwa 4, the burden is 16,590 yen.
Taxes
Freelancers pay various taxes, but you first need to get income tax and resident tax down. Both are taxes you are obligated to pay on taxable income, which you calculate by subtracting expenses and various deductions from revenue.
Income tax
Income tax is levied on income from January 1 through December 31, and you pay it after filing the final return in February–March of the following year. The rate is a stepped rate from 5% to 45% depending on income. For the rate on a given income and similar details, you can calculate it from the National Tax Agency site.
Resident tax
Resident tax is also levied on income from January 1 through December 31, same as income tax, but the tax is decided in June of the following year and you pay it on a schedule after that. Once the annual income tax is decided you pay it soon. Resident tax is more like a tax on the previous year’s income.
Tax-saving measures
Increase deductions
Increasing deductions saves tax. Blue-return special deduction is a given, and it also matters to increase deductions in a proper way, such as using iDeCo (individual-type defined contribution pension). iDeCo is a personal pension system, and the monthly contribution is deductible from income. For freelancers the monthly contribution cap is 68,000 yen, about three times an employee’s. If you contribute the full amount you can deduct about 800,000 yen. You generally cannot withdraw until age 60, though, so you need to keep the monthly contribution at a level that is not a burden.
Treat expenses properly
Booking expenses properly saves not only tax but also social insurance premiums. For remote work, rent, internet, and electricity can be booked as expenses using allocation (the share used for work is the expense).
That does not mean you can expense everything, so in practice I think it is better to contract a tax accountant and have them check. The freelance agent I use, TECHBIZ, includes free tax-accountant support. They can file the business start notification, handle the final return, and take tax questions, so I recommend it.
Join a health insurance association
National Health Insurance is quite a bit more expensive than Health Insurance, but joining a health insurance association can make the premium cheaper. Premiums are normally based on income, but joining an association can make the premium a flat amount. Above a certain income, joining the association can be the better deal.
There are many kinds of associations. The one you may be able to join is the Japan Writers and Artists National Health Insurance Association (Bunbei Kokuhō). If you join Bunbei Kokuhō, the premium becomes a flat amount of about 250,000 yen per year. The join condition is that you belong to one of various associations. JILLA (Japan Illustration Association) is the most likely path. That association mainly targets web designers, and you have to submit copies of work produced in the business and a copy of your final tax return. You have to start on National Health Insurance first, and you can join the association and the union after your first final return is done.
Takeaways
If you do not understand tax and social insurance premiums correctly, I think you can lose money in units of 1,000,000 yen, so it matters to understand them properly. There are also things you cannot judge alone, so setting up proper support — such as contracting a tax accountant — matters too.