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Reimbursing Expenses to Employees in Japan: A Guide for Overseas Employers

Employers will often reimburse certain work-related expenses to their employees, but that takes on a new dimension with remote overseas workers.  The types of expenses may be similar to those of your home country employees, such as computing equipment, software, travel allowances and business trips. 

However, there are two issues that arise, 1) whether the expenses are taxable to the employee and 2) how the expenses are paid to be in compliance with local labor and employment laws.  In Japan, there are specific rules used for both of these items, and they will pertain to a local employee, whether they are resident or expat.

What types of expenses are subject to tax in Japan?

Most allowances are taxable to the employee in Japan, with a few exceptions.  For example, commuting via public transportation is non-taxable up to JPY 150,000 per month, and commuting by private transport has the same monthly cap, even if combined with public transport.  Allowable private commuting expenses are calculated according to distance, with longer distance commutes having a higher monthly maximum.

Business trip expenses are also non-taxable, as are certain on-the-job allowances.  The next question is how those expenses are reported and reimbursed to the employee.

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Client Case: Can an international employer reimburse a Japanese employee directly?

Context:

Our client with employees in Japan had recently reimbursed their employee’s expenses directly, and they wanted to know if this was compliant or not.  They also had questions about the need for an employee signed waiver and filing of taxes for expense reimbursement.

Solution:

We informed them that because their employee was technically employed by our employer of record (EOR) in Japan, it would be best if all expense reimbursements were run through our in-country entity.  Reimbursing the employee directly undermines the benefit of having a Japanese EOR run payroll and could be non-compliant if done regularly.

The reasons are:

  • To meet Japanese criteria and reporting rules for tax-free reimbursement, or risk losing the tax-free benefit.
  • To minimize the compliance risk for our client, the employee and the EOR, which all must fall within the Japanese guidelines for payroll, corporate tax and withholding.
  • To lessen the risk for the client of being seen in a ‘co-employment’ relationship with the EOR based on any direct client-employee payments.
  • To prevent additional tax liability for the employee, either decreasing their net income or requiring the client to ‘gross up’ the amount in payroll through the EOR.
  • The EOR could directly handle any waiver requirements and tax filing questions for the employee.

Do you need more information about Japan?

If you are just getting started with hiring in Japan, you may have additional questions such as:

Are reimbursed non-taxable expenses still listed on the payslip for reporting requirements?

For business travel, is it permitted for the employee to use the client’s credit card to pay for expenses, or should they use their personal card and be reimbursed?

How are expenses handled for travel that has a ‘shared’ purpose, i.e. combined work and vacation trips?

These types of detailed questions are brought up frequently by our clients, and we respond with specific, compliant solutions to all payroll, tax and benefit issues. We make international employment simple.

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