New to freelancing - sole proprietor & tax deductions?

[robd0123]

Someone offline pointed me to this subreddit for advice. On a spouse visa, no work restrictions, no overseas tax obligations, first year in Japan. sorry if some of these questions are very basic and dumb-sounding!

I’m about to start freelancing (let’s say writing) for a Japanese company and this will be my main source of income. So I’ve been told it‘ll be best if I register as a sole proprietor for tax purposes and this is a relatively simple process that can be done by filling out a form at the kuyakusho.

is there anything else, paperwork-wise, i need to be wary of besides my obligatory payments as a freelancer?

I understand that I’ll have to pay my own nenkin, kokumin hoken and taxes so i’d have to set aside money for taxes to be paid at the end of the year, and then nenkin and insurance monthly, is that correct? would using one of those online services that help with accounting (freely or something?) for freelancers be worth the hassle of calculating on my own? I’m not going to be making a ton of money, but I don’t really understand the process very well.

from what I understand, i’ll have to state the nature of my business. Now, let‘s say that, in addition to my writing work, I restore clay figurines and make art as a hobby. While I would love to make money from art, it’s not possible just yet. So let’s say I have all these artworks and figurines piling up from my hobby - could I put them up for sale on the internet and then claim the costs that go into procuring, making and putting them up for sale as business expenses, even if i make zero sales? Would I have to include something like 販売 in the business description?

and finally, stuff that constitutes a business expense that I am unsure of:

• I read that if I WFH, I can claim some part of my electricity & internet bills as business expenses, e.g. 1/3 for one of the rooms in a 2DK or something like that. Does this still apply if the bills are in my spouse’s name? Of course I do contribute to paying for them, but I don’t know if that matters for deduction purposes.
• asset depreciation ? E.g. for my office chair and perhaps laptop or external hardware.
• training materials? Do stuff like reference books, workshops, online course subscriptions count?

 

[mrobisr]

@robd0123 I made this, which may be helpful to you: https://github.com/pcboy/the-law/blob/master/Japan/Taxes.md

 

[kristhuy]

@robd0123

I’ve been told it‘ll be best if I register as a sole proprietor for tax purposes and this is a relatively simple process that can be done by filling out a form at the kuyakusho.

There is no registration system for sole proprietors in Japan. If you start generating "business income", you are supposed to notify your local NTA office (not ward office) within one month (see the notification form here). You may also be required to notify your prefecture—check their website. These are merely notifications though and, in the case of the NTA, little more than a courtesy. There are no penalties for failure to submit the notification.

The main incentive to submit the notification is that it enables you to apply for blue-type tax return filing status, which provides some tax advantages in exchange for slightly more onerous accounting requirements.

I’ll have to pay my own nenkin, kokumin hoken

Yes. Enrol in those at your ward office. Pension is a fixed monthly premium but health insurance is based on the income you declared on your tax return for the previous year. In the year you move to Japan this number will typically be zero, so your health insurance premiums will be very low.

would using one of those online services that help with accounting (freely or something?) for freelancers be worth the hassle of calculating on my own?

Very difficult to say. For some people, paid services are a waste of money because they are more than capable of doing the calculations/bookkeeping themselves. For other people, paid services are essential. It depends on your capacity and resources. If you are unsure, though, using such a service is probably worth considering.

could I put them up for sale on the internet and then claim the costs that go into procuring, making and putting them up for sale as business expenses, even if i make zero sales?

You can still have deductible business expenses if you have zero sales; the key is whether the activity is sufficiently "profit-seeking". This means that the business operator must have a concrete, viable plan for how they will turn their loss into a profit in the near future. If there is no obvious path to profitability, then you are talking about a hobby, not a business. See this post for more information about what constitutes business income.

Does this still apply if the bills are in my spouse’s name?

Yes. But note that shared expenses (between business use and personal use) are only deductible to the extent that you can clearly quantify the different uses. Ballpark percentages are prohibited and will result in the entire expense being non-deductible.

asset depreciation ?

Yes, based on the useful life of each depreciable asset as stated in the regulations here. Assets with a purchase price of less than 100,000 yen are not depreciable though. See more information about depreciation here.

And as with household utilities, to be able to deduct the depreciation of mixed-use assets (business and personal), it is necessary to be able to objectively quantify how much the asset was used for each purpose.

training materials? Do stuff like reference books, workshops, online course subscriptions count?

Potentially, depending on the connection between the materials and your business. The NTA has some general information about business expenses in English here. A useful strategy, when contemplating whether an expense is deductible, can be to google the expense together with 必要経費 (necessary expenses) and look for commentary on the topic by tax accountants, etc. Otherwise, of course, you can ask your local NTA office for guidance and/or hire a professional.

 

[reflectionsbythewater]

@kristhuy

You can still have deductible business expenses if you have zero sales; the key is whether the activity is sufficiently "profit-seeking". This means that the business operator must have a concrete, viable plan for how they will turn their loss into a profit in the near future.

This is true, but the kind of costs OP described here would be Inventory/Cost of Goods Sold and not an expense until actual sales are made.

 

[childofgod49]

@robd0123 Hi there, just moved to Japan in similar situation with Spouse Visa and sole proprietorship a few months ago. I can probably answer some of your questions at least.

So I’ve been told it‘ll be best if I register as a sole proprietor for tax purposes and this is a relatively simple process that can be done by filling out a form at the kuyakusho.

Yep. Kuyakusho or Shiyakusho, depending on where your residence is of course. However, this is for registering for Nenkin and Kokumin Kenko Hoken, etc. Once you take care of that, then they gave me a temporary paper to use for medical stuff until my card came in a week later or so. I started getting bills for nenkin and hoken in the mail as well, which you can choose to pay however you want, even in cash at a konbini, etc. My spouse was very very helpful in this process as well.

For registering a sole-proprietorship, it should be the same way regardless of your citizenship as this is just for properly doing taxes in Japan. For that, you need to go to your local tax office instead of the Kuyakusho. I just came up with a name for my "business", filled out some paper work, paid a fee I think, and yeah, there wasn't much else to that. You even have the option of "paying" your spouse as an employee for tax deductions is what they told us. Might need to talk to a zeirishi if you're unsure. Oh, and you have the option to do double bookkeeping with "The Blue Form" which will give you a nice tax deduction apparently.

I'm a U.S. citizen, so I have to take care of U.S. tax filings as well, but that's simply a different story. In the U.S., you don't technically have to register anything if you're a sole-proprietor. If you do contract work, you're pretty much that. If you're from another country, then you may not even have any tax obligations for your freelance work in Japan anyway, so this may not apply to you.

I understand that I’ll have to pay my own nenkin, kokumin hoken and taxes so i’d have to set aside money for taxes to be paid at the end of the year, and then nenkin and insurance monthly, is that correct?

Yes, as a sole-proprietor and freelancer, you are in charge of setting aside money to pay off your income tax, hoken, nenkin, and other taxes yourself. As a general rule of thumb for myself since I haven't been here a year yet, I'm playing it safe and setting aside a large percent of my income as untouchable money that can only be used for paying those monthly and annual payments. (I'm doing like 40%, which is probably well higher than necessary, but it's also because I'm paying for my wife's hoken and nenkin basically).

from what I understand, i’ll have to state the nature of my business. Now, let‘s say that, in addition to my writing work, I restore clay figurines and make art as a hobby. While I would love to make money from art, it’s not possible just yet. So let’s say I have all these artworks and figurines piling up from my hobby - could I put them up for sale on the internet and then claim the costs that go into procuring, making and putting them up for sale as business expenses, even if i make zero sales? Would I have to include something like 販売 in the business description?

This, I'm not 100% sure on, but keep in mind the consumption tax, which is around like 10% I believe depending on the nature of your work. I do software development and sell my time to an overseas client, so it does not appear to apply to me. It would apply, however, for "consumers" within Japan I think, so that's something you typically add on as a cost for your services in invoices. Again, I think it would be good to talk to a zeirishi about that in particular. I do not 100% know what can be counted as business expenses, but I would make sure you have either a physical or digital record and receipt of anything you buy that you think might be, regardless of whether you make money off of it or not. I have heard the same about living space, subscriptions (I use AI tools that I pay for each month for example for my work), utilities, etc.

Anyway, I'm in the same boat, so some of these things I am currently doing and have been told but have not yet experienced, so I would make sure to get a second opinion. Good luck!

 

[phillev]

@childofgod49 Nice answer! Let me just add a couple of points:

For that, you need to go to your local tax office instead of the Kuyakusho. I just came up with a name for my "business", filled out some paper work, paid a fee I think, and yeah, there wasn't much else to that.

Yes, indeed you register a sole proprietorship at the tax office, not the municipal office. You can, but don’t have to, write a name for your business. Also, there is no fee.

Oh, and you have the option to do double bookkeeping with "The Blue Form" which will give you a nice tax deduction apparently.

Specifically, filing with the white form will give you a 100,000 yen deduction, whereas filing with the blue form will give you a 550,000 or 650,000 yen deduction (depending on some conditions) as well as some advantages such as being able to carry forward losses for 3 years, being able to depreciate items under 300,000 yen in one go, etc.

OP also mentioned using Freee, which does double entry bookkeeping as standard.

This, I'm not 100% sure on

Yes, you can do two different kinds of activities in your business.