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How To Calculate Income Tax



Q: How is the income tax of company employees calculated?

Income tax is imposed on the income gained in a year beginning from January to December. In case of company employees, the approximate amount of their income tax is withheld by their company out of their monthly salary and tax payment is made every month. Official amount of income tax is recomputed in year-end tax adjustment. When it turns out, as a result of year-end tax adjustment, that the amount of income tax already withheld exceeds the official amount of tax, the redundantly paid tax is refunded to their salary paid in December (Refund.) and in the case where the amount of income tax runs short, the amount due is deducted from their salary paid in December (Levy). The document indicating the bottom line of each year for company employees is called a certificate of income and withholding tax.

差額を還付 - How To Calculate Income Tax



A set of procedures of recalculation required in year-end tax adjustment are as follows;

1. Sum up the annual salary and bonus. (A)
You sum up the amount of salary and bonus you received in a year beginning from January to December. However, traffic expenses up to 100,000 (one hundred thousand) yen per month is not included in this amount because income tax is not imposed on traffic expenses up to 100,000 yen per month.


2. Calculate the amount of deduction for employment income. (B)
The amount deducted refers to the amount deducted from one’s income as expenses. The greater the expenses are compared with one’s income, the less one’s profit becomes. In this case, therefore, the amount of income tax due decreases. The expenses permitted for company employees are called deduction for employment income. To company employees, the rule of calculating the amount deducted according to the amount of their salary is applied.


3. Calculate employment income. (C)
Employment income refers to the amount in which employment income deduction is deducted from annual salary income. (A) - (B) = (C)

Example: Employment income in the case where the total income is 5,000,000 (five million) yen with salary and bonus combined together
5,000,000 yen - 1,540,000 yen = 3,460,000 yen


源泉徴収票 - How To Calculate Income Tax

給与所得控除額 - How To Calculate Income Tax




4. Calculate the amount of exemption and deduction from income. (D)
Deduction from taxable income refers to preferential tax treatment established to give consideration to special individual circumstances such as having dependent family member(s), being advanced age, having insurance, etc. If you are a company employee, you may have filled in the number of dependent family member(s) or the contents written in the postcard delivered from your insurance company in your year-end adjustment form. The more relevant items you have, the more deduction amount and the less amount of tax you have.


所得控除額 - How To Calculate Income Tax

Example: The amount of employment income deduction in the case where the total amount of salary and bonus is 5,000,000 (five million) yen

income deduction : Deduction for spouse (380,000 yen)
+ 2 kids (380,000 yen + 380,000 yen)
+ Deduction for social insurance premiums (600,000 yen)
+ Deduction for social insurance premiums (100,000 yen)
+ Basic deduction (380,000 yen)
-------------------------------
2,220,000 yen -> D


< List of major income deduction >

Name

Content

Deduction for social insurance premiums

Total amount of social insurance premium paid per year

Deduction for social insurance premiums

Specific sum of money is deducted according to life insurance premium and/or private pension insurance premium paid in a year *1

Earthquake insurance premium deduction

Specific sum of money is deducted according to earthquake insurance premium paid in a year *2

Deduction for spouse

Necessary expense permitted for the spouse with income of less than 380,000 yen according to his/her income
Ordinary people (less than 70 YRS) 380,000 yen
Senior people (over 70 YRS) 480,000 yen

Special deduction for spouse

Necessary expense permitted for the spouse with income of more than 380,000 yen up to 760,000 yen

Deduction for dependents

Necessary expense permitted for family member(s) to be supported
Ordinary people (over 16 YRS) 380,000 yen
Specific people (over 19 and less than 23 YRS) 630,000 yen
Senior people (over 70 YRS) 480,000 yen
Senior parent(s) living together (over 70 YRS) 580,000 yen
*Revised from 2011.

Basic deduction

Necessary expense permitted for all the taxpayers 380,000 yen

*1 < Table of deduction of general life insurance premium and private pension insurance premium >

Total amount of
insurance premium paid

Amount deducted

Less than 25,000 yen

Total amount paid

from 25,001 to 50,000 yen

Total amount paid X 0.5+12,500 yen

from 50,001 to 100,000 yen

Total amount paid X 0.25+25,000 yen

Over 100,000 yen

50,000 yen

*2 < Earthquake insurance premium deduction >

 

Total amount of insurance premium paid

Amount deducted

Earthquake insurance premium

Less than 50,000 yen

Full amount

Over 50,000 yen

50,000 yen




5. Calculate income tax. (E)
Taxable income (basic amount to which income tax is imposed) refers to the amount of income one receives in a year (the total amount of salary and bonus) withheld by employment income deduction and income deduction. Income tax rate is determined based on cascade system.

Example: The amount of employment income deduction in the case where the total amount of salary and bonus is 5,000,000 (five million) yen

* The amount of employment income
= The amount of salary and bonus (5,000,000 yen)
- employment income deduction (1,540,000 yen) = 3,460,000 yen

* Taxable employment income
= Employment income (3,460,000 yen)
- deduction from income (2,220,000 yen) = 1,240,000 yen

* Income tax = taxable employment income (1,240,000 yen) X 5%=62,000 yen

Calculate Income Tax - How To Calculate Income Tax

< Simplified chart of income tax >
Amount of income tax = taxable employment income X tax rate - amount deducted
Simplified chart of income tax - How To Calculate Income Tax



Calculate income tax from dimensions!

Example: The case where taxable income is 3,000,000 yen
1. You can calculate the dimensions of income tax within the red frame as follows.
3,000,000 yen X 10% = 300,000 yen

2. You can calculate the dimensions of income tax within the green frame as follows.
1,950,000 yen X 5% = 97,500 yen

3. Subtract the amount in the green frame from the amount in the red frame. (Both the red and green frame refer to calculation method of income tax.)
300,000 yen - 97,500 yen = 202,500 yen

These calculations can be summed up in the following calculating formula by using simplified chart.
3,000,000 yen X 10% - 97,500 yen = 202,500 yen

In this way, tax rate is raised according to the income based on cascade system. This is called a progressive taxation system.

Visual structure of income tax rate

所得税率の仕組み - How To Calculate Income Tax

Calculate your income tax automatically!
所得税自動計算フォーム


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ワイズライフFPコンサルタント 山中伸枝 - How To Calculate Income Tax

Y's Life FP Consultant
Nobue Yamanaka
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