In Japan, sole proprietors and freelancers may sometimes be asked to pay income tax during the year under a system called yotei nozei(予定納税), or estimated tax payment.
This can feel like a fairly heavy burden, especially if your business situation has changed from the previous year.
But when does this system apply? Does it only increase your cash burden? Do you simply have to pay the amount written on the notice?
In this article, let us look at the basic idea of estimated income tax payments and what you can do if this year’s profit is expected to be lower than last year’s.
What Are Estimated Income Tax Payments?
Some sole proprietors and freelancers in Japan receive a notice from the tax office around July showing the amount of their estimated income tax payment.
Estimated income tax payment is a system where part of the current year’s income tax is paid in advance, based mainly on the previous year’s income tax amount.
More precisely, the amount is judged and calculated based on a figure called the estimated tax base amount(Yotei Nozei Kijun Gaku / 予定納税基準額). In simple terms, if the previous year’s tax amount was above a certain level, the tax office may require you to pay part of this year’s tax before the final tax return.
It means you do not wait until the following year’s final income tax return to pay everything at once. Instead, part of the tax is paid during the year.
Because it is a payment made “in advance,” the amount paid is later deducted when you file your final tax return.
Is It Only a Burden?
Estimated tax payments are calculated based on the previous year’s income. For that reason, even if your current year’s business situation has changed significantly, the notice may show an amount similar to what would be expected from last year’s results.
If sales have decreased or if profit has dropped, the payment can feel especially heavy.
In practice, when I support clients on an ongoing basis, I sometimes explain in advance that the following year may bring this kind of payment burden, depending on the previous year’s tax result.
However, estimated tax payments do not only increase the burden.
For example, suppose your final income tax amount for the year is calculated as JPY2,000,000 when you file your tax return the following year. If you have already paid JPY1,400,000 in estimated tax payments, the final amount to be paid by the tax return deadline will be JPY600,000.
In other words, estimated tax payments have the nature of a prepayment.
But what happens if your overall profit for the current year falls so much that the prepayment amount becomes too high?
In such a case, a reduction application may be possible.
When Can You Apply for a Reduction?
A reduction application is not a system that is approved simply because your cash flow is difficult.
It is generally available when, after estimating your income and tax amount for the current year, your actual income tax is expected to be lower than the estimated tax payment amount notified by the tax office.
For example, this may apply in cases such as the following:
- Sales or profit have decreased significantly compared with the previous year.
- You have suspended or closed your business.
- A large loss has occurred.
- Your expected tax amount has decreased because of increased income deductions or similar factors.
When applying, you need to estimate your income tax amount for the year based on your sales, expenses, and other relevant information.
For that reason, keeping your bookkeeping up to date during the year is important. If your books are up to date, it is easier to estimate your income and consider whether a reduction application is realistic.
On the other hand, if bookkeeping is delayed, it may become difficult even to judge whether you should apply.
What Are the Deadlines?
There are deadlines for applying to reduce estimated income tax payments.
First, let us look at the payment periods.
In general, estimated tax payments are made twice during the year. Each payment is usually one-third of the previous year’s relevant tax amount, paid as the first and second installments.
The payment periods are generally as follows:
- First installment: July 1 to July 31 of the year
- Second installment: November 1 to November 30 of the year
There are some differences for certain agricultural taxpayers, so the above is the general rule for many sole proprietors and freelancers.
The deadlines for the reduction application are different depending on which installment you want to reduce.
- For both the first and second installments: generally from July 1 to July 15
- For the second installment only: generally from November 1 to November 15
If the deadline passes, you may no longer be able to apply for a reduction for that installment. This is why timing matters.
Check Before the Notice Arrives
Some people receive the notice in July and only then realize that their current year’s business performance has worsened.
However, in practice, it is better to check your business situation around June.
You can often tell whether an estimated tax payment notice is likely to arrive by looking at your previous year’s income tax return. Check the section related to estimated tax payments.
If your income is expected to be much lower than the previous year, there may be a possibility of applying for a reduction.
At the same time, if you simply do not pay without filing a reduction application, late payment tax and other issues may arise.
It is risky to decide on your own that “profit has gone down, so I do not need to pay.” Instead, it is important to check early whether your situation may qualify for a reduction application.
An estimated tax payment is basically a prepayment system. But if your actual income is expected to fall significantly, there is also a system that may allow that situation to be reflected.
If the required payment is beyond what your current business situation can reasonably support, do not ignore the notice. Check whether a reduction application is available.
If this year’s business performance is worse than last year’s, you may be able to apply to reduce your estimated income tax payments.
The application has a deadline, and you will need materials showing why your estimated income or tax amount is expected to decrease. When you receive a notice for estimated tax payments, it is worth checking your current business situation before simply making the payment.
