Freelance Taxes and Tax Returns Explained: Income Tax, Resident Tax, Insurance, Pension, Blue Return

For employees, taxes are withheld from their salary, and the company handles the year-end adjustment. But once you become a freelancer or sole proprietor, you must calculate and report yourself how much you earned, how much you spent on expenses, and how much tax you owe over the year. This whole process is the tax return. This article walks through the basics of the tax returns and taxes that freelancers cannot avoid, in a way that even first-timers can follow.

What a Tax Return Is

A tax return is the process of calculating your own income for the year from January 1 to December 31, determining the income tax due on that income, and reporting and paying it to the national tax authority. As a rule, it is filed between February 16 and March 15 of the following year.

If you are a freelancer or sole proprietor and your business income (profit after subtracting expenses from sales) exceeds a certain amount, you are obligated to file a tax return. When you file, the information is automatically shared with your municipality and is also used to calculate resident tax and national health insurance premiums. In other words, the tax return is the starting point that determines not only income tax but also various burdens that follow.

When you want to grasp roughly how much tax and insurance you will owe, entering your projected sales and expenses into the Freelance Tax Calculator makes it easier to see the full picture.

Calculating Income and Deductible Expenses

Tax calculation begins by finding your income. Income is not simply your sales (revenue); it is the profit after subtracting necessary expenses from sales.

Income = Sales (revenue) − Necessary expenses

From this income, you further subtract various income deductions (the basic deduction, social insurance premium deduction, dependent deduction, and so on) to arrive at your "taxable income," and income tax is calculated by applying the tax rate to that. More expenses mean lower income and therefore lower tax, so it is important to correctly understand what can be counted as an expense.

• Can be expensed: spending needed for the business, such as a work computer, communication costs, transportation, meeting costs with clients, and rent for a workspace (the business-use share if it doubles as your home).
• Cannot be expensed: private meals or shopping, income tax and resident tax themselves, living costs, and other spending unrelated to the business.

If you work from home, you can reasonably apportion the business-use share of rent and electricity as expenses. This is called household apportionment. Since receipts are evidence for your expenses, keep them carefully and regularly.

Five Taxes and Insurances Freelancers Pay

Income tax is not the only thing freelancers pay. Keep these five representative items in mind.

Income tax is progressive, rising with income from 5% up to 45% in stages. Resident tax is levied the following year based on the previous year's income and is roughly 10% of income. Because it is not withheld as it is for employees, many people are surprised at how high it is when the payment slip arrives.

National health insurance and national pension are social insurance. While employed, the company covered half, but freelancers pay the full amount. The national pension is generally a fixed amount, but national health insurance varies greatly with the previous year's income. In addition, for certain trades defined by law, enterprise tax applies to income above 2.9 million yen per year. Once you add all of these up, your take-home pay is smaller than you might imagine, so estimating the total burden in advance with the Freelance Tax Calculator gives peace of mind.

Blue Return vs. White Return

There are two ways to file a tax return: the white return and the blue return. Which you choose greatly affects both the effort involved and the tax savings.

The white return requires no prior application and the bookkeeping is relatively simple. It is easy to start, but it offers almost no tax advantages.

The blue return can only be chosen by those who submitted a "business opening notice" and a "blue return approval application" to the tax office in advance. In exchange for proper bookkeeping such as double-entry, it offers many tax-saving benefits, including a special deduction of up to 650,000 yen, the ability to carry losses forward for three years, and the ability to expense salaries paid to family members. It takes more effort, but if you expect a reasonable level of income, the benefits of the blue return are large.

Conditions for the 650,000-Yen Blue Return Deduction

The biggest appeal of the blue return is the blue return special deduction. This lets you subtract up to 650,000 yen from your income, directly lightening your tax. However, to receive the full 650,000 yen you must meet several conditions.

• Keep records using double-entry bookkeeping.
• Attach a balance sheet and a profit and loss statement to the return.
• File within the deadline (as a rule, by March 15).
• File via e-Tax (electronic filing) or keep electronic books.

If you do not meet these and file with simple bookkeeping, the deduction drops to 100,000 or 550,000 yen. In particular, note that filing on paper without e-Tax gives you 550,000 yen rather than 650,000 yen. The 650,000-yen deduction lowers not only income tax but also the income that forms the basis for resident tax and national health insurance, so the total tax-saving effect is larger than the deduction amount appears. To picture your take-home pay with the deduction applied, it helps to compare different deduction amounts in the Freelance Tax Calculator.

Consumption Tax and the Invoice System

Besides income tax and resident tax, businesses also face the matter of consumption tax. As a rule, a business whose taxable sales two years earlier (the base period) were 10 million yen or less is a "tax-exempt business" excused from paying consumption tax. Many small freelancers fall into this category.

However, the invoice system (qualified invoice retention method) that started in October 2023 made things a bit more complex. For a client (the buyer) to deduct the consumption tax they paid (input tax credit), a "qualified invoice" is generally required. And only a taxable business registered with the tax office can issue such an invoice.

If you remain a tax-exempt business, you cannot issue invoices, and your clients may be unable to take the input tax credit.

For this reason, depending on your relationship with clients, you may need to decide whether to deliberately register as a taxable business so you can issue invoices, or to remain tax-exempt. Becoming a taxable business creates an obligation to pay consumption tax, but there are measures to ease the burden, such as the simplified taxation system and transitional measures (like the 20% special rule). Consider it carefully based on your sales scale and your clients' situation.

Freelance tax returns and taxes involve income tax, resident tax, social insurance, and consumption tax intricately intertwined. We recommend starting by entering your sales and expenses in the Freelance Tax Calculator to grasp your approximate tax burden and take-home pay. Once you see the whole picture, decisions such as whether to file a blue return, how much to expense, and whether to register for invoices become easier.

Please note that this article is intended to provide general information, and the details of tax amounts and rules vary with your business situation and annual revisions. When filing in practice, check the latest official information from the National Tax Agency and others, and consult a professional such as a tax accountant where needed before deciding.