Info request: US Soc. Security/Jpns Pension - a tricky employment situation

[JimmySeal]

Hello all after a long absence,

I'm facing a bit of a complicated employment situation. I am living in Japan and am looking at the possibility of being employed as a subcontractor for a US company that exists entirely within the US, while still living in Japan and working remotely. I'm trying to figure out how much this is going to cost me in terms of taxes, etc.
Up until now I've been employed by Japanese companies in Japan and haven't had to pay anything to the US government, but when I run the info through TurboTax under the new scenario, it comes up with a very large self-employment tax figure that doesn't come up as excluded.


I've found an HR Bill detailing a Japan-US treaty concerning Japanese pension and US Social Security, and I think it means I would not have to pay one of them, but I'm not sure of that, and I'm less sure which one I wouldn't have to pay if that's the case.

The HR Bill is H. Doc 108-234
govinfo

So to sum up: self-employed living in Japan and working for a US company. Would I be excluded from paying Japanese pension or US self-employment tax?

Does anyone know anything about this type of situation?

 

[orochi]

From what I know, if you are self-employed, you open yourself up to the possibility of paying self-employment tax to the US (if you are are making a profit), which is essentially paying into the US social security program. However, if you are paying into the Japanese social security system, you are exempt. And keep in mind that if you are 20 or older and a resident of Japan that you need to be paying into the nenkin system (be it individually or through your company).

However, if your revenue is above the foreign earned income exclusion, then you may need to pay taxes (just as with employment income).

 

[JimmySeal]

Thanks for responding.

I wouldn't actually be running my own business, just working as a contract worker (as opposed to a full-fledged employee) for an American company. I wouldn't have any expenses to speak of, so does that mean everything I earn is "profit?"

The part of that HR bill that seems to apply here is Article 4, Paragraph 1:

Unless otherwise provided in this Article, a person who works as an employee or self-employed person in the territory of one of the Parties shall, with respect to that employment or self-employment, be subject to the laws of only that party.

So this means that I'd either be exempt from Japanese pension or US soc. sec., depending on the interpretation of "works as [a] ... self-employed person in the territory of"
Given that the company I'd be working for is in the US, does that mean I'd be considered to be "working in the territory of" the US even though I'm living in Japan? Or would I be considred to be "working in the territory of" Japan because that's where I physically am?

 

[orochi]

If you're not an employee, but you're providing a service to this company, then I would say you are indeed running a business. Just like a freelance translator, writer, or journalist, etc.

You're based in Japan, so that means you would be self-employed (自営業). That means you need to pay nenkin (the fixed monthly payments) and also sign up for kokumin kenko hoken. Paying into the nenkin system should exempt you from having to pay into the US system since there's a totalization agreement between the countries.

Being self-employed means you will indeed have expenses. Let's say your home office is 20 percent of your apartment. That means 20 percent of your monthly rent is a business expense. Keep track of how much you spend on pencil, papers, computers, and other items.

 

[JimmySeal]

Ok, thank you for that further clarification. That's quite the relief.

One last question: Is there any kind of documentation I need to certify that I am paying Japanese nenkin and would be exempt from US self-employment tax?

 

[Glenski]

If you are hired by the U.S. company and paid by the U.S. company, there should be no reason why Japanese taxes would be levied on you.

It is not foreign earned income. It is American money. You should be taxed on that according to IRS regulations.

 

[JimmySeal]

Thank you for your reply Glenski.

It was my impression that anyone over 20 and living in Japan and not employed full time is subject to kokumin nenkin, even if they have no income. Are you saying that doesn't apply to foreigners, or that I'd have to pay nenkin and all American taxes as though I were in America and just not Japanese taxes? That's the first time I've heard anything like that.

 

[Glenski]

Tons of foreigners don't bother to register for the kokumin nenkin system, and many Japanese avoid paying into it. Doesn't mean it's right or legal, but it happens a log. Nobody is going to hound you if you decide to skip out on paying for it, despite what you see here about the mandatory nature of pension.
http://www.sia.go.jp/e/np.html
Notice the last paragraph on low income youth. Don't ask me more about it because I just don't know and would suggest you contact the ward office.

Are you saying that doesn't apply to foreigners, or that I'd have to pay nenkin and all American taxes as though I were in America and just not Japanese taxes?

What U.S. taxes are you concerned about? You will probably be held responsible for paying any state taxes, and you certainly must file for U.S. taxes. If you are a resident here, I believe you have to pay resident taxes. Just how long did you plan to stay, and what visa status do you have?

And, why are you now asking about no income, when clearly you are going to be making something?

 

[orochi]

If you are hired by the U.S. company and paid by the U.S. company, there should be no reason why Japanese taxes would be levied on you.

It's a matter of tax home and depends on how long you have lived in Japan.
Taxes

So let's say Jimmy has been here over 5 years. Then he needs to pay taxes on foreign-earned income. If the company withholds the necessary amount on their end, then he should be exempt from paying again in Japan. However, if the company pays in full, he will need to pay taxes to Japan (and can then offset those taxes paid in Japan to any owed in the US).

Jimmy should try as hard as he can to rack up relevant and pertinent business expenses to counteract this in either case.

It's great to be self-employed.

Tons of foreigners don't bother to register for the kokumin nenkin system, and many Japanese avoid paying into it. Doesn't mean it's right or legal, but it happens a log. Nobody is going to hound you if you decide to skip out on paying for it, despite what you see here about the mandatory nature of pension.

Ok, but if you don't pay into it, what do you plan to do after retirement? Where do you plan to retire? You do want to receive social security, right? If you are not paying into either the US or Japan system and are living in either country when you retire, you won't be able to pay rent and eat with the checks coming in.

 

[Glenski]

It's a matter of tax home and depends on how long you have lived in Japan.
Taxes
So let's say Jimmy has been here over 5 years. Then he needs to pay taxes on foreign-earned income.

But, the money is not foreign earned. It would be U.S. money paid to him while he is outside the country.

Does he need to pay taxes on foreign earned income? Not necessarily. There is always an (ever-growing) amount that Americans are exempt from paying taxes on (the equivalent of roughly $92,000 this year).

 

[orochi]

Ah, gotcha. From the US perspective, he'd just be receiving professional fees for his services. Good point. US foreign-earned income is irrelevant. We'd have to wait and see how his US-based payer decided to treat him though.

And his tax obligation in Japan would be dependent on the link I mentioned above.

 

[JimmySeal]

Thanks guys for the info, especially the new links.

I shelled out a little money to talk to an "expert" at JustAnswer.com, and they answered a lot of my questions.

Orochi is correct about the self-employment tax:
International Programs - Totalization Agreement with Japan

If I am self-employed living in Japan, I can pay Japanese nenkin and apply for a "certificate of coverage" which will exempt me from paying US self-employment tax under the totalization agreement.

I've talked to a lot of people about this tax situation (including people at the IRS) and all of them except you Glenski have said that my income tax would be covered under the foreign-earned income exclusion. I will be self-employed and physically doing my work in Japan, which means that the money is earned in Japan, even if I am doing work for an overseas entity. It might be a different situation if I were an employee of the US company.

So it looks like I'm solid.

Thanks again!

 

[orochi]

Good news. And don't forget about those expenses.

 

[Jerry Cullins]

But, the money is not foreign earned. It would be U.S. money paid to him while he is outside the country.
Does he need to pay taxes on foreign earned income? Not necessarily. There is always an (ever-growing) amount that Americans are exempt from paying taxes on (the equivalent of roughly $92,000 this year).

You should immediately get either the IRS's opinion or a good CPA's opinion.

When I was in Japan I was employed by a US company, was paid into a US bank account in US dollars, paid into the SS system, and had US health insurance rather than the Japanese national health insurance. I also paid Japanese income tax, got the foreign exclusion every year except my last one (too many business trips to the USA - something to watch out about, my tax bill was NUTS that year), etc. It was worth it, for me, to pay to have my taxes done because they were too damned complicated for me to do. (for instance back then you could deduct your Japanese living expenses if you still maintained a residence in the USA)

Don't take turbo-tax's word for it or some random people over the internet, contact the IRS or a tax competent CPA. Also consider getting a Japanese CPA, since you've been living in Japan for 5 years for tax purposes Japan considers you a resident whether the US company reports your income to Japan or not (and you do not want to run afoul of the tax man).

 

[johnnyG]

You should immediately get either the IRS's opinion or a good CPA's opinion.
...contact the IRS or a tax competent CPA. Also consider getting a Japanese CPA, since you've been living in Japan for 5 years for tax purposes Japan considers you a resident whether the US company reports your income to Japan or not (and you do not want to run afoul of the tax man).

+1 Definitely a situation for pro tax service & advice.