Tax Question re: Royalties

Hey all, ご無沙汰しております。

I have a question that has proven a little beyond a simple google search--or perhaps I'm not thinking of the right search phrase. Here's the situation:

I'm doing some translation for my friend's e-commerce store (product descriptions, mostly). Instead of being paid directly for this service (like X amount for each item translated), I'm being compensated with a percentage of international sales (foreign customers being the audience for my translations).

This money will be deposited directly into a Japanese bank account that I hold, and I have no intention to move it to the states. I'm currently traveling and will be doing the translation from a variety of places, although for the time being I am in Japan. I will be receiving these royalties into a Japanese bank account while I am not in the country.

I'm curious about the rules regarding taxation on this. Where do I go to find out the right way to calculate taxes, and exactly to whom I should be paying. I'd certainly rather not get double-taxed for money that will mostly just collect in this Japanese bank account until I come back to use it. For that matter, I'd rather not let the US government get their hands on it at all, considering the money will never reach US soil in the first place (my opinion on how they've been spending my tax dollars aside).

Thanks in advance for your help!

Are these really royalties, though? The term is used mostly for authors of books, music, etc. to describe the money the see coming in off the sale of their copyrighted material. What your system sounds like is that you receive a percentage of foreign sales--or a commission based on sales coming from outside Japan. I would speak to your accountant or local tax office first and determine what exactly these payments are considered legally before doing too much research in any direction.

Commission is treated the same as salary, so you would need to report this. It's essentially the same as receiving money for teaching English or walking somebody's dog. As for liability in the US, you can find information on the IRS's website.

The Japanese word you want to Google around with is 印税.

ok, we'll contact their accountant and see what the exact status is.

Assuming it's commission, as you say, it will be treated the same as salary; I would have to declare this to the IRS, even though the money isn't being earned or transported in any way to the US? Also, would the Japanese government also want a cut from it?

I did some work for this company earlier this year (for direct pay, as an independent contractor), and about 20% of my fee was withheld. A friend of mine just informed me that this is common practice for foreign contractors in Japan, but that I could somehow reclaim it by filing an exemption. He's still in the process of filling out the paperwork so he was pretty vague about it... if commission is treated the same as salary pay, would the Japanese government withhold the 20%, leaving the US to tax the remainder? That would kind of suck :<

Now I think I see your situation better. First of all, apologies for using "salary" above. Salary would refer to income earned as an employee. However, you are acting as a freelancer or independent contractor.

Just to confirm, are you living in Japan? If so, 20 percent sounds a bit high. Typically 10 percent is withheld at the source for professional fees paid to a resident of Japan (regardless of nationality). The 20 percent deduction is withheld when it is to someone without residence in Japan (living overseas, etc.). So you definitely should see about getting that back. It sounds like the payer withheld too much.

As for the fees earned from the website translations, these would be handled similarly to the past translations you had. The payer would withhold 10 percent and you would receive the rest. If you are receiving income, fees, etc. from more than one source, you will need to report this to your local tax ward in Japan via the kakutei shinkoku form.

As for reporting your earnings from Japan to the US, the IRS requires that US citizens report foreign-earned income, so you will need to fill out your 1040, etc. annually. There is an exclusion for earnings up to ~90,000 USD, so as long as you are making less than that, you will not have to pay more to the US. If you make more than the exclusion amount, you'll need to pay taxes to the US on the excess amount.

Even if you are living abroad you will be taxed on your worldwide international income. However you if you have lived in Japan for an entire tax year you will be eligible for the Foreign Earned Income Exclusion. Assuming you are an American citizen you will be able to exclude from your income up to $91,400 of your foreign earnings and you will not be taxed on this. Not you total earnings earned in the US and Japan.

As for tax on incomes, it would depend on your status. Are you a company? Or are you self employed? This will all affect how you will be taxed. Things like income for money earned on property is high, I own two buildings and land which I get money for and the tax is much, much higher on that income than on a salary.

Long story short , you will only be taxed on that income here in Japan, the US won't tax you if you can pass the requirements I stated above.

Thanks for your help, fellas!

I do not have residency in Japan, I'm just passing through on a landing visa. I'm getting started on the translations here in my spare time, but a majority of the work will be done while I'm on the road. I'm working on my own, though I didn't set up a private business before I left the states. I had employment in the states and just started doing freelance before I left the country. Even if we hit our sales goals, my commission probably won't come close to $90K. So I should expect that 20 percent to be withheld? Are there still exceptions available to the Japanese taxes?

Ultimately, I know that my income is probably too small for the government to take notice or care about, but I would like to keep things above-board, if not for my own sake then for my friend's company.

Just a reminder that the withholding tax (be it 10% or 20%) is on the Japanese side, and the 90K USD limit is on the US side. These aren't related. Since you are a non-resident in Japan the 20% will apply, so the payer will need to hold 20% and pay you the rest to your account. You report the rest as earnings to both Japan and the US.

However, one thing you may want to look into is whether or not you can apply the US-Japan tax treaties to these payments. If the payer agrees, then you can fill out some forms and they will submit them to their local tax office. You could see a reduction to 10%. Another option would be to ask the payer to treat these payments as royalties for transfer of copyright. Then you would see the amount withheld at the source go to 0. That might be the best option to explore.

国税庁ホームページリニューアルのお知らせ｜国税庁
租税条約 - Wikipedia

Thanks Orochi! I will talk to them about it tomorrow and report back here.

OK, I talked to them about it and we got distracted by work so it got put on the backburner, but we were looking at the forms and we're trying to figure out just which one applies to us. We're going to ask their Tax Agent to get a professional opinion on it.

currently we were thinking it's either this one
国税庁ホームページリニューアルのお知らせ｜国税庁
linked from 国税庁ホームページリニューアルのお知らせ｜国税庁

or this one
国税庁ホームページリニューアルのお知らせ｜国税庁
linked from 国税庁ホームページリニューアルのお知らせ｜国税庁


Man, tax documents are written in such unnecessarily complicated gibberish.

What happened to treating these as royalties? As mentioned before, that is probably your best bet in terms of receiving full compensation.

The form would be this one:
国税庁ホームページリニューアルのお知らせ｜国税庁

ah! thanks again We'll lead with that when we meet with the Tax Agent.

Also, so far I've only been paid 100,000 of 300,000 yen from the work I did earlier this year; so only 20,000 yen so far has been withheld. What's the likelihood of being able to recover any of that, or at least have less withheld from the remaining amount?

We finally got our tax person in today, and she brought with her Form 7, which would have me paying 10 percent as you said, as "income earned by professionals, entertainers, sportsmen, or temporary visitors," but we showed her Form 3 (relief from Japanese income tax on royalties) and explained the situation, she agreed it could be applied to this situation, as I am basically retaining copyright on my translations and licensing it to the company for a percentage of sales on those products. I just drew up a contract to solidify the agreement.

So if it all goes through, it looks like I won't have to pay taxes on future income from this project in Japan. Since we've already paid taxes on the amounts paid before, we probably won't be able to recover that, but as it was more or less direct pay for services rendered, it was taxed appropriately.

I wonder how I'll be required to file/report this to the IRS. It won't amount to too much by the end of the year, but someday hopefully this will actually get to the point where I do need to pay US taxes on it!

Thanks so much for your help!!