Research on Taxation

​US-Japan Social Security & Income Tax Relationships

Updated: 2025.01.26

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(a) Japanese income tax liability

(b) Japanese social security liability (national health insurance, national pension, social insurance)

(c) US income tax liability 

(d) US social security tax liability (self-employment, FICA)

※ estate taxes will not be addressed​

・Would a US citizen with Japanese tax resident status, residing in Japan for five or more years, be able to work as an independent contractor (1099-NEC) for a US-based US entity without (a) ~ (d)?

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　　Let us assume that no services were performed within the US as the US citizen is residing in Japan.

This income will be considered foreign-sourced income, not US-sourced income. *1

　　A US citizen is subject to US income taxes regardless of domicile. *2

　　Let us assume that as a Japanese tax resident, the US citizen holds either a Japanese long-term or permanent residence status. Let us also assume the US citizen is either unemployed or self-employed. Regardless of being a student, unemployed, or self-employed, Japanese tax residents must pay national health insurance and national pension contributions. *3

　　According to the US-Japan Social Security Totalization Agreement, if a US citizen is paying into (b), then (d) would be exempted. Normally, a US citizen would need to pay (d, ~15%) on all non-employee earned income.

　　The US citizen would request a Certificate of Coverage (USA/J 6) from the Japanese Pension Office and attach it to their annual tax declaration. *4

　　As a Japanese tax resident, the US citizen would be required to register their self-employed business with the Japanese National Tax Agency (NTA), declare worldwide income, and be subject to Japanese income taxation. *5

 

(c) * 1 : No US tax withheld by US-based US entity. Foreign-sourced income.

(c) * 2 : Liable for US income tax dependent on deductions, expenses, exclusions, or exemptions.

(b) * 3 : Liable for Japanese social security tax.

(d) * 4 : Not liable for US social security tax.
(a) * 5 : Liable for Japanese income tax.

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A US citizen residing in Japan for five or more years, with Japanese tax resident status, would be able to work as an independent contractor (1099-NEC) for a US-based US entity while only being liable for (a) ~ (c), not (d). 

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However, is this still the case if said US citizen was also working for a Japan-based Japanese entity as an employee and covered by social insurance? In Japan, one would either be covered by social insurance, national health insurance and pension, or nothing (non-resident). Would this US citizen's self-employment income still be exempt from US self-employment tax? 

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Yes.
Read below. *6

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In the US, a US citizen residing in the US may simultaneously be required to pay FICA that is withheld from their salary (W-2) as well as self-employment tax that is calculated from non-employee earned income. Whereas in Japan, there is no social security tax obligation for an individual who is already covered by social insurance, provided by their Japanese employer. 

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There is an international focus on a base global tax, income and estate tax treaties, branch profits taxes, controlled foreign corporations, passive income, etc. But what about earned income in relation to social security ramifications? 

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There are many cases where in Japan, a business expense would be acceptable whereas in the US, the same business expense would not be acceptable, thus showing different taxable amounts from what is declared on a self-employed person's blue tax return (Japan) and their Schedule C (US). 

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Japanese national pension contributions are fixed at around 16,000円 per month whereas it is a percentile of taxable income in the US. Japanese national health insurance is a percentile of taxable income, just like the US, however said taxable income would be substantially lower on the blue tax return than compared with a Schedule C due to the flexibility of what the NTA considers a valid business expense. 

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It would seem advantageous, if a US citizen residing in Japan for five or more years, as a Japanese tax resident, to obtain social insurance coverage while simultaneously continuing self-employed activities, if the intent is to continue self-employment activities. 

 

Another consideration are consumption taxes.

In Japan, entities liable to pay consumption tax are able to offset their consumption tax liability by consumption taxes paid into business expenses throughout the year. Normally, all sales would be subject to consumption tax (10%), yet generally, services and products exported out of Japan are not subject to Japanese consumption tax. Therefore, a US citizen residing in Japan providing services in an independent contractor capacity (1099-NEC) would need to declare such income to Japan, yet such income would not be subject to Japanese consumption tax. 

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Contrarily, if the US citizen was residing within the US, providing the same services, then consumption tax would be paid to the state in which the US citizen lives in. Let's assume the US citizen does not travel to the US for any reason, travel or business, and there is no physical presence nexus. With the possibility of an economic nexus, US sales tax may still be imposed. In such a case, it would be best to avoid conducting services for a payer based in a state with a sales tax. 

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Anyways... 

★☆☆☆☆ = Worst

★★★★★ = Best

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・US citizen residing in Japan for five or more years, Japanese tax resident

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★☆☆☆☆

Employee for a US-based entity & Exempted from Japanese Social Security Tax Liability

[ this scenario is only possible if a US-based entity sent the US citizen to work in Japan for five years or less, which is not the case for a US citizen hired in Japan, or hired in the US, but have already lived in Japan for five or more years ]

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　　Japanese social security (health insurance) plays a more active role than US social security (medicare) as US residents must also be covered by private, employer, or government provided health insurance schemes, usually at an additional cost

　　To be exempt from Japanese social security means to not be covered by Japanese health insurance, means to pay full-price for health or dental related costs that would have normally been covered

　　To be exempt from Japanese social security would also impact the US citizen negatively in renewing or changing the status of their residence status

　　The US-based entity risks creating a PE unless said US-based entity has a Japan-based entity branch; in such a case, the US citizen would be employed by a Japan-based entity and be subject to Japanese social security tax obligations [this situation does not apply in this scenario]

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(+) = Pros​

(-) = Cons

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★☆☆☆☆

Non-employee contractor for Japan-based payer​

　　(-): depending on NTA tax declaration, be subject to Japanese consumption tax (10%) on all sales

　　(-): no stable income (安定収入), which is a major factor in borrowing from Japanese institutions

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★★☆☆☆

Non-employee contractor for US-based payer [in state or territory without sales tax]​

　　(+): most likely be entitled to a consumption tax refund for Japan-based expenses that have incurred consumption tax against sales income that was not subject to consumption tax

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★★★☆☆

Non-employee contractor for US-based payer while also employed by Japan-based entity​​

　　(+): the above and;

　　(+): be exempt from Japanese national health insurance, pension and US self-employment tax simultaneously while family (self and dependents dependent on dependent's individual earned income) are covered by Japanese social insurance (health insurance and income)

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★★★★☆

Non-employee contractor for US-based payer while also employed by Japan-based branch OR Japan-based Professional Employer Organization (PEO) of US-based entity​​

　　(+): the above and;

　　(+): Japan-based entities tend to, historically, pay comparatively low salaries, due to effects of low or negative inflation, low cost of living, and culture; whereas, US-based employers tend to pay higher salaries due to inflation, high costs of living, and culture

　　(+): a prospective employee, even negotiating for "market rate" for a position may receive a Japanese equivalent of 2~5x more than what is considered normal for the same or similar role in Japan

　　(+): if a US citizen with non-native Japanese language capabilities, then most likely able to use English

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★★★★★

Non-employee contractor for US-based payer (owned/managed by said US citizen) while also employed by Japan-based entity (owned/managed by said US citizen) being paid the absolute minimum required to receive Japanese social insurance coverage

　　(+): maximum autonomy and control over taxation environment

　　(-): requires exceptional amount of time, effort, resources, and opportunity to successfully create

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「社会保障に関する日本国とアメリカ合衆国との間の協定」​

*6: Notes on the J / USA 6, Certificate of Coverage, provided by the Japanese Pension Office:

There are (5) informational areas of the certificate.
(1) Determining whether is an Employee or Self-Employed Person, or Both

... Name, Date of Birth, Permanent Address in Japan, Basic Pension Number (Japanese) 

(2) Place of Work in Japan [IF EMPLOYED AND/OR SELF-EMPLOYED IN JAPAN]

... Name of Company, Address of Company

(3) Place of Work in the US [IF EMPLOYED AND/OR SELF-EMPLOYED IN THE US]

... Name of Company, Address of Company

(4) Certification

... "The worker named in (1) is covered by the legislation concerning the Japanese public pensions systems and the Japanese public health insurance systems (Article 2.1 of the Agreement) and is exempt from U.S. laws with respect to Retirement, Survivors, Disability, and Medicare in accordance with the following Article of the Agreement."

... 4.1, 4.2, 4.4, 4.5, 4.6, 4.7 (C), OR 4.8, and Period of Coverage, From and To
(5) Liaison Agency

... Japanese Pension Office, Address of Japanese Pension Office

... Date of Stamp of Approval, Stamp of Approval

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​https://www.ssa.gov/international/Agreement_Texts/japan.html

AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND JAPAN ON SOCIAL SECURITY

PART II, Provisions on Coverage, Article 4

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.

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In the scenarios above, regardless if a US citizen residing in Japan for five or more years, as a Japanese tax resident, is self-employed and/or employed in Japan, they would fall under Article 4.1 of the Agreement

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Article 4.2~4.6 cover crews, vessels, and temporary assignments...
Article 4.7 (a) ~ (c) cover US and Japanese government employees being covered by their respective countries regardless of location...

Article 4.8 is to grant an exception, as long as ONE of either the US or Japan imposes social security liabilities...