When creating an invoice for a business partner, you might be unsure as to whether you need to include the withholding tax amount.

Withholding tax applies not only to salaried employees’ wages but also to certain types of remuneration, such as lecture fees, writing fees, and business commission fees. Technically, you are not required to put the withholding tax amount on an invoice. But does that mean it is a good practice not to include it?

In this article, we’ll provide clarity on withholding tax, including how to calculate it and record it on invoices. We’ll cover the types of remuneration subject to withholding tax, important considerations when recording withholding tax amounts, and how the withholding tax system differs from the Qualified Invoice System.

What’s in this article?

• What is the withholding tax system?
  
• Why it’s advisable to record withholding tax on invoices
  
• How to record the withholding tax amount on invoices
  
• How to calculate withholding tax for invoices
  
• Advantages of recording withholding tax on invoices
  
• Key points when recording withholding tax on invoices
  
• The withholding tax system vs. the Qualified Invoice System
  
• How Stripe Invoicing can help
  

What is the withholding tax system?

When you hear the phrase “withholding tax system,” the first thing to come to mind might be the income tax withheld from salaried employees’ wages. However, withholding tax is not a system limited solely to salaried employees such as company workers. It can also apply to individuals who issue invoices under a business outsourcing contract and receive remuneration for that work. It is therefore very important for both sole proprietors and freelancers to have an accurate understanding of how the withholding tax system works.

The main types of remuneration and fees that are subject to withholding tax

According to Japan’s National Tax Agency (NTA), the scope of remuneration and fees subject to withholding tax varies depending on whether the recipient is a resident of Japan or a domestic corporation.

There are specific cases where remuneration or fees paid to Japanese residents are subject to withholding tax, such as lecture fees, signing bonuses, and advertising prizes.

Why it’s advisable to record withholding tax on invoices

As the payee (i.e., the one requesting payment), you are not legally required to record withholding tax on your invoices, nor will you be penalized for excluding it. However, recording it tends to prevent problems and offer practical benefits such as smoother payments and accounting procedures.

The following are common issues that tend to arise when withholding tax is not recorded on an invoice:

• It takes longer for the business partner (i.e., the payer) to verify the contents of the invoice, causing payment delays.
  
• The payer transfers the full, gross amount to the payee without withholding and remitting the proper tax.
  
• The contents of the invoice do not match the payment statement from the business partner, increasing the verification work required to file a tax return.
  
• If the payer calculates the amount assuming withholding tax has already been deducted, they might request revisions to the invoice.
  

It is therefore advisable to clearly state the withholding tax amount, especially for the first transaction with a business partner, or on contracts for outsourcing work.

How to record the withholding tax amount on invoices

When recording withholding tax amounts on invoices, it is ideal to include clear line items for each of the following:

• Gross amount or subtotal (i.e., the amount you earned for the services you provided)
  
• Applicable withholding tax amount
  
• Consumption tax (if you have a taxable business)
  
• Actual amount to be paid (i.e., the total net amount the invoice receiver owes you)
  

You also need to be sure to include the following basic items that are required on all invoices:

• Invoice title (i.e., the document should be titled “Invoice”)
  
• Invoice number
  
• Invoice issue date
  
• Invoice registration number (for registered businesses)
  
• Invoice issuer’s information
  
• Invoice receiver’s information
  
• Transaction date
  
• Transaction details
  
• Payment due date
  
• Payment method
  
• Any remarks
  

Depending on the nature of the work, some jobs require withholding tax while others do not. Be sure to confirm the work in question is subject to withholding tax before creating the invoice.

How to calculate withholding tax for invoices

Withholding tax is not paid directly by the individual (i.e., the payee) to the tax office, but rather paid by the company (i.e., the payer), which acts as the withholding agent, on behalf of the individual. Therefore, instead of stating the amount to be paid by the company including the withholding tax, the amount should be the gross amount (i.e., the subtotal) minus the withholding tax.

The withholding tax is calculated by multiplying the subtotal by the relevant tax rate, but the calculation method differs depending on whether the subtotal exceeds 1 million yen or not. Let’s take a look at some concrete examples and the math involved.

If the subtotal is 1 million yen or less

Formula: Withholding Tax Amount = Subtotal × Tax Rate of 10.21%

Example: Let’s say the subtotal is 200,000 yen. The math would would be:

200,000 × 10.21% = 20,420

The withholding tax amount comes out to 20,420 yen. But there is an additional formula needed to determine the total net amount the payer owes the payee (i.e., the actual amount to be paid):

Formula: Actual Amount to Be Paid = Subtotal – Withholding Tax Amount

In this example, the math would look like:

200,000 – 20,420 = 179,580

This makes the actual amount to be paid 179,580 yen.

If the invoice is more than 1 million yen

Formula: Withholding Tax Amount = (Subtotal – 1,000,000) × Tax Rate of 20.42% + 102,100

Example: Let’s say the subtotal is 1,800,000 yen. The math would be:

(1,800,000 – 1,000,000) × 20.42% + 102,100 = 265,460

So, the withholding tax amount is 265,460 yen. However, we need to use the same formula as in the previous example to determine the actual amount to be paid. This looks like:

1,800,000 – 265,460 = 1,534,540

Thus, the payee would invoice for 1,534,540 yen.

Advantages of recording the withholding tax amount on invoices

As mentioned previously, there is no law requiring withholding tax to be recorded on invoices. However, recording it offers multiple benefits.

The process of confirming payment amounts is smoother

If you’ve recorded the withholding tax amount, the difference between the subtotal and the amount to be paid is easier to understand, thereby reducing the verification work for payment staff and enabling faster transfers. This is particularly effective in preventing issues for one-time or first-time transactions.

Verification is easier when filing tax returns

For sole proprietors and freelancers, the amount of tax that has been withheld must be settled by filing a tax return. If a payment statement received from a business partner contains insufficient information, the details on the payee’s invoice become a key reference point for verification.

A payment statement typically includes details such as the payment amount, withholding tax amount, and payer’s name, but it does not often specify the date of the transaction or which invoice it corresponds to. Therefore, having the withholding tax amount, transaction details, and transaction date clearly listed on the invoice makes it easier to cross-reference with the payment statement.

Key points when recording withholding tax on invoices

When preparing an invoice that states the amount of withholding tax, there are certain things you need to do beforehand to ensure a smooth transaction.

Confirm whether the remuneration amount should be treated as tax-inclusive or tax-exclusive

Calculating withholding tax using the tax-exclusive method generally results in lower taxes paid, so it is preferable to state amounts as tax-exclusive. However, the payer can sometimes calculate the withholding tax amount using the tax-inclusive method. It is therefore important to confirm with your business partners in advance how consumption tax will be stated and calculated.

Separate remuneration from expenses

When both the remuneration and expenses—such as transportation costs, advance payments, and material costs—are invoiced together, withholding tax might be applied to expenses that are not normally subject to it.

Therefore, it is important to clearly separate the amounts subject to withholding tax from expenses that are not subject to it on an invoice.

If a fractional amount of withholding tax arises, round it down

When calculating withholding tax, numbers after the decimal place can occur. According to the NTA, when calculating an amount that results in a fraction less than one yen, it must always be rounded down. Regular rounding to the nearest whole yen or rounding up is not permitted.

As such, if the withholding tax amount includes a decimal, round down and include the rounded amount on the invoice.

The withholding tax system vs. the Qualified Invoice System

Japan’s Qualified Invoice System primarily concerns input tax credits—also called purchase tax credits—for consumption tax. It is not related to the withholding tax system (i.e., income tax withholding). This means that having an invoice number does not automatically make the work you invoice for subject to withholding tax, and, conversely, paying withholding tax does not require registration under the invoice system.

Whether withholding tax is required is determined based on the type of remuneration or fees involved and not the invoice system. When creating invoices, it can be helpful to clearly separate the entries for consumption tax and withholding tax to prevent confusion between the two and enable smooth and accurate accounting.

How Stripe Invoicing can help

Stripe Invoicing simplifies your accounts receivable (AR) process—from invoice creation to payment collection. Whether you’re managing one-time or recurring billing, Stripe helps businesses get paid faster and streamline operations:

• Automate accounts receivable: Easily create, customize, and send professional invoices—no coding required. Stripe automatically tracks invoice status, sends payment reminders, and processes refunds, helping you stay on top of your cash flow.
  
• Accelerate cash flow: Reduce days sales outstanding (DSO) and get paid faster with integrated global payments, automatic reminders, and AI-powered dunning tools that help you recover more revenue.
  
• Enhance the customer experience: Deliver a modern payment experience with support for 25+ languages, 135+ currencies, and 100+ payment methods. Invoices are easy to access and pay through a self-serve customer portal.
  
• Reduce back-office workload: Generate invoices in minutes and reduce time spent on collections through automatic reminders and a Stripe-hosted invoice payment page.
  
• Integrate with your existing systems: Stripe Invoicing integrates with popular accounting and enterprise resource planning (ERP) software, helping you keep systems in sync and reduce manual data entry.
  

Learn more about how Stripe can simplify your accounts receivable process, or get started today.