How to Make Year-end Adjustments for 2024

Introduction

On September 24, the National Tax Agency (NTA) opened a "Year-End Adjustments FAQ Page (for 2024)" on its website, and published "How to Make Year-end Adjustments for the Year 2024”, and other information. The year-end adjustments for the 2024 tax year include an annual adjustment of the flat-rate tax reductions, in addition to the usual year-end adjustment procedure.

Basic Flow of Year-end Adjustments

Making year-end adjustments is a procedure to settle the income tax withheld by a company from an employee's salary. Although salaried employees are subject to monthly withholding of taxes based on their income for the year, any excess or deficiency will be adjusted through the year-end adjustment. The specific procedures are as follows:

1. Submission of Application for Exemption for Dependents
   An employee submits an "Application for (Change in) Exemption for Dependents of Employment Income Earner" to the company. This is to report the number of dependents, the spousal exemption, the exemption for disabled persons, etc.
2. Submission of Insurance Premiums Deduction Declaration Form
   The "Application for Deduction for Insurance Premiums for Salaried Workers" is submitted to report deductions for life insurance premiums, earthquake insurance premiums, etc. Also, payments that are eligible for deductions for social insurance premiums and small-scale enterprise mutual aid premiums should be reported here.
3. Declaration of Basic Exemption, Special Exemption for Spouse, etc.
     If the employee's spouse earns less than a certain amount, the employee is eligible for a special spousal exemption.
4. Confirmation and Settlement of Deductions
   The company verifies the employee's income and deductions for the year, and recalculates the amount of income taxes. Based on this recalculation, any over- or under-taxes will be adjusted in the December salary payment.

Paperwork for Annual Adjustmentof Tax Reduction related to Flat-Rate Tax Reductions

A flat-rate tax reduction for income tax was introduced in 2024. The purpose of this system is to reduce the tax burden on individuals by directly deducting a certain amount from their income tax. The main points of the flat-rate tax reduction in the year-end adjustment are as follows.

【Those Applicable】

The flat-rate tax credit applies to salaried employees who meet certain income requirements. The coverage is broad and applies to ordinary salaried workers, with some restrictions for higher-income earners.

【Procedures for Year-end Adjustment】

The company identifies employees who are eligible for the flat-rate tax credit at the time of year-end adjustment, and calculates the amount of the flat-rate credit. Based on this, the income tax amount is reduced. As with regular deductions, it is important that employees submit the appropriate documentation.

The "Year-End Adjustment for 2024" page includes a "Year-End Adjustment Checklist for 2024," summarizing the points that are easy to make mistakes on when carrying out a year-end tax adjustment. In addition to the basic procedures, new adjustments are required for the next year-end adjustment due to the introduction of the flat-rate tax reduction system. It is important to understand how the year-end adjustment works, and to support employees so that they can receive appropriate tax reductions.

How to Think about Duration of Childcare Leave and Length of Employment

Introduction

The Child Care and Family Care Leave Law stipulates that, in principle, the period until a child is one year old (up to a maximum of two years old) is covered by childcare leave. The period of leave for childcare is included in an employee’s years of service.  According to the results of the 2023 Basic Survey of Gender Equality in Employment Management* released by the Ministry of Health, Labor and Welfare, 84.1% of women and 30.1% of men took childcare leave.
* https://www.mhlw.go.jp/toukei/itiran/eiyaku.html

The Childcare Leave Period is Also Included in Years of Employment

Understanding the calculation of the length of childcare leave and the years of employment for the retirement income deduction under the Income Tax Law is an important factor affecting severance pay paid upon retirement. The retirement income deduction is a system that allows a certain amount to be deducted from the amount of retirement payments to reduce the tax burden on retirement benefits.

This deduction is calculated based on years of employment. Whether or not the childcare leave period is included in the years of service (employment) affects the amount of the retirement income deduction, so an accurate understanding is necessary.

Calculation of Retirement Income Deduction

The amount of the retirement income deduction is calculated based on years of service using the following formula:

• If the number of years of employment is less than 20 years: 400,000 yen × number of years of employment
• If the number of years of service exceeds 20 years: 8 million yen + (700,000 yen x (years of service - 20 years))

Thus, the amount of the retirement income deduction increases with the years of service. Therefore, whether or not the period of childcare leave is included in the years of service has a direct impact on the amount of the deduction.

Calculation of years of service during childcare leave

Under the Income Tax Law, "years of employment/service” for the retirement income deduction does not refer to only the period of actual work, but rather to the entire period during which the employment relationship continues. Even during childcare leave, as long as the employment contract has not been terminated, that period is also included in calculations of years of service.

Therefore, the period of childcare leave is included in the years of employment, and is not disadvantageous in the calculation of the retirement income deduction.

Specific Example regarding the Calculation of Years of Service

For example, if Employee A worked for a period of 20 years, and took childcare leave for two of those years, his/her years of service, including those two years, would be calculated as 20 years. Therefore, the amount of the deduction for Employee A's retirement income would be as follows:

For 20 years of service: 400,000 yen × 20 years = 8 million yen

If A had worked for the same 20 years without taking childcare leave, his retirement income deduction would be the same 8 million yen, and his years of service and the deduction would not be affected by his taking childcare leave.

The Importance of a Children Leave Period Being Included in Years of Service

By including the period of childcare leave in the years of service, it protects employees who take childcare leave from being placed at a disadvantage. Although childcare leave is a period of time during which work is interrupted due to childbirth or child rearing, it does not adversely affect the retirement income deduction, a tax relief measure for severance pay received when an employee leaves the company, because the employment relationship continues.

Therefore, taking childcare leave does not put an employee at a disadvantage when s(he) eventually leaves their company, allowing them to feel reassured.

Utilization of the Childcare Leave System, and Company Responses

The childcare leave system is an important system that helps employees balance work and childcare, and protects the rights of working parents. By making the system known to employees and creating an environment in which it is easy for them to take childcare leave, you can help reduce their anxiety and promote their smooth return to work afterward.

On Deciding Whether or Not to Outsource

Introduction

There are cases where outsourcing may at first glance seem to reduce costs, but in fact it does not. In the manufacturing industry, for example, companies sometimes face the question of whether to produce part of the process in-house, or to outsource it. Let’s think about how this should be considered.

In-house or Outsourced?

A manufacturing company uses procured raw materials to make ‘part A’ through its processing process, then in its assembly process uses that part when it produces 'product B’. Now, in order to reduce costs, the company is considering outsourcing the entire process from the procurement of the raw materials to the processing of ‘part A’.

• Direct material costs: 50,000 yen (parts + raw material costs)
• Regular (Full-time) employee labor costs: 20,000 yen (labor costs for regular employees directly involved in processing operations)
• Contract employee labor costs: 5,000 yen (labor costs for contract employees directly involved in processing operations)
• Manufacturing overhead: 15,000 yen (depreciation and other expenses incurred throughout the plant (incurred on a fixed periodic basis regardless of whether or not outsourcing is performed))
• Total: 90,000 yen

According to the factory management department, the production cost of part A is 90,000 yen per piece, the breakdown of which is shown in the figure above. On the other hand, a potential subcontractor says it will undertake subcontract processing of the same part for 60,000 yen per piece. In the case of subcontracting, the manufacturer plans to terminate its contract with the contract employee(s). In this case, can the company reduce costs if it subcontracts out the processing of part A?

Will Full-time Labor Costs be Reduced?

 If a product with a manufacturing cost of 90,000 yen can be outsourced for 60,000 yen, would outsourcing lead to cost reduction? Actually, it’s not that simple. Let's clarify the subject of comparison, break it down into its elements, and identify the parts that will change and those that will not.

Direct material costs will disappear if the company outsources. Contract labor costs will also be eliminated, because it plans to terminate its contract with the contract employee. Manufacturing overhead costs will remain unchanged regardless of whether or not the part is outsourced.

So what about permanent employee labor costs? It seems that if the company decides to transfer the regular employee to another department, it would also eliminate those labor costs, but is that really the case?

<Outsourcing causes full-time labor costs to become zero, and appears to be preferable>.

	In-house manufacturing	Outsourcing
Direct material costs	50,000 yen	0 yen
Full-time employee labor costs	20,000 yen	0 yen
Contract employee labor costs	5,000 yen	0 yen
Manufacturing overhead	15,000 yen	15,000 yen
Outsourcing expenses	0 yen	60,000 yen
Total amount	90,000 yen	75,000 yen

Fixed costs are said to be fixed because the resource from which they originate is fixed. Therefore, unless the managed resource itself is gone, fixed costs will not decrease. In other words, labor costs will not decrease unless full-time employees are laid off.

<As long as no layoffs are made, full-time employee labor costs will not be reduced to zero, thus favoring in-house production>.

	In-house manufacturing	Outsourcing
Direct material costs	50,000 yen	0 yen
Full-time employee labor costs	20,000 yen	20,000 yen
Contract employee labor costs	5,000 yen	0 yen
Manufacturing overhead	15,000 yen	15,000 yen
Outsourcing expenses	0 yen	60,000 yen
Total amount	90,000 yen	95,000 yen

Unless layoffs or pay cuts are made, full-time employee labor costs cannot be reduced. Therefore, the conclusion is that from the standpoint of cost reduction, in this case the company should continue to produce in-house instead of outsourcing.