Raising the Level of the “Wall (Barrier) of 1,030,000 Yen“ Has Become a Topic of Discussion

Introduction

The National Democratic Party of Japan made great strides in the recent House of Representatives election, and one of its key policies, the raising the level of the "wall of 1,030,000 yen” has become a hot issue. The "wall of 1,030,000 yen," which has been in place for many years, may be raised. If its level is raised, as seems likely, then take-home pay for salaried workers will increase, so this is attracting attention.

What is the "Wall of 1,030,000 Yen"?

Under Japan's income tax laws, a taxpayer is exempt from income tax if their annual income is 1,030,000 yen or less.

This system allows lower-earning spouses and children to reduce their household’s tax burden  by limiting their income from part-time jobs to 1,030,000 yen per year. The 1,030,000 yen figure consists of a 550,000 yen deduction for employment income and a 480,000 yen basic exemption, so that earned income up to a total of 1,030,000 yen is exempt from tax.

Specifically, if income is 1,030,000 yen or less, the lower-earning spouse is entitled to a spousal exemption, which reduces the taxable income of the supporting family members (often the husband).

In other words, due to the income tax and dependent care exemption rules, which could increase the overall tax burden on households, the phenomenon of trying to keep part-time income within 1,030,000 yen is called the “wall of 1,030,000-yen annual income”.

Impact of Exceeding the 1,030,000 Yen Level

Once the annual income amount exceeds ¥1,030,000, the lower-earning spouse will no longer be eligible for the spousal deduction. However, the tax burden does not increase significantly.

First, the lower-earning spouse is only subject to income tax on the portion of his or her income? that exceeds 1,030,000 yen; the entire income is not taxed even if it exceeds 1,030,000 yen, so there is no significant reduction in take-home pay.

Next, the income tax and inhabitant tax deductions for family members (mostly husbands) who support the spouse do not immediately disappear even if the lower-earning spouse’s income exceeds 1,030,000 yen. If the 1,030,000-yen level is surpassed, the spousal exemption ceases to apply, but the lower-earning spouse can receive a special spousal exemption.

However, there is no such provision for dependents such as children. It should be noted that if a child's part-time work exceeds 1,030,000 yen, the family members who support the child (often the father) will have a heavier income tax and inhabitant tax burden.

Special spousal exemption
The difference between the two above-mentioned exemptions is that the spousal exemption is applicable when the lower-earning spouse's income is small (less than ¥480,000 per year), whereas the special spousal exemption is applicable even when that spouse's income is within a certain range (more than ¥480,000 but not more than ¥1.33 million per year).
*The amounts of the exemptions are set in stages, according to the income of the  lower-earning spouse.

Benefits from the Employer Are Also Affected

Under the Income Tax Law, even if a lower-earning spouse's annual income exceeds 1,030,000 yen, his/her take-home pay does not decrease significantly if the special spousal exemption can be used.

However, there are cases where a spousal allowance or dependent care allowance is provided by the employer, and the requirement for these allowances is set at an annual income of 1,030,000 yen or less. In such cases, if that spouse's annual income exceeds 1,030,000 yen, he/she may no longer be eligible for the allowance, so it is necessary to check about this in advance.

This article has explained the “wall of 1,030,000 yen" for income tax. There are various  other walls/barriers, including the “wall of 1,060,000 yen" and the “wall of 1,300,000 yen” for social insurance. It is difficult to understand all of them accurately, but a correct understanding is necessary if your family is affected by these barriers.

The Annual Income Walls/Barriers in Social Insurance

Introduction

 Apart from the above-mentioned wall under the income tax law, there are also walls in social insurance. This wall might be recently revised, and the future direction of this situation is becoming clearer, so let’s verify about it.

About the “Wall of 1,300,000 Yen”

The “wall of 1,300,000 yen" is an income threshold mainly affecting lower-earning spouses who work part-time, and whose annual income exceeds 1,300,000 million yen.

If their income exceeds this level, the individual is then excluded from being a dependent on their {higher-earning} spouse’s social insurance, and is required to pay health insurance and pension premiums on his/her own, which reduces his/her take-home pay. This is the so-called “wall of 1,300,000 yen".

The Newly-Created “Wall of 1,060,000 Yen”

A new “wall of 1,060,000 yen" was added in October 2016. The purpose is to enhance social security for short-timeworkers, in order to cope with the declining birthrate, aging population, and diversification of work styles.

The obligation to enroll in social insurance is now applicable to part-time workers . The conditions for social insurance enrollment as of October 2016 were as follows:

• Minimum of 20 hours of work per week
• Monthly income of 88,000 yen or more (equivalent to annual income of 1,060,000 yen or more)
• Employment period is expected to be at least one year
• Company has 501 or more employees
• Must not be a student

Part-timers who met these conditions were no longer covered by the traditional support system, and were obligated to enroll in social insurance.

“Wall of 1,060,000 Yen"  Expanded

In October 2016, the “wall of 1,060,000 yen" only applied to those working for large companies with 501 or more employees, but the scope of application has been expanded due to a revision of the law. As of October 2022, the condition "Company has 501 or more employees" became "Company has 101 or more employees" for the above list. In addition, the condition "Employment period is expected to be at least one year" was revised to "Employment period is expected to be over two months”.

From October of this year, the coverage has been further expanded, to "Company has 51 or more employees”. In addition, the elimination of the “wall of 1,060,000 yen" for annual income is being considered.

The future direction is that all non-student part-time workers who work more than 20 hours per week may become eligible for social insurance coverage. This will probably have a greater impact on take-home pay than does the “wall of 1,030,000 yen" for annual income. Part-timers who have been working less than 30 hours per week to avoid application of social insurance coverage may see their take-home pay decrease by more than 100,000 yen per year if social insurance premiums are deducted from their paychecks.

Projected Impact of the Expansion of Part-time Social Insurance Coverage

The government explains that the expansion of social insurance coverage for part-time workers is a measure to increase future pension benefits; however, this is inconsistent with its policy direction of increasing the take-home pay of the working-age population, and is expected to be resented by the public. Small, medium, and micro-enterprises will also likely face a heavy economic burden if they apply social insurance to part-timers who work more than 20 hours or more per week.

Even if the “wall of 1,030,000 yen" for income tax is raised, thereby increasing take-home income, the new wall due to the expansion of social insurance could result in a decrease in take-home pay. The future direction of this debate will be watched closely.

Decision-Making on Discount Requests

Introduction

How do you handle cases where your gross profit margin is negative?  There seem to be various policies, such as at all, or making judgments based on the amount involved. In the manufacturing industry, there are cases where it is better to accept an order even if the gross profit margin is negative. We will consider how decisions should be made.

Should We Accept an Order Even if the Price is Below Our Cost?

A manufacturing company is engaged in the manufacture and sale of Product A on order. The cost per unit of Product A is 20,000 yen, as detailed below:

Cost of Product A

• Direct materials cost: 14,000 yen
• Direct labor cost: 4,000 yen
• Manufacturing overhead: 2,000 yen
• Total: 20,000 yen

"Direct materials cost” is the cost of materials used in the manufacture of Product A. “Direct labor cost” refers to the labor cost of regular employees directly involved in manufacturing, and “manufacturing overhead” refers to all fixed costs.

Suppose that the company sells this Product A for 25,000 yen. It just received an inquiry from a new customer who wants to order one unit of Product A. However, the customer said it is not profitable for him to pay 25,000 yen per unit, so he asked the company if it could sell the unit to him at 18,000 yen per unit.

Should the company accept such an order from this customer? The company has sufficient production capacity and is able to fulfill the order within its current production capacity.

Should the seller not sell it for 18,000 yen, because it would be below cost? Or should it make the sale even if the gross profit margin is negative?

It's More Profitable to Take the Order

If the company receives an order, it will realize 18,000 yen in sales. However, if no order is received, no sales will be generated. What about costs? Direct materials costs consume 14,000 yen if an order is received, but zero if no order is received. Direct labor costs and direct overhead costs are sunk (embedded) costs that do not change regardless of whether or not an order is received.

	Takes the order	No order taken	Difference
revenue	18,000 yen	0 yen	18,000 yen
direct materials cost	14,000 yen	0 yen	14,000 yen
direct labor cost	4,000 yen	4,000 yen	0 yen
manufacturing overhead	2,000 yen	2,000 yen	0 yen
Total difference			4,000 yen

As shown in the table, profits will increase by 4,000 yen if the order is taken. This 4,000 yen is calculated by subtracting only direct materials costs, which are variable costs, from the revenue amount. This profit is called “marginal profit”, and is expressed by the following formula:

Revenue - variable costs = marginal profit

The meaning of the term “marginal profit” is a bit difficult to grasp, but it is easier to understand if we view it in terms of "variable or additional profit”. In this case, “variable” means ‘directly proportional to changes in sales’.

However, while accepting orders at a reduced price can be beneficial in terms of profits, the impact on brand image must also be considered. By accepting discounted pricing, your products risk being perceived by customers as “cheap", which may damage the long-term value of your brand. So please be careful to not get caught up in a simple price war.