Becoming a freelancer in Japan (As a software engineer): Costs estimations

With the boom of remote work due to Covid lots of people are considering working remotely for overseas companies. It makes a lot of sense: salaries are better, conditions are better and engineering problems are more interesting.

Many companies are setting up themselves as legal entities in Japan just for the sake of hiring engineers. However many of them are not, but they are still hiring remotely worldwide.

If you want to work for an overseas company with no legal entity in Japan you need to either (i) setup your own company, (ii) be a freelancer, (iii) work through a third party. all of those have different benefits and upfront requirements. In this post I won’t cover the question of which setup is better. However this is one question you should make yourself depending on your circumstances and your expected income.

I am working for an overseas company from Japan. Due to various circumstances I decided to setup myself as a freelancer.

In this post I will try to address detailed questions regarding costs so you can make a realistic estimate and thus can charge your prospect clients with better information at hand. In my case, I got ‘hired’ by an European company and I struggled to give them a number for my hourly rate, as I did not know how my costs would increase with respect to being a “kaishain”. The existing information online regarding costs is not very clear. I had lots of questions.

I will leave aside the details of why do you want to setup yourself as a freelancer. I will also leave aside visa details as they are out of the scope of this post

Administrative procedures

Administrative procedures are very straightforward and it should take you less than just 2 hours. There is very little to say here and you probably will find many information online on how to do it.

In order to become a freelancer you need to go to your local tax office. There you need to fill a form. The form will ask basic details such as:

• Your Hanko
• The purpose of your business
• The name of your business
• Your Zairyu Card

Once you are at the tax office you need to register yourself as a freelancer for which you have two choices: Blue Form and White form.

This is a very important detail. You should research about Blue form vs White form differences. In short if you pick the blue form you need to keep detailed accounting with the advantages that you get more tax benefits at the end of the fiscal year.
If you pick the white form your requirements regarding accounting are not as strict but there is less uplift regarding taxes.

Once that procedure is done then you are legally freelancing.

An important note is that you can start freelancing before registering yourself at the tax office. However from your first gig you have a deadline of three months to register yourself as a freelancer.

I will skip details regarding this step, there are plenty online and most of them are accurate. The procedure itself is very easy.

Estimating costs

This is the important bit, if you are in my position you are negotiating your “salary” with your companies overseas. In which case you are trying to estimate how much you would be paying for : Pension , Health Insurance, and Taxes.

Pension

Once you are a freelancer you will be under the national pension scheme . Good news is that this means you will be paying a fixed amount per month ~16k yen per month . Which is probably much lower than what you were paying as a Kaishain .

The bad news is that once you reach retirement age you will get very little every month .

If you have dependents when you were a Kaishain they got their pensions covered . Now that you are a freelancer those dependents have to pay their own pension too. This means if your partner is a dependent then you have to pay another ~16k yen .

To be on the national pension you need to go to the ward office. You have to:

• Fill a form
• A letter from your previous company stating that you not longer work there
• Spend a few hours.
• Pick a payment method

Health Insurance

Health insurance costs will increase massively . You will be under national health insurance . This does not have other impact in terms of services . You can access the same health services as before.

The good point is your health insurance cover all your dependents, unlike pension you only need to pay one insurance and that covers all your dependents .

Cost wise expect a massive increase. Look at your previous payslips and add another 30% to 40% to your existing health costs. Your health insurance costs will be calculated based on how much money you did in the previous fiscal year .

In order to be on the national health insurance you need to go to your ward office and ask for it. You need to:

• Fill a form
• A letter from your previous company stating that you not longer work there
• Spend a few hours.
• Pick a payment method

It is hard to come up with an exact number for your health insurance costs as these depends on: (i) you previous year income, (ii) your location, each city has a different rate.

Taxes

Taxes will be paid at the end of the fiscal year. You can get an accountant to do this on your behalf . Depending on how simple your business is you can probably do it yourself via one of the websites I talk to in the accounting section.

If you are working with overseas companies you don’t need to pay VAT. This is because you are exporting a service . You can charge VAT to your customer but you don’t have to pay it as long as your customer is not based in Japan .

You can get a lot of tax benefits if you are on the blue form.

You can also claim expenses such as:

• Up to 30% of your rent if you work from home. The percentage you can deduct is given by calculating the percentage of your home that you use as an office
• Business meetings , restaurant outings (of business related )
• Tools for your job : i.e new computer , new headsets
• Service costs : internet , electricity
• Education: Books, conference, conference trips.

Accounting

My advice is to get in touch with an accountant to solve more personal and detailed questions. During your first year (while you learn how things are done) let this person do the yearly tax submission at the end of the fiscal year.

I will briefly describe my setup so you can bootstrap yourself :

• I’ve been using the accounting services of Fuchi-san ( https://www.kaori-fuchi.com/en/ ). She helped me solve very basic questions and helped me get setup. She can also do the yearly taxes on your behalf.
• Get a new bank account . This bank account will be used exclusively for your customers to wire money to you. You don’t have to create a new account for just this purpose, however by doing it, you will massively simplify your accounting efforts.
• I am using https://www.freee.co.jp/ . This is a webservice that connects to your bank account and keep tracks of your money expenses and income.

Using freee.co.jp provides me two things :

1. A way to do journaling (keeping a record of my expenses, income) This is one of the requirements for the blue form. When you create an account on freee it will ask you which form you picked (white or blue)
2. You can generate the end of the year tax submission via freee. I think this is possible if your business is straightforward enough.

freee.co.jp keeps track ofevery transaction from your bank. Whenever you spend some money you can tag it in a list of predefined expenses that they provide for you already.
Every time money is wired to your account the same thing happens. So you can tag your income as a `non-vat taxable` income for example.

freee.co.jp is easy to setup, it lets me comply withthe regulation required for operating under blue form freelancing. At the end of the year my accountant can use freee.co.jp to generate my end of the year submission.

Keeping track of things can get difficult if you have a single bank account for both personal and business. Make sure to make a new bank account as soon as you consider freelancing, and make sure you transfer money from your business bank account to your personal one for you daily needs.

Liability Insurance

Most likely your clients will require you to have some sort of liability insurance. You can directly contact insurance companies and get a liability insurance depending on your particular requirements.

However if the requirements are not particularly special you can use https://www.freelance-jp.org/ to get a basic liability insurance. If you become a member there you get a lot of benefits, one of them is a standard liability insurance (see benefits: https://www.freelance-jp.org/benefits). Other ones include discounts for Coworking spaces.

In overall getting setup was easier than I expected. The same goes for taxes and also receiving payments.