In Japan, many employees do not file their own income tax returns every year.
This does not mean that they are not paying income tax. Their employer deducts tax from their salary and adjusts the amount at the end of the year.
Each month, the company withholds income tax from the employee’s salary. This is known as tax withholding.
However, the amount withheld each month is only an estimate. At the end of the year, the company checks the employee’s annual salary, dependents, life insurance premiums, and other relevant information. It then recalculates the income tax due on that salary. This process is called the year-end adjustment.
If too much tax was withheld, the employee receives a refund. If too little was withheld, the difference is deducted from the employee’s salary. For many employees, this completes the income tax process for their salary.
Employees also submit documents about insurance premiums and other deductions to their company near the end of the year. However, they usually do not feel that they are personally filing a tax return. It feels more like giving the company the documents it needs.
For this reason, many employees in Japan see filing a tax return as something they do only when they have special circumstances.
For example, they may need to file one if they earn income from a side job that their company cannot include in the year-end adjustment, or if they receive salaries from more than one employer.
Employees may also file a tax return to claim deductions that cannot be handled through the year-end adjustment, such as a medical expense deduction or a home loan deduction in the first year.
The reason most employees do not file their own tax returns is not that their taxes are being ignored. Their employers already handle the monthly tax withholding and the year-end adjustment.