Japanese Social Security and self-employment

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I have a potential client (of the accounting firm I work for) that is a US Citizen that is apparently married to a Japanese woman and has Japanese kids and lives in Tokyo.  He works for an American company.  He wrote a book that is kinda related to what his work is about, and it came out in 2021, which he received advanced payments for.  I was tasked with analyzing his 2021 US tax return and seeing if there were any mistakes made.  This is the start of a rabbit hole that I'm getting very frustrated with.

The main issue that I'm having difficulty with is whether he should be paying US self-employment tax on his book income.  In general, if a US citizen lives abroad and has business income, they pay self-employment tax on that income (in addition to any income tax, though that is normally reduced to zero through various mechanisms) which is a replacement of the social security payroll taxes on wage income.  However, the US has what is called a Totalization Agreement with Japan that somewhat coordinates the social security systems for those whose work might be subject to the taxes of both countries.  This is not new to me in theory, as I've dealt with a similar situation for someone but with respect to Canada instead of Japan.

However in the current case, I have a much more difficult time analyzing his Japanese tax return, nor do I know much about how the Japanese social security system works.  I've tried to read about it via things that I've googled, but I keep getting turned around in circles and I'm not sure if people are using the same terms for everything.  Obviously it would help a lot if I could read Japanese well, but my Japanese reading skills are very limited, and I know nothing about the terminology used for taxation or social security.

From what I can tell, he reported the income that he received for the book on the Japanese return, and also reported the net income (after expenses) that matched up with the source document I had for those expenses.  However, I don't see any indication that he paid anything resembling the US self-employment tax on this net income, nor does it appear as though business income is taxed any differently in Japan than wage income; the document explaining the tax return in English that I found suggests that both sources of income are aggregated for taxation and the only income that has tax calculated differently is related to some times of investment income that presumably have preferential treatment.

According to what I've read on the US-Japan Totalization agreement, since he is a resident of Japan he should be paying only Japanese social security taxes on the self-employment income.  Or rather, the US Social Security administration indicates that he pays only Japanese social security taxes if he's self-employed.  But in this case, the self-employment income is just a side gig to his main job, and I'm not sure if that makes a difference.  Additionally, his US wage statement (W-2) indicates that social security taxes were withheld, which seems to be at odds with what I'm reading about the Totalization agreement that says if he works for a US firm for more than 5 years in Japan that he should only be paying Japanese social security.  He seems to have been in Japan at least 10 years judging by the age of his kids that have Japanese names.  I did not get a copy of his Japanese wage statement (if he even got one).

On top of this, he apparently is voluntarily paying into the Japanese National Pension, but while this is something like Social Security, it is explicitly not covered by the Totalization agreement, since even if it's a government program with a similar goal, it doesn't work anything like US Social Security.  I know he's paying into this because he claimed a deduction for the contributions on the Japanese tax return, and in that case I was use my knowledge of kanji to tell quickly the that writing on that line was the same as the name of the National Pension.  It shouldn't matter that he's contributing to the National Pension in terms of how that affects his US Social Security, but that suggests to me in a way that he's perhaps not paying into any other Japanese social security system, whether on his wages or on his book's income.

I spent all morning doing research on this topic and got effectively nowhere, as I felt I knew less about the topic than I did at the start of day, or at least it was the case that the facts of this guy's situation didn't seem to square with what I was reading about how it should work.  His employer is not exactly a Fortune 500 company and is privately owned, but it has offices all over the world and its Detroit presence is fairly well known in the business community, so I would assume that his employer is doing things correctly, but that's just an assumption that might very well be wrong. 

I'm going on a Zoom call with him tomorrow afternoon and I can check the forum from work to see if anyone can provide me with any more information that they have with regard to any of the topics that I've covered.   I'm mostly interested in what people can tell me about how any government-run required pension program and associated health insurance works so as to know whether he paid into a Japanese system equivalent to US Social Security on his book's earnings in some way.  I hate to bring my work to the forum, but it's one resource that might be able to help me, as I feel like there just isn't enough good information available online on this topic.

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A rabbit hole indeed.  I'm afraid I can't contribute anything, sorry to say.  A few questions have come to mind, however.

1) Did your Zoom call last Wednesday with your potential client help you in any way?

2) Is this potential client able to provide you with a copy of his Japanese wage statement?  I would be surprised if he didn't get one, and this sounds like quite an important document for you to have.

3) Since this person's company has offices all over the world, would it be appropriate for you to seek out and talk to that company's tax lawyers or tax consultants?  Or might that cause problems if it's your job to see if there's any possible wrongdoing?

4)  Can your company assign to you a Japanese-speaking person who could not only translate the Japanese tax return but who would be knowledgeable enough about the terminology that is being used to give you a thorough understanding of the document and the laws pertaining to it rather just a simple line-by-line translation?  You would need the same help with the Japanese social security system terminology.  Online language assistance is just not going to be up to the task of what you're being assigned to do.  You need a quite specialized type of assistance related to Japanese tax law as well as Japanese social security law.  And you're stumbling along trying to do this in a language you're not sufficiently familiar with!  Your company needs to provide you with some specialized translation assistance.  If you had some reference material that was translated into English, you would be fine.  You would still need to do some more fact-finding in this particular case just like you would any other work assignment, but you wouldn't be put in an impossible situation like you find yourself in now.  A rabbit hole indeed.







Edited by sumojoann
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The Zoom call went perfectly well.  The guy said that he was voluntarily paying into US Social Security because he had little confidence that he'd ever get anything from Japan because of the demographic crisis.  I informed him that was a potentially good idea, but given the amount of money he made, it wouldn't take very many years of US SS withholding to put him at a place where it no longer was a economically beneficial investment.  US Social Security is an extremely good investment for those on the low end of the pay scale, and as you make less money it becomes less and less attractive, and by the time you've hit the wage limit, it's a very poor investment.  But no one ever really thinks that way, because most people don't have a choice.

So he said that he's basically considered a freelancer in Japan.  He said that his company has no actual office in Japan - it's just him.  He doesn't pay into anything other than the National Pension that he's required to.  I did more research and determined that said plan was the only thing available to those who were not employed (for whatever reason), which has to be a major detractor from entrepreneurship; the US, you can save a lot more money in tax-favored plans if you're self-employed than if you're a worker (assuming you make good money), while in Japan you apparently can't save anything more than anyone else who isn't exempted from the National Pension payments.

I'm still not sure how to apply the Totalization agreement in his situation.  It doesn't seem like the system in Japan resembles that in the US at all, so I'm not sure exactly how it works.  There's no indexing of benefits based on wages, and no additional tax on wages that gets filtered down to the poor; there's just some amount of general revenue that's needed to fund the system (which also doesn't occur at all in the US - SS has to fund itself through payroll taxes, but won't in probably 15 years if action isn't taken soon).   So I'm not sure what the US SS website means when it says that if you're self-employed in Japan you only pay taxes to Japan, unless that's referring explicitly to the National Pension, and paying into that makes all your self-employment income, regardless of amount, unable to be taxed by the US.  The Internal Revenue Code that implements the agreement seems to suggest that the earnings have to be taxed by the other country to be exempt, but it's not entirely clear, and I can't find anything that explicates it further; only plenty of places that repeat it verbatim.

It's unlikely that it's going to be my problem though, because we discussed the numerous things that the preparer of his US return did incorrectly based on the documents he provided me, and I even missed one thing then, but he did say to not worry about researching it any more, because he had plenty of things to go back to his other preparer about.  He may or may not use our firm going forward; he'll get billed something for our review of his return, but I doubt it will make up for all the time i spent on it.  I was more under the impression he was highly likely to become a client, because practically everyone who asks us to review their return ends up becoming one, but we'll have to wait and see.

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