Some companies provide allowances or special leave to employees who have served for a long time. While such allowances are offered as benefits, companies should be careful about how to treat social and labor insurance premiums on such benefits. This article explains about social and labor insurance premiums and income tax on long-service allowances.
[1] Social insurance
Under the social insurance program, all items that are provided routinely and substantially in return for labor and serve as support for insured employees’ livelihood are considered as “remunerations.” The Japan Pension Service’s “Examples of items for the procedure of periodically scheduled decisions and occasional revisions of standard monthly remunerations,” dated June 27, 2023, states that, as a basic rule, long-service allowances that satisfy the following conditions are considered benefits and do not fall under “remunerations.”
(Purpose of allowance)
Allowances provided as part of the company’s benefit program or for the encouragement of long service. In the case the allowance is accompanied by “refresh holidays,” it is considered to have the nature of benefits package.
(Commendation standard)
Allowances provided to any employees with the length of service as the sole requirement
(Form of allowances)
Allowances whose amounts do not exceed the level of cash contributions in light of socially accepted conventions and whose period of commendation is roughly five years or more.
An allowance will not be immediately considered as remuneration, just because it does not meet any of the conditions above. Instead, whether it is considered as remuneration in a general sense should be carefully examined before making the decision.
[2] Labor insurance
Under the labor insurance program, all items paid to employees in return for labor are treated as wages, whether they are categorized as wages, allowances or bonuses.
The government provides a list of specific items that are treated as wages and that are not. For example, rewards for continued services are not considered as wages, whether there are labor agreements, work rules or not. Since long-service allowances are a type of such rewards, companies should exclude them from wages under the labor insurance program.
[3] Income tax
The National Tax Agency’s website has the explanation about income tax.
Commemorative gifts provided to employees on the occasion of a company anniversary or items given for long-time services will be excluded from taxable income, if they meet all the conditions. (Please refer to the reference link for the conditions.)
If a company offers cash or gift tickets, instead of commemorative items or expenses for leisure like travels or plays, the amount, or the face amount in the case of gift tickets, will be included in taxable incomes.
Even if the purpose is the same, benefits are treated differently under individual laws. Please check carefully if they are treated appropriately.
[Reference]
Japan Pension Service, “Examples of items for the procedure of periodically scheduled decisions and occasional revisions of standard monthly remunerations”
https://www.nenkin.go.jp/service/kounen/hokenryo/hoshu/20121017.files/jireisyu.pdf
Labour Ministry, “How to complete the fiscal 2023 labor insurance annual renewal form for employers (continued business)
https://www.mhlw.go.jp/new-info/kobetu/roudou/gyousei/hoken/kakikata/keizoku.html
National Tax Agency, “No. 2591 When commemorative gifts for company anniversary or long-service gifts were provided to employees”
https://www.nta.go.jp/taxes/shiraberu/taxanswer/gensen/2591.htm
*The content is valid as of the date of this article.
