Among sole proprietors and freelancers, a method of using a "micro-corporation (one-person company)" to hold down social insurance premiums is well known. The idea is that by setting up a small company and setting your own director's compensation low, you can bring your social insurance premiums (health insurance and employees' pension) down to the minimum level. This is a legal option under the system, but it presupposes a genuine business, and a company that exists only in form carries the risk of being denied and hit with back payments. This article organizes, neutrally, why premiums fall, a rough sense of the savings, and the conditions you must keep and the risks involved.
Why does a micro-corporation lower social insurance premiums?
The key is the difference in how the premiums are determined.
A sole proprietor's National Health Insurance: linked to the previous year's income. The higher your income, the higher it gets, and it can reach the cap (over ¥800,000 a year). The National Pension is a flat amount (about ¥17,000 a month).
A company's Health Insurance / Employees' Pension: determined by the "standard monthly remuneration" of directors and employees. If the compensation is low, the premiums are low too (there is a lowest grade).
As a rule, a company is obliged to enroll in Health Insurance and Employees' Pension even if it has only one director, the president[Japan Pension Service (in Japanese)]. So if you deliberately set the director's compensation low, the standard monthly remuneration falls to the lowest grade and social insurance premiums are minimized. Furthermore, once you are enrolled in social insurance through the company, even if the same person's sole-proprietor income is large, they do not enroll in National Health Insurance or the National Pension (because social insurance takes priority). This is the point at which you can avoid the "income-linked National Health Insurance."
How much should you set the director's compensation at?
・¥45,000 or less a month: a guide at which no income tax is levied on the individual and it is easy to keep social insurance premiums at the minimum level.
・Up to about ¥63,000 a month: a range in which the standard monthly remuneration tends to stay at the lowest grade (varies by the grade table of the Japan Health Insurance Association [Kyokai Kenpo] and by fiscal year).
* The specific premium amount is determined by the prefecture-by-prefecture premium table of the health insurance you enroll in (Kyokai Kenpo, etc.) and by the grade for that fiscal year. Always check the latest amount against the official premium table[Kyokai Kenpo].
Because you set the director's compensation low, the company's profit is subject to corporate tax; but it is common to design things so the micro-corporation's profit is kept small. Most of your living expenses end up being covered by your other sole-proprietor income.
The "dual-wielding" design (sole proprietorship + micro-corporation)
Many cases involve holding both a sole proprietorship and a micro-corporation — "dual-wielding." The point is to divide the roles.
| Sole proprietorship (blue return) | Micro-corporation | |
|---|---|---|
| Main role | The main earnings (business income) | Where you enroll in social insurance (director's compensation kept low) |
| Tax merit | Blue return special deduction of up to ¥650,000 | Employment income deduction; wider scope of expenses |
| Social insurance | (No National Health Insurance / National Pension needed, because you enroll through the company) | Health Insurance / Employees' Pension (minimum level) |
If it looks like you have simply and arbitrarily split the same business between an individual and a company, there is a risk of denial. The basic approach is to clearly separate the business content, for example "the sole proprietorship is consulting and writing; the company is product sales and real estate." The premise is that both have genuine substance (transactions, books, contracts).
A picture of the savings
National Health Insurance (income-linked) can reach several hundred thousand yen a year up to the cap for high earners. On the other hand, if you set the director's compensation of a micro-corporation to the minimum level, you may be able to hold the Health Insurance + Employees' Pension premiums (employer and employee combined) to around ¥300,000 a year.
→ The larger a sole proprietor's income, the more easily the savings effect on social insurance premiums appears, through the difference against National Health Insurance.
* This is strictly a rough image. The actual amount varies greatly by income, municipality, fiscal year, and family composition. Check estimates with a certified social insurance labor consultant, or a tax accountant / labor consultant.
Note that once you enroll in the Employees' Pension, your future pension becomes more generous than the National Pension alone (the old-age employees' pension is added on top). "Paying premiums" also has the aspect of future benefits.
Risks and points to note (be sure to check)
If it is deemed a company without substance set up solely for the purpose of reducing social insurance premiums, the social insurance enrollment itself may be denied, and you may be retroactively charged back National Health Insurance, National Pension, and the like. Genuine business substance (sales, transactions, books, contracts) is indispensable.
- Splitting the same business is a no-go: a form in which you have merely reassigned the same work as your sole proprietorship to the company is easily denied.
- Fictitious or inflated amounts are illegal: paying salary to a family member who does not actually work, or booking private expenses as business expenses, amounts to tax evasion.
- Director's compensation is, in principle, fixed and periodic: you cannot freely change it mid-term, and if you set it low you also need to consider the balance with your living expenses[National Tax Agency No.5200].
- The cost of maintaining a company: even in the red, the per-capita levy of corporate residence tax (from about ¥70,000 a year), tax accountant fees, and the administrative burden of social insurance arise.
- The relationship with the various National Health Insurance systems: injury-and-illness allowance and maternity allowance exist under Health Insurance (Kyokai Kenpo, etc.), but also check that the premises for dependents and premium calculation change.
"Optimizing social insurance premiums" is fine as long as it is within the legal range, but the premises are that it is accompanied by genuine substance and that the separation of the businesses is clear. We strongly recommend consulting a tax accountant or a certified social insurance labor consultant before incorporating.
Who it suits and who should think carefully
Worth considering
- Sole-proprietor income is large and National Health Insurance is expensive
- You can run, in a company, a business with genuine substance separate from the sole proprietorship
- Savings exceeding the cost of setting up and maintaining a company are expected
- You can properly manage your books and filings
Be careful
- You cannot separate the business substance (only the same business)
- Income is small and National Health Insurance was low to begin with
- You want to avoid the administrative and cost burden
- You value only the immediate premiums over the future pension amount (employees' pension)
FAQ
Is lowering social insurance premiums with a micro-corporation illegal?
Enrolling in social insurance with a company that has genuine business substance and setting the director's compensation low is itself legal. However, a company without substance set up solely to reduce social insurance premiums may be denied. Substance and separation of the businesses are the premise.
How much should the director's compensation be?
If you want no income tax levied and social insurance premiums at the minimum level too, ¥45,000 or less a month is one guide. Because the lowest grade of the standard monthly remuneration differs by the Kyokai Kenpo premium table and by fiscal year, check against the latest table.
What happens to the sole proprietorship's National Health Insurance?
If you enroll in Health Insurance / Employees' Pension through the company, the same person does not enroll in National Health Insurance or the National Pension. Being able to avoid income-linked National Health Insurance is the central merit of this method.
What kind of business should the company run?
The basic approach is a business with genuine substance separate from the sole proprietorship (e.g., the individual does consulting; the company does product sales or real estate). Formally splitting the same business carries the risk of denial.
Summary
Reference links (sources)
This article is based on materials from the following public bodies (neutral, primary sources). Because premium rates and grades are revised every year, always check the latest premium table and the advice of a tax accountant or a certified social insurance labor consultant.
- Japan Pension Service — Covered establishments and insured persons (in Japanese)
- Japan Health Insurance Association (Kyokai Kenpo) — Premium tables (in Japanese)
- National Tax Agency No.5200 Director's remuneration (fixed periodic remuneration, etc.) (in Japanese)
- National Tax Agency No.2070 The blue return system (in Japanese)
* This article is general information, not tax or social insurance advice. For whether to proceed and how to design it, please consult a tax accountant or a certified social insurance labor consultant.