The practice of adjusting work schedules by part-time workers to reduce their annual income to avoid taxes and social insurance premiums is attracting attention. As workers adjust their work schedules to prevent annual income from exceeding levels at which workers must pay taxes and social insurance premiums, an hourly wage hike leads to a decrease in labor supply, troubling employers.
The wives of salaried workers often adjust their hours in such ways. Those who are not covered by their employers’ social insurance programs must pay about 300,000 yen per year in national pension and health insurance premiums. However, if annual income is 1.3 million yen or less for the spouse of a worker covered by the employee pension insurance program, the spouse, as a third-category insured person, can be covered by the national pension program without paying any premiums and is treated as a dependent family member so they are also covered by the worker’s health insurance program without paying any premium.
In addition to the 1.3-million-yen income limit for avoiding social insurance premiums, there is an income limit below which tax is exempt.
The 1.03-million-yen income limit is often seen as a barrier to taxation as it is the point at which family members are no longer considered dependents and therefore are expected to contribute to public systems by paying taxes. In fact, the tax burden that is initiated at the 1.03-million limit is minimal. However, the spouse becomes subject to resident tax if annual income surpasses a limit that differs by municipality, ranging from 0.96 million to 1 million yen. The special spousal tax deduction is also removed as the spouse’s annual income tops 1.5 million yen (this income limit was raised from 1.05 million yen to 1.5 million yen in 2018). If the tax burdens of both spouses are considered together, the household only needs to pay about 20,000 yen extra when the part-time spouse’s income increases from 950,000 yen to 1,050,000 yen.
◆◆◆
So how many people actually adjust their annual income to avoid tax or social insurance premium payments? To grasp the actual situation, we examine the distribution of pre-tax salary income for women with spouses.
The left figure shows the range of annual income up to 8 million yen in increments of 100,000 yen. The highest share of women make an annual income of 900,000 to 1 million yen, followed by the share for 1 million to 1.1 million yen, so approximately 1 million yen. As annual income exceeds 1.3 million yen, there is a precipitous decrease. The next peak appears around 2 million yen.
The right figure is an enlargement of the area around the peak. The 500,000- to 2-million-yen portion indicated by the vertical dotted lines in the left figure is shown in higher-detail increments of 10,000 yen in the right figure. The vertical dotted lines indicate the 1.03-million and 1.3-million-yen amounts.
The largest salary population in the right figure is for 960,000 yen, just below 1.03-million-yen mark. 960,000 yen represents a tax exemption limit for resident tax on individuals in some local municipalities, which means maintaining income levels below 80,000 yen per month.
Except for the prominent population of women in the 960,000-yen group, the highest share is for 1.03 million yen. As annual income exceeds 1.03 million yen, a sharp decrease occurs. The clear barriers in the distribution of annual income occur at 1.03 million and 1.3 million yen.
Interestingly, the 1.03-million-yen barrier is more prominent than the 1.3-million-yen barrier. Resident and income taxes on the spouse at an annual income around 1.3 million yen and the tax increase resulting from the reduction of the special spousal tax deduction are combined into approximately 20,000 yen per year, which is far less than the approximately 300,000 yen in social insurance premiums for annual income just above 1.3 million yen. Nevertheless, the 1.03-million-yen barrier seems more prominent.
Resident tax on an individual basis is imposed on spouses with annual incomes of 1 million yen or more. Additionally, the special spousal tax deduction decreased when the spouse’s annual income reached 1.05 million yen (before 2018). Nevertheless, the income tax exemption limit of 1.03 million yen is viewed as a more significant barrier. Income tax is only 5% of the excess over the 1.03-million-yen limit and smaller than the resident tax levied on the spouse with annual income topping 1 million yen. Nevertheless, many spouses tend to adjust annual income to 1.03 million yen or less. Why?
One potential factor behind the tendency is family allowances provided by the husband's employer. As of 2021, more than 20% of private companies with 50 or more employees only provide spousal allowances for spouses with annual incomes below 1.03 million yen. Family allowances often total more than 100,000 yen per year. According to a survey conducted by the Japan Institute for Labour Policy and Training in 2016, however, the number of part-time workers who cited family allowances as a reason for adjusting their work schedules was only one-third of those who cited the spousal income tax exemption and their own income taxes.
Those who adjust their annual income to 1.03 million yen or less may been under the impression that becoming “subject to income tax” or “no longer eligible for the spousal tax deduction” are insurmountable difficulties. It is possible that the number of people willing to work for salaries above the 1.03-million-yen limit would increase simply by disseminating correct information, such as the fact that tax on income above the limit is actually quite small, or that changing the name from the spousal deduction to the special spousal deduction does not decrease the deduction amount.
Even if the 1.03-million-yen barrier disappeared thanks to the thorough provision of correct information, however, the 1.3-million-yen barrier might remain. If annual income tops 1.3 million yen for a part-time worker, the worker’s net income declines substantially due to mandatory social insurance premiums. In order to essentially solve the work adjustment problem, the 1.3-million-yen barrier must be eliminated; however, eliminating this barrier is not easy because changing the system of Category-3 pensions and health insurance dependents would require a fundamental modification to the social insurance system.
◆◆◆
The impact of the 1.3-million-yen barrier may be weakened through the expansion of social insurance coverage for part-time workers. Companies with 501 or more employees became required in October 2016 to provide social insurance coverage to their employees who earn at least 88,000 yen in monthly salary and are set to work at least 20 hours per week. The requirement took effect for companies with 101 to 500 employees in October 2022 and will do so for those with 51 to 100 employees in October 2024. As such, part-timers, if covered by social insurance, may not have to be concerned with the 1.3-million-yen barrier.
Of course, the expansion of social insurance coverage requires more part-time workers to pay social insurance premiums. If a part-timer is provided with social insurance coverage after earning slightly more than 88,000 yen in monthly salary, the part-timer’s social insurance premium payments may total about 150,000 yen per year. Since a monthly salary of 88,000 yen means an annual salary of about 1.06 million yen, the social insurance coverage threshold can now be called the 1.06-million-yen barrier. However, greater employee pension coverage should increase future pension benefits, which would be beneficial for insured workers over the long term. In this sense, the 1.06-million-yen barrier is characteristically different from the 1.3-million-yen barrier, which only represents an increase in premium payments without an increase in future pension benefits.
Since employers must share social insurance premium payments with employees, employers may try to avoid social insurance coverage for employees. In such cases, employers may decide to keep weekly work hours below 20. While some government subsidies are under consideration to counter the 1.06-million-yen barrier, the extent to which part-time workers will be covered by social insurance may depend on labor demand for part time workers that are willing to work more than 20 hours per week despite the social insurance premiums.
Let's return to the reality of work schedule adjustment. The figure above covers the period when social insurance coverage was extended to part-time workers at companies with 501 or more employees. At least during this period, there is no evidence that attempts were made to adjust annual income to 1.06 million yen. On the other hand, policy discussions tend to be biased toward the burden of social insurance premiums. Since the 1.03-million-yen barrier regarding tax has been virtually eliminated, it is understandable that institutional revisions tend to first focus on social insurance. In reality, however, many part-timers are still adjusting their annual income to 1.03 million yen or less.
Given the complexity of the taxation and social insurance systems, it is plausible that part-timers are adjusting their work schedules based solely on the assumption they may suffer losses if they cross the 1.03-million-yen barrier, without actually understanding the facts. The media’s communication of correct information may help to alleviate the work adjustment problem.
>> Original text in Japanese
* Translated by RIETI.
September 15, 2023 Nihon Keizai Shimbun
