The taxes a sole proprietor pays are not only income tax, residence tax, and consumption tax. Once your business income exceeds ¥2.9 million, the "individual enterprise tax" (a prefectural tax) applies. It is a tax that many people first learn about only when a tax notice suddenly arrives in August, but the mechanism is simple. This article explains, with sources, which types of business are covered, how it is calculated, the pitfall that the blue-return special deduction does not apply, and even which occupations are not taxed.
① It applies to businesses in the statutory business categories (70 categories). The rates are 5% for Category 1, 4% for Category 2, and 5% for Category 3 (partly 3%)[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
② Because there is a business-owner deduction of ¥2.9 million, it does not apply if your business income (revenue minus expenses) is ¥2.9 million or less.
③ In the calculation, the blue-return special deduction (¥650,000) cannot be subtracted. Even when "income tax is zero, the individual enterprise tax may still apply."
④ In principle no separate filing is required (the income tax final return is enough). You pay it twice, in August and November, via a tax notice from the prefecture.
⑤ The individual enterprise tax you have paid can be treated as an expense (taxes and dues) — a major difference from income tax and residence tax.
Which business types are covered and which are not
The individual enterprise tax applies only to businesses that fall within the statutory business categories (70 categories) set by the Local Tax Act[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Category | Rate | Examples of business types |
|---|---|---|
| Category 1 (37 types) | 5% | Goods sales, restaurants, real estate leasing, contracting, advertising, consultants, and most other commercial businesses |
| Category 2 (3 types) | 4% | Livestock farming, fisheries, charcoal/firewood manufacturing |
| Category 3 (30 types) | 5% (partly 3%) | Doctors, tax accountants, designers, beauty and other liberal professions (massage, shiatsu, etc. are 3%) |
Work that does not fall within the statutory business categories is not taxed. Typical examples are writers, authors, manga artists, painters, and musicians. For engineers and programmers as well, whether they are taxed depends on whether the actual nature of the work amounts to "contracting" (the final judgment rests with the prefectural tax office). Even among freelancers, there is a gray zone where being taxed or not changes with the form and reality of the contract, so if you have any doubts when a notice arrives, check with the prefecture.
How it is calculated (the blue-return special deduction does not apply!)
"Business income" is revenue minus expenses and payments to family employees. The important points here are as follows.
- The blue-return special deduction (up to ¥650,000) cannot be subtracted: because it does not apply to the individual enterprise tax, even if a blue return brings your income tax to zero, the individual enterprise tax may still apply.
- The business-owner deduction is ¥2.9 million (prorated monthly if the business period is less than one year)[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
- Example: income of ¥5 million, Category 1 → (¥5 million − ¥2.9 million) × 5% = ¥105,000.
For the basics of bookkeeping, see The basics of account titles and journal entries, and for the ¥650,000 deduction, see Blue returns and white returns.
The filing and payment flow
- In principle no separate filing is required: if you have completed your income tax final return (there is an enterprise tax field on the second table), the prefecture calculates it automatically.
- Payment is twice, in August and November: the tax notice arrives from the prefectural tax office in August[Tokyo Metropolitan Bureau of Taxation (in Japanese)]. Besides account transfer, you can also use cashless payment via eL-QR. For the yearly schedule, see the tax calendar.
- The amount you pay becomes an expense: because the individual enterprise tax is a "tax on the business," it can be included in necessary expenses as taxes and dues (income tax and residence tax cannot).
- There are also reduction or exemption systems for cases such as closing the business in the previous year or in the event of a disaster.
FAQ
From what level of income does the individual enterprise tax apply?
It applies once your business income (revenue minus expenses, etc.) exceeds the business-owner deduction of ¥2.9 million. If it is ¥2.9 million or less, the tax is zero and no notice arrives. In a year when the business period is less than one year, the deduction is prorated monthly.
If I file a blue return, does the individual enterprise tax also become cheaper?
The blue-return special deduction (up to ¥650,000) cannot be subtracted in the individual enterprise tax calculation. So even if your income tax drops significantly, the individual enterprise tax stays as "(income − ¥2.9 million) × rate." On the other hand, salaries paid to blue-return family employees are also deductible as an expense for the individual enterprise tax.
Does it also apply to freelance engineers and writers?
It depends on the type of business. Work that does not fall within the statutory business categories, such as writing, is not covered. Engineers may be taxed if the actual nature of the contract is judged to be a "contracting business," and the handling varies from prefecture to prefecture. If you have doubts about a notice, check with the prefectural tax office.
Can I treat the individual enterprise tax as an expense?
Yes. Because it is a tax imposed on the business, it can be included in the necessary expenses (taxes and dues) of the year you pay it. Income tax and residence tax cannot be treated as expenses, so be careful not to confuse them.
Data sources
- Statutory business categories and rates, the ¥2.9 million business-owner deduction, and the payment dates (August/November): Tokyo Metropolitan Bureau of Taxation — Individual enterprise tax (in Japanese)
* The individual enterprise tax is a prefectural tax, and the recognition of business types and the procedures may be handled differently from prefecture to prefecture. This article provides general information; for individual judgments, please confirm with a prefectural tax office or a tax accountant.