If your family helps with your sole proprietorship, the "salary paid to a blue-form full-time family employee" (aoshoku jigyo senjusha kyuyo) is a classic tax-saving move. Ordinarily, a salary paid to a family member who shares the same household budget cannot be treated as an expense, but if a blue-return filer submits a notification, they can treat an appropriate salary as a fully deductible expense. The essence is that you can spread income taxed at the proprietor's high rate to family members taxed at lower rates. We explain everything from the requirements and the notification to the most important caveat — that it cannot be combined with the spouse deduction — with sources from the National Tax Agency.
① A blue-return filer can treat a salary paid to a family member as an expense if they submit the "Notification concerning salary for a blue-form full-time family employee" by March 15 (or within 2 months for a business that opens partway through the year or a new family employee)[National Tax Agency A1-11].
② Requirements for the family employee: a spouse or relative sharing the same household budget / aged 15 or over as of December 31 of that year / working exclusively for the business for more than half the year (more than 6 months)[National Tax Agency No.2075].
③ The amount is limited to an "appropriate amount" that matches the work performed (within the range stated in the notification).
④ If you pay even ¥1 of salary to a full-time family employee, you cannot use the spouse deduction or dependent deduction for that family member.
⑤ For white-return filers, there is no salary; only a fixed full-time family employee deduction (¥860,000 for a spouse, ¥500,000 for others).
Why does it save tax? (Spreading income)
Because income tax is progressive, concentrating all income on one proprietor results in more household tax than dividing it, as salary, among family members who work. Moreover, on the family employee's side, a salary income deduction (minimum ¥650,000) applies, so for around ¥80,000 a month the family employee themselves owes no income tax. Social insurance too: if the proprietor is on National Health Insurance, splitting the salary does not greatly change the household's total National Health Insurance premium either — another reason the combination works well.
Requirements and notification (miss these and you can't deduct it)
| Item | Details |
|---|---|
| Eligible person (family employee) | A spouse, or a relative aged 15 or over, who shares the same household budget (as of Dec 31 of that year), and who works exclusively for the business for more than half the year[National Tax Agency] |
| Notification | Submit the "Notification concerning salary for a blue-form full-time family employee" to the tax office by March 15 of the year you want to deduct it (for a business opened on or after Jan 16, or a newly added family employee, within 2 months from that date)[National Tax Agency A1-11] |
| Amount | Within the range stated in the notification, an appropriate amount matching the work content and hours worked. Any excessive portion is not deductible |
| How to pay | The salary must actually be paid (keep bookkeeping and transfer records). Depending on the amount, withholding tax and the year-end adjustment are also the proprietor's job |
A family member who has another full-time job or part-time work cannot be said to "work exclusively" and is in principle not eligible (the same applies to a student whose main occupation is study). A small side job may leave room for it to be recognized, but the judgment is based on the actual situation.
Which is better than the spouse deduction? (Cannot be combined)
A family member to whom you pay a full-time family employee salary cannot use the spouse deduction (¥380,000), the special spouse deduction, or the dependent deduction at all[National Tax Agency]. A comparison is therefore as follows.
| Use the spouse deduction | Pay a family employee salary | |
|---|---|---|
| Household deduction / expense | ¥380,000 (income limits apply. Details) | The full salary amount (within the appropriate range) |
| Rule of thumb | Advantageous if you can only pay a salary equivalent to ¥380,000 a year or less | Advantageous if the work is worth well over ¥380,000, such as ¥960,000 a year (¥80,000 a month) |
In practice, "the ¥80,000-something a month range (about ¥960,000–1,000,000 a year)" is common for three reasons: (1) it is comfortably larger than ¥380,000, giving a real tax-saving effect; (2) below ¥88,000 a month, withholding is not required (when a declaration for dependents, etc. is submitted); and (3) the family employee themselves bears a light tax because it is within the ¥650,000 salary income deduction. Of course, the major premise is that it matches the actual amount of work; setting it higher than the real substance of the work risks being denied in a tax audit.
For white-return filers (full-time family employee deduction)
With a white return you cannot deduct a salary as an expense; instead, you can subtract a fixed full-time family employee deduction (¥860,000 for a spouse, ¥500,000 per other relative, or "business income ÷ (number of family employees + 1)," whichever is lower)[National Tax Agency No.2075]. If you run the business with your family, this alone makes it well worth switching to a blue return. Note that the family employee salary is also an expense in calculating the individual enterprise tax.
Summary
- Blue-return filers who submit a notification can deduct the full salary paid to family members sharing their livelihood, up to an appropriate amount.
- The notification is due by March 15 of the year you want to deduct it. If you start a business mid-year or add a new family employee, it is due within 2 months of that date.
- A family employee is a spouse or relative aged 15 or over who works exclusively in the business for more than half the year. Family members with other jobs generally do not qualify.
- The spouse deduction and dependent deduction cannot be used for a family member paid a family employee salary. If their work is worth well over about ¥380,000 a year, the family employee salary is the better choice.
- White-return filers only get a fixed family employee deduction (¥860,000 for a spouse, ¥500,000 for each other relative).
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Data sources
- Salary for a blue-form full-time family employee and the full-time family employee deduction (requirements, cannot be combined, ¥860,000 / ¥500,000): National Tax Agency No.2075 (in Japanese)
- The notification and its deadline (March 15 / within 2 months): National Tax Agency A1-11 Notification procedure concerning salary for a blue-form full-time family employee (in Japanese)
* This article is general information, not tax advice. For judging the appropriate amount and for individual application, please confirm with a tax office or a tax accountant.