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  3. What is the optimal director compensation? Calculating with the balance of corporate tax and social insurance

The optimal director compensation? Balancing corporate tax, income tax, and social insurance

This is an English translation of our Japanese article. Rules and figures may change; the Japanese version and official sources are authoritative.

Last updated: June 14, 2026 / This article was prepared after checking materials published by the National Tax Agency and the Japan Pension Service (as of June 2026) (sources are noted in the text and at the end).

The basic mechanism

The dual structure of corporate tax and personal tax, and how to think about setting compensation.

Basics

Comparing tax rates

The corporate effective tax rate vs. the personal marginal tax rate (income tax + residence tax + social insurance).

Comparison

Simulation by compensation amount

A side-by-side comparison of the optimal compensation for pre-compensation profits of ¥10M and ¥20M.

Simulation

The impact and ceilings of social insurance premiums

The ceilings for employees' pension and health insurance, and their impact on compensation design.

Social insurance

The rules for fixed regular salary

The requirements for deductibility and the timing at which you can change it.

Practice

Points to note

The risk of excessive director compensation being disallowed, spreading compensation to family, and more.

Caution

The basic way to think about setting director compensation

Compensation received by a director of a small or mid-sized company (such as a representative director) can be included in the corporation's deductible expenses. This reduces the corporation's taxable income and lowers its corporate tax. However, the compensation the individual receives is subject to income tax, residence tax, and social insurance premiums.

In other words, director compensation is an "adjustment valve" for allocating money between the corporation and the individual. The following two forces pull against each other.

Corporate side
If you raise director compensation…
  • The corporation's taxable income decreases
  • Corporate tax decreases (up to 34% in tax savings)
  • The cash remaining in the corporation decreases
Personal side
If you raise director compensation…
  • The individual's employment income increases
  • Income tax and residence tax increase
  • Social insurance premiums (health + pension) increase
The criterion for optimal compensation
Corporate tax rate (tax saved) ＞ The individual's effective tax rate (income tax + residence tax + social insurance)

→ Raising director compensation is advantageous (corporate tax savings > increased personal tax)

Corporate tax rate (tax saved) ＜ The individual's effective tax rate (income tax + residence tax + social insurance)

→ Raising director compensation is disadvantageous (increased personal tax > corporate tax savings)

Point: corporate retained earnings carry an "exit tax"

If you later take out funds left in the corporation as dividends, dividend income tax (about 20%) applies separately. Over the long run, taking money out "as director compensation" is often more advantageous than "retaining it in the corporation → paying dividends," so it is important to design your plan with the exit strategy included.

Comparing the corporate tax rate vs. the personal effective tax rate

The starting point for optimizing director compensation is to contrast "the tax rate on the corporate side" with "the effective tax rate on the personal side."

The corporate effective tax rate (small/mid-sized companies with capital of ¥100 million or less)

The corporation's taxable income Corporate tax rate (national tax) Effective tax rate (rough estimate including local taxes)
¥8 million a year or less[NTA No.5759 (in Japanese)] 15% (reduced rate) about 21%
Over ¥8 million a year 23.2% about 34%

* The effective tax rate is a rough estimate including corporate residence tax and corporate enterprise tax. It differs for corporations with capital over ¥100 million and for group-aggregation corporations.

The individual's marginal effective tax rate (income tax + residence tax + social insurance premiums)

Director compensation (annual) guide Marginal income tax rate Residence tax Social insurance premiums (individual's share) Total effective tax rate (rough estimate)
Up to ¥2 million 5% 10% about 14% about 20–24%
¥2 million – ¥4 million 5–10% 10% about 14% about 25–32%
¥4 million – ¥6 million 10–20% 10% about 14% about 32–39%
¥6 million – ¥8 million 20% 10% about 14% about 39–44%
¥8 million – ¥10 million 20–23% 10% about 10–14% (approaching the pension ceiling) about 40–44%
¥10 million – ¥18 million 33% 10% about 7–10% (over the pension ceiling) about 45–50%

* Rough estimates after the FY2025 (Reiwa 7) revision (basic deduction ¥580,000). Social insurance premiums are the director's own share under the Japan Health Insurance Association (Tokyo).

A guide for your judgment

It pays first to shift into director compensation the portion of the corporation's taxable income that exceeds ¥8 million (corporate tax rate about 34%). Since the individual's effective tax rate starts to exceed 34% at around ¥6 million of annual income (including social insurance), an annual income of around ¥5–6 million is a guide for many small and mid-sized business owners.

Simulation by director compensation amount

In two patterns with different "corporate profit before paying director compensation (pre-compensation profit)," we compare the total of the individual's take-home pay plus the corporation's remaining cash as the amount of director compensation changes.

Pattern A: pre-compensation profit of ¥10 million

Director compensation (annual) Individual take-home (rough estimate) Corporation's remaining cash (rough estimate) Total (rough estimate) Total tax burden
¥0 (all retained in the corporation) ¥0 ¥7.64M ¥7.64M ¥2.36M
¥2 million ¥1.61M ¥6.32M ¥7.93M ◀ Maximum ¥2.07M
¥3 million ¥2.36M ¥5.53M ¥7.89M ¥2.11M
¥4 million ¥3.09M ¥4.74M ¥7.83M ¥2.17M
¥6 million ¥4.44M ¥3.16M ¥7.60M ¥2.40M
¥10 million ¥6.96M ¥0 ¥6.96M ¥3.04M

* With a profit of ¥10 million, the portion over ¥8 million is only ¥2 million (the high 34% rate). Since ¥2 million of director compensation brings the corporate income down to exactly ¥8 million, that is the optimal point.

Pattern B: pre-compensation profit of ¥20 million

Director compensation (annual) Individual take-home (rough estimate) Corporation's remaining cash (rough estimate) Total (rough estimate) Total tax burden
¥0 (all retained in the corporation) ¥0 ¥14.24M ¥14.24M ¥5.76M
¥4 million ¥3.09M ¥11.60M ¥14.69M ¥5.31M
¥6 million ¥4.44M ¥10.28M ¥14.72M ◀ Maximum ¥5.28M
¥8 million ¥5.64M ¥8.96M ¥14.60M ¥5.40M
¥10 million ¥6.96M ¥7.64M ¥14.60M ¥5.40M
¥15 million ¥9.71M ¥3.95M ¥13.66M ¥6.34M
¥20 million (all as compensation) ¥12.51M ¥0 ¥12.51M ¥7.49M

* Calculation conditions: one director, single, Japan Health Insurance Association Tokyo, FY2025 (Reiwa 7) tax system (basic deduction ¥580,000). Rough estimates accounting for the employment income deduction, income tax, residence tax, and social insurance (the individual's share). Please confirm with your tax accountant using your actual figures.

The case of ¥20 million profit and ¥6 million director compensation (detailed calculation)
Pre-compensation profit¥20M
Director compensation (deductible)▲ ¥6M
Corporate taxable income¥14M
Corporate tax etc. (¥8M×21% + ¥6M×34%)▲ ¥3.72M
Corporation's remaining cash¥10.28M
Director compensation (income)¥6M
Employment income deduction (¥6M×20% + ¥440,000)▲ ¥1.64M
Basic deduction▲ ¥580,000
Income tax (taxable income ¥3.78M)▲ ¥330,000
Residence tax (taxable income ¥3.83M)▲ ¥380,000
Social insurance premiums (rough estimate of the individual's share)▲ ¥850,000
Individual take-home¥4.44M (effective tax rate 26%)
Individual take-home + corporation's remaining cash (total)¥14.72M

Because the corporate tax saved (¥6M×34% = ¥2.04M) > the individual's net tax increase (¥1.56M), setting director compensation is advantageous.

A simple guide to the "optimal compensation amount"

A basic starting point is to set compensation so that the corporation's taxable income (after director compensation) fits within ¥8 million or less. Shifting the portion over ¥8 million (rate 34%) to the individual is advantageous, but a realistic point to pause is around ¥6 million of annual income, where the individual's effective tax rate starts to exceed 34%.

The impact and ceilings of social insurance premiums

Directors are also compulsorily enrolled in social insurance (health insurance + employees' pension). Social insurance premiums are calculated based on the monthly compensation amount, and the company (corporation) and the director split them equally. The higher the compensation, the higher the premiums; but because there are ceilings, the impact eases once you exceed a certain level.

Employees' pension insurance
Premium rate and ceiling
Premium rate18.3% (split between employer and employee)
Individual's share9.15%
Ceiling (standard monthly compensation)¥650,000/month
Annual-income equivalentCeiling at ¥7.8 million[Pension Service (in Japanese)]
Health insurance (Japan Health Insurance Association, Tokyo)
Premium rate and ceiling
Premium rate9.98% (split between employer and employee)
Individual's share4.99%
Ceiling (standard monthly compensation)¥1.39 million/month
Annual-income equivalentCeiling at ¥16.68 million
Employer's share (a cost on the corporate side)
It also becomes a corporate expense
The corporation also bears halfThe same amount as the individual
The corporation's deductible expenseDeductible
Real costReduced only by the deductible portion
After the ceiling is exceededNo increase (fixed amount)
Designing compensation using the social insurance ceilings

The ceiling for employees' pension is ¥650,000/month (¥7.8 million a year). Above this, there is no additional employees' pension burden, and the individual's effective tax rate falls. If you want to maximize your future pension benefits while saving on tax, there is room to consider a first-stage optimization at around ¥7.8 million of annual income. Also, since the corporation's social insurance share (its half) is fully deductible, you could say that the corporation absorbs part of the individual's social insurance cost.

The fixed regular salary rule and the timing at which you can change it

To include director compensation in the corporation's deductible expenses, you must meet the requirements for "fixed regular salary." Compensation that falls outside the requirements becomes non-deductible and may increase corporate tax[NTA No.5200 (in Japanese)].

1
Decide the amount within 3 months after the start of the fiscal year
Resolve the director compensation amount at the ordinary general meeting of shareholders or the board of directors, and prepare minutes. For a corporation with a March fiscal year-end (starting in April), the deadline is the end of June.
▶ A newly established corporation must do so within 3 months from the date of establishment (or the day before the end of the first fiscal year, whichever is earlier).
2
Keep paying the "same amount" every month
A fixed regular salary is compensation paid in the same amount every month. If you change the amount midway, the difference after the change may become non-deductible.
▶ If you set director compensation at ¥300,000 a month, you must keep paying exactly ¥300,000 every month.
3
The "exceptional timing" when you can increase or decrease it
You can change a fixed regular salary during the fiscal year only in the following cases (certain procedures are required).
① Beginning-of-period revision: revision within 3 months after the start of the next fiscal year
② Revision due to worsening performance: where a marked deterioration in business results or financial condition is recognized
③ Extraordinary revision: where a director's position or scope of duties "changes markedly"
4
How to make a bonus deductible with "pre-determined fixed-amount salary"
Separately from fixed regular salary, you can make a director's bonus deductible by notifying the tax office in advance of the payment date and amount (pre-determined fixed-amount salary). The notification deadline is whichever is earlier: "within 1 month from the day of the shareholders' meeting, etc." or "within 4 months from the start of the fiscal year."
▶ If the notified amount and the amount actually paid differ by even ¥1, it becomes non-deductible, so accurate management is required.

Points to note and common pitfalls

Excessive director compensation becomes non-deductible
The portion that the tax office judges to be "unreasonably high" compared with corporations of a similar size and industry is disallowed as a deductible expense. In particular, be careful about the balance between the scale of your sales and the compensation. Confirm its reasonableness with your tax accountant.
Spreading director compensation to a spouse or family for tax savings
Making your spouse or child a director and spreading the compensation lowers each person's tax rate and can reduce the household's total tax burden. However, actual work substance is required, and a director in name only carries a risk of being disallowed.
In the founding year, the decision must be made within 2 months
For a newly established corporation, unless you decide director compensation within 2 months from the date of establishment (or the day before the end of the first fiscal year, whichever is earlier), the entire amount for the first period becomes non-deductible. It is important not to put off the decision-making right after establishment.
Leaving too much money in the corporation risks retained earnings tax
If a family company piles up excessive internal reserves without a specific purpose, "retained earnings tax" may apply (a special tax rate for certain family companies). Small and mid-sized companies with capital of ¥100 million or less are in principle outside its scope, but confirmation is needed.
Don't forget to account for the "employer's share" of social insurance
When director compensation is high, the employer's share of social insurance premiums also increases. This is deductible for the corporation, but the cash outflow also grows. Think in terms of not just the director's take-home pay but the total cost on the corporate side (compensation + the employer's social insurance share).
Residence tax is levied the following year
Residence tax is levied from June of the following year based on the prior year's income. In the year after you suddenly raise director compensation substantially, the increase in residence tax is large, so it is important to plan your cash flow.
The optimal director compensation needs to be reviewed "every period"

The optimal amount changes with business results, family composition, the annual revision of social insurance (every April), and tax reforms. We recommend running estimates with your tax accountant at least at the start of each period and setting a compensation amount that matches your target profit for that year.

FAQ

By when should I decide director compensation?

To make it deductible, the rule is in principle "fixed regular salary": decide the amount within 3 months from the start of the fiscal year, and pay the same amount every month. If you increase or decrease it during the year without reason, that changed portion cannot be included in deductible expenses.

Is it always better to make director compensation higher?

No. Raising compensation reduces corporate tax, but the individual's income tax, residence tax, and social insurance premiums (the employer and employee shares combined) increase. The optimal level is where the decrease in corporate tax and the increase on the personal side balance out, and generally an annual income of around ¥8 million to ¥10 million is considered a guide (it varies by situation).

Can a bonus (director's bonus) be treated as an expense?

In principle it is not deductible, but it can be made deductible if it meets the requirements for "pre-determined fixed-amount salary," which is notified to the tax office in advance. You must pay it exactly as notified in amount and timing.

Should I take social insurance premiums into account too?

Yes. Director compensation is the basis for calculating social insurance premiums, and because the burden is large when you include the employer's share, it is important to estimate the optimal amount by including not just tax but also social insurance premiums.

Sources and official information

This article is based on the following official information. Rules may be revised. Please check the latest information on each official site.

* The content of this article is for informational purposes and is not tax or legal advice. For individual tax judgments, please consult your local tax office or a tax accountant.