Were you surprised to find a "Notice of estimated tax prepayment" from the tax office in your mailbox in June? Estimated tax prepayment is a system in which people whose prior-year income tax was above a certain amount pay part of this year's tax in advance, in July and November. It is not a penalty or an additional charge, but a "prepayment" that is always reconciled in your final tax return. However, if you fail to pay, delinquent tax applies; and in a year when your profit has fallen, you can reduce it with a "reduction application," so make sure you understand how it works.
① Who is covered: people whose estimated tax prepayment base amount (roughly the prior-year self-assessed tax) is ¥150,000 or more. The tax office sends the notice by June 15[National Tax Agency No.2040].
② Payment: pay one-third of the base amount each for the 1st installment (July 1–July 31) and the 2nd installment (November 1–November 30).
③ If this year's profit looks like it will fall, use a "reduction application": estimate based on your situation as of June 30 and submit by July 15 (for the 2nd installment only, by November 15).
④ What you paid is reconciled in your final tax return. If you overpaid, it is refunded (with a refund additional amount). Beware: if you ignore it and don't pay, delinquent tax applies (8.7% per year; 2.4% within the first 2 months).
Who is covered? (Base amount of ¥150,000 or more)
People whose estimated tax prepayment base amount is ¥150,000 or more are covered. The base amount is roughly "the prior year's self-assessed tax (the income tax paid via your final return, excluding amounts withheld at source)"[National Tax Agency No.2040]. Typically:
- Sole proprietors and freelancers who made a profit last year and paid ¥150,000 or more via their final return
- Employees who had a large self-assessed tax from real estate income, a side job, and the like
No application is needed; for those covered, the notice (or an e-Tax message) is automatically delivered by June 15. e-Tax users may not receive a paper notice, so check your message box as well.
When and how much do you pay?
| Payment amount | Payment period | |
|---|---|---|
| 1st installment | 1/3 of the estimated tax prepayment base amount | July 1 – July 31 |
| 2nd installment | 1/3 of the estimated tax prepayment base amount | November 1 – November 30 |
| Remainder | Reconciled in the final tax return (pay any shortfall / overpayment is refunded) | March 15 of the following year (final tax return) |
For payment methods, in addition to transfer payment (direct debit from your account, no fee), you can use direct payment, smartphone-app payment, credit card, and more. See Cashless tax payment for a comparison. For the yearly payment schedule, see the tax calendar.
In a year when profit fell: the "reduction application"
"Last year was good, but this year is tough." In such a year, you can reduce your prepayment[National Tax Agency No.2040].
- Reduce from the 1st installment: estimate your annual income and tax based on your situation as of June 30 that year, and submit the "Application for reduction of estimated tax prepayment" to the tax office by July 15 (e-Tax allowed).
- Reduce the 2nd installment only: estimate based on your situation as of October 31 and submit by November 15.
- Examples that are approved: closure, suspension, or poor business results such that this year's estimated tax is clearly less than the base amount; disaster or theft; a large medical expense deduction is expected; and the like.
If you pay more estimated tax prepayment and it becomes a refund in your final return, a refund additional amount (equivalent to interest; the annual rate is at the same level as the reduced rate for delinquent tax) is added. If you have room in your cash flow, not forcing a reduction is one way to think about it. Conversely, if cash flow is a priority, a reduction application within the deadline is effective.
What happens if you don't pay? / Common misunderstandings
- Leave it unpaid and delinquent tax applies: estimated tax prepayment is a legal tax obligation. From the day after the payment deadline, delinquent tax applies (within 2 months: 2.4% per year; after that: 8.7% per year
), and you can also become subject to reminders and seizure. - It is not "double taxation": the estimated tax prepayment you paid is always reconciled by entering it in the "estimated tax prepayment amount" field of your final tax return. Keep the notice until your final return (used in how to prepare year-end accounts and e-Tax filing).
- Forgetting to enter it leads to overpayment: if you forget to write the estimated tax prepayment amount on your return, you end up paying that amount twice. With e-Tax it is often reflected automatically from the notice data, but confirm this.
FAQ
I don't have the funds and can't pay by the deadline.
First consider a reduction application. Even if you don't meet the requirements, there are systems such as a grace period for payment if you consult the tax office. Falling into arrears without notice increases the delinquent tax (up to 8.7% per year), so leaving it alone is the most disadvantageous.
Summary
- It applies to people whose estimated tax prepayment base amount (roughly the previous year's tax on the return) is ¥150,000 or more. Notices are sent by June 15.
- One third of the base amount is paid in each of the first installment (July 1 to July 31) and the second installment (November 1 to November 30).
- If profits are likely to fall, apply for a reduction: by July 15 from the first installment, or by November 15 for the second installment only.
- Amounts paid are settled in your tax return (kakutei shinkoku). Forgetting to enter them in the estimated tax prepayment field means paying twice.
- If ignored, delinquency tax accrues from the day after the due date (2.4% a year within 2 months, 8.7% a year after that).
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Data sources
- Estimated tax prepayment (base amount ¥150,000 or more / notice by June 15 / 1st installment July, 2nd installment November / reduction application July 15): National Tax Agency No.2040 Estimated tax prepayment (in Japanese)
- Rates of delinquent tax: National Tax Agency — Rates of delinquent tax (in Japanese)
* In a year when a deadline falls on a weekend or public holiday, the next business day is the deadline. This article is general information; for individual decisions, please confirm with a tax office or tax accountant.