This article was written by HeiKin Wong.
When business is doing well, there are numerous ways business owners could share this news with their employees. One way which business owners in Japan could share this success is by distributing a bonus called 期末賞与 Kimatsu shōyo (government page in Japanese) / 決算賞与 Kessan shōyo (or end-term bonus in English). This is great for the motivation of your employees as the fiscal year comes to an end. What many new businesses in Japan did not know is that having an end-term bonus could help with tax reduction. In this article, we’ll walk you through what end-term bonus 決算賞与 is and how it can contribute to reducing your corporate tax this year.
If you wish to know more about the techniques of reducing corporate taxes, then visit our main page to see more articles on how you could pay fewer taxes this year.
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What is End-Term Bonus 決算賞与 / 期末賞与? (and when do you pay it)
In simple terms, end-term bonus 決算賞与 is the additional bonus a business owner pay to his/her employees at the end of a financial year. This extra bonus is usually paid out by Japanese businesses when things are going well for the business. Normally, this bonus is paid in March (where the fiscal year usually ends) or at the end of the year (whichever the company decides to be at the end of its fiscal year).
What is the difference between ボーナス vs 決算賞与?
While a similar concept when translated to English, these terms in Japanese have very different meanings. The biggest difference between ボーナス and 決算賞与 is how the payout is calculated. For ボーナス, the amount paid to employees is usually based on the performance of the individual. This means that employees who perform well in the business would receive a bigger ボーナス. 決算賞与 is paid out based on the performance of your company. When a company does well in a particular fiscal year, it may decide to pay out a set amount of bonus to all its employees in proportion to the performance of the company as a whole. Every employee will get the same bonus and it ignores individual performance.
There’s also a timing between ボーナス and 賞与. Whereas ボーナス is given at set period twice a year (usually summer and winter), there’s no guarantee that a 賞与 will be given every year and it entirely depends on the company’s performance.
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Why would business owners pay out End-Term Bonus 決算賞与?
Because 賞与 can be counted as loss (損金) when calculating corporate taxes. Suppose your business had a great fiscal year. It is reasonable to expect a large amount of net profit on your financial sheet. However, that also means that your corporate tax would go up by a significant amount. For example, assuming the corporate tax is 30% and your company has made 10 million Yen this fiscal year. Say you take 3 million out and give back to the employees as 決算賞与. Then your corporate tax will go from 3 million Yen to (10-3)*0.3=2.1 million Yen.
By giving some money back to your employee, these expenses can be counted as a loss in the financial calculation and thus lower your net profit. This technique is especially useful when your business might pass a certain threshold in the corporate tax calculation and you want to lower your profit.
Another benefit is, as discussed in the introduction, motivation for your employees. Having an unexpected bonus paid out can do wonders for their motivation and encourages them to work harder as a group (since 賞与 is paid based on the company’s performance). Employees would also tend to stick with the company even during times like COVID if they know the company would pay out 賞与 when things return to normal.
We both already know that answer, but what would have a bigger impact on your company, paying more corporate taxes, or paying end-term bonus 期末賞与 for your team?
Are there any requirements when paying out End-Term Bonus 決算賞与?
While there is no specific requirement when paying out 決算賞与, you can still pay out this end-term bonus even if you can’t pay them by the end of the fiscal year. However, it would require you to inform your employees in advance and the full amount of 賞与 have to be paid in full within the next month (check out this article in Japan if you want to know more).
What are some limitations / tradeoffs for paying End-Term bonus 決算賞与?
Giving out additional bonuses eats into your profit. In the example shown above, while you have reduced your corporate tax by 900 thousand Yen, you also paid out an additional 2.1 million to your employees. This could affect future investment and the cash flow of your business. Therefore, it is important to balance between how much tax you want to reduce and how much you want to give out to your employees before it affects the business in a negative way.
An additional downside for a company that continuously pay out 決算賞与 is that employees might get used to having this bonus. This could work against their motivation when the company is not performing and therefore not paying out the bonus.
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Maximize Your End-Term Bonus Benefits with Expert Guidance
The end-term bonus, or 決算賞与, offers a strategic approach for businesses in Japan to motivate employees and optimize tax deductions. However, striking the right balance between tax savings and employee motivation requires a nuanced understanding of Japan’s financial landscape. To ensure you’re leveraging this and other tax benefits to their fullest, consider the expertise of a seasoned accountant. Discover how an accountant can guide you through these complexities in our Ultimate Guide to an Accountant in Japan.
Ultimate Guide to an Accountant in Japan
Video on End-Term Bonus 決算賞与
Here are some videos on 決算賞与 (in Japanese) if you wish to know more!
From 濱田会計事務所のちょっとお得な税金の豆知識
From 会計事務所経営支援塾チャンネル
Concluding Thoughts
期末賞与 is a technique used by small and large Japanese businesses alike to reduce their corporate tax when they had a great fiscal year. It is also a great way to motivate your employees to commit themselves to improve the company’s performance.
Aside from reducing taxes, increasing your company’s effectiveness can go a long way to better your company. Check out this article on Capability Maturity Model to see how you can better manage your business.
