Labor insurance (worker’s accident insurance and employment insurance) declaration and payment (in the case of automatic direct debit, it will be in September) will be made on July 10th. Labor insurance payments are unique, and the estimated insurance premiums until March 31st of the next year will be paid in a lump-sum based on the actual results from April 1st to March 31st of the previous year, so the accounting treatment will be complicated if you try to do it seriously. Therefore, small and medium-sized enterprises (SME) often get by with simple accounting treatment, but consolidated subsidiaries of listed companies and foreign-owned enterprises may not allow it. This time, I will explain the accounting treatment of this complicated pattern.

1. When processing personal contributions as a negative amount for legal welfare, foreign-owned enterprises may be shocked…

The personal contribution for employment insurance is withheld from your monthly salary. (For general businesses, it is 0.6%) In many cases, SME process this deduction as “legal welfare” rather than as a “deposits received”. Since employment insurance is paid once a year, the entire amount is expensed as legal welfares at the time of payment (declaration), and the amount collected from individuals is expensed as a negative amount for legal welfare, which is very simple. From the perspective of Japanese experts, this is a relatively normal process, but when I explain this to foreigners, they are often shocked and say, “What a barbaric process to deduct personal contributions as expenses. Can’t something be done?”

2. It’s not as simple as just processing the deposits received… At the time of payment and subsequently, it is necessary to record the deposits received as an advance payment, which is very troublesome.

In that case, in addition to method 1, there is also a way to process the personal contribution into the “deposits received” account, just like other social insurance and withholding income tax, so you will process it that way. You may think, “That’s fine! Just make it deposits received instead of legal welfare”, but it’s not that simple. This is because employment insurance is an unusual system in which “an estimate for the year from April 1st of the current year to March 31st of the following year is paid in advance”. Therefore, if you process it under the deposits received account, the accounting will be very complicated.

①First, when paying on July 10th, the personal contribution of the estimated amount for the current year will be processed as follow:

(advance payment) / (cash deposit)

(Because the company pays the employee’s personal contribution in advance)

② Next, when the monthly salary is paid, the personal contribution of employment insurance  is recorded as:

(salaries and wages) / (deposits received – employment insurance)

③ After that, since “the amount deposited has been cleared”, make the following entry:

(deposits received – employment insurance) / (advance payment)

Thanks to the employment insurance estimated premium prepayment system, it becomes a real hassle. Also, when the balance of the advance payment is gone, the accounting entry in ③ becomes unnecessary, since “all the advance payment is returned by the employee, and the company is just holding it.”

④ At the time of the final payment (declaration) on July 10 of the following year, it is recalculated based on the actual results, and if there is a shortfall in the estimated premium make the following entry:

(deposits received – employment insurance) / (cash deposit)

By making this entry, the deposits received – employment insurance up to March 31 is finally cleared. However, this is difficult to understand unless you have some knowledge of labor insurance (worker’s accidents and employment) declarations. Naturally, I think it would be even more difficult for foreigners.

3. Bonus 1: For some reason, the tax law states that the company’s contribution is “included in expenses,” but shouldn’t it be “can be included”?

Note that the above is about the individual’s contribution. There are some subtle points about the company’s contribution. The Fundamental directives of corporate tax 9-3-3 states, “(1) Estimated insurance premiums: Among the estimated insurance premiums, the portion to be contributed by the insured person shall be treated as an advance payment, and the remaining estimated insurance premiums shall be included in the amount of expenses for the business year in which the declaration form is submitted (or the date of decision for the determined amount) or the date of payment falls.” This means that it is possible to include in deductible expenses in one lump-sum, but it says “be included,” not “can be included.” Therefore, if the company’s contribution is paid in advance and then the actual amount is withdrawn (transferred to expenses) like the monthly actual amount paid for by the individual, it will result in a strange discrepancy with tax law, even though the accounting is correct. However, the point-by-point commentary of the notification states that the gist of it is that “it is also permitted to treat it as deductible expenses at the time of payment.” If that is the case, it seems to me that the notice should have said “it CAN BE included in the amount of deductible expenses” or “it is permitted.” What do you think?

4. Bonus 2: In the case of negative processing of legal welfare for the individual contribution, if the entire amount of the individual contribution is deducted as an expense at the time of payment, it is actually problematic → There are almost no cases where this has been pointed out in an investigation

In addition, the above notice states that “the portion to be contributed by the insured person shall be treated as an advance payment”, so the processing in 1, “the entire amount of individual contribution is also deducted as a legal welfare at the time of payment (declaration),” seems to be technically problematic from a tax perspective, but there are almost no cases where this problem has been pointed out in an actual tax investigation. This is also something that seems to be a concern for faithful people.