Complete Invoice System Guide for Side Hustlers
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What is the Invoice System? Impact on Side Hustlers
The Invoice System (Qualified Invoice Preservation System) that started in October 2023 requires preservation of qualified invoices to receive input tax credits for consumption tax. For side hustlers, compliance with this system can significantly impact relationships with clients and income.
Key Decision Points
Registration for the Invoice System is optional, but if you don't register, your clients cannot receive input tax credits. This could lead to renegotiated terms or loss of business. You need to make decisions based on your business situation.
Basic Mechanics of the Invoice System
Consumption Tax and Input Tax Credits
Previous System
- - Deduct consumption tax paid on purchases from consumption tax collected on sales, then pay the difference
- - Tax-exempt businesses with annual sales under 10 million yen had no consumption tax payment obligation
- - Clients could claim input tax credits even on payments to tax-exempt businesses
Changes Under the Invoice System
- - No input tax credit without a qualified invoice
- - Only registered qualified invoice issuers can issue invoices
- - Registration creates consumption tax payment obligation even for previously tax-exempt businesses
- - Transitional measures: Creditable percentage gradually decreases until September 2029
Transitional Measure Schedule
| Period | Creditable Percentage | Additional Burden on Clients |
|---|---|---|
| October 2023 - September 2026 | 80% | 20% of consumption tax |
| October 2026 - September 2029 | 50% | 50% of consumption tax |
| October 2029 onwards | 0% | 100% of consumption tax |
Registration Decision Points for Side Hustlers
When to Register
Registration Recommended
- - Clients are mainly corporations or taxable businesses
High need for input tax credits
- - Annual sales exceed 10 million yen
Already a taxable business, no disadvantage to registering
- - Primarily B2B business
Invoice issuance needed to maintain business relationships
- - Have ongoing contractor agreements
When clients request registration
Registration May Not Be Needed
- - Clients are mainly individual consumers
Consumers don't claim input tax credits
- - Low annual sales
Consumption tax payments would burden profits
- - Transactions between tax-exempt businesses
Neither party needs invoices
- - Sales through platforms
Platform may issue invoices on your behalf
Revenue Impact Calculation
Example: Side Hustler with 3 Million Yen Annual Sales
If Not Registered (Remain Tax-Exempt)
- - Consumption tax payment: 0 yen
- - Amount clients cannot deduct: Approx. 270,000 yen (consumption tax equivalent)
- - Price negotiation risk: Potential 10-20% price reduction requests
If Registered (Taxable Business)
- - Consumption tax payment obligation: Approx. 270,000 yen minus consumption tax on expenses
- - With 20% Special Rule: Approx. 54,000 yen payment (20% of consumption tax)
- - With Simplified Taxation: Calculation based on deemed purchase ratio by industry
What is the 20% Special Rule?
For those who became taxable businesses due to the Invoice System, this special measure reduces consumption tax payment to 20% of sales tax until 2026. No application needed - simply choose this option when filing your tax return.
Qualified Invoice Issuer Registration Procedure
Registration Process
Submit Registration Application
Submit to tax office via e-Tax or paper form
Review & Registration Number Issuance
Registration number notification in approximately 2 weeks to 1 month
Publication on NTA Website
Business information becomes searchable by registration number
Begin Issuing Invoices
Include registration number and other required items on invoices
Registration Number Format
- - Corporations: T + Corporate Number (13 digits) e.g., T1234567890123
- - Sole Proprietors: T + 13-digit number e.g., T9876543210987
*The registration number for sole proprietors is newly assigned and is different from the Individual Number (My Number)
Qualified Invoice Requirements
Required Items
- 1. Name/trade name and registration number of qualified invoice issuer
- 2. Transaction date
- 3. Transaction description (note if reduced tax rate applies)
- 4. Amount by tax rate (before or after tax) and applicable tax rate
- 5. Consumption tax amount by tax rate
- 6. Name/trade name of the recipient business
Invoice Example
========================================
INVOICE
========================================
To: XX Corporation (6)
Invoice No: INV-2025-001
Issue Date: January 15, 2025 (2)
========================================
Taro Yamada (1)
Registration No: T1234567890123 (1)
1-1-1 XX, Chiyoda-ku, Tokyo
========================================
[Invoice Details]
Item Qty Unit Price Amount
========================================
Web Writing 5 $80 $400 (3)
Design Work 2 $200 $400 (3)
========================================
10% Subtotal $800 (4)
Consumption Tax (10%) $80 (5)
========================================
Total Amount $880
========================================
Payment Due: January 31, 2025
Bank: XX Bank, XX Branch, Regular 1234567
Common Mistakes
- - Missing registration number
- - No tax rate breakdown (when mixing 10% and 8%)
- - Inconsistent rounding of consumption tax (only once per invoice)
- - Recipient name blank or generic (official name required in principle)
Simplified Invoice
Certain businesses that sell to unspecified customers can issue simplified invoices that omit the recipient name.
Businesses That Can Issue Simplified Invoices
- - Retail businesses
- - Restaurants
- - Photography businesses
- - Travel agencies
- - Taxi services
- - Parking facilities (for unspecified customers)
- - Other businesses with transactions to unspecified customers
Simplified Invoice Requirements
- - Name/trade name and registration number of qualified invoice issuer
- - Transaction date
- - Transaction description (note if reduced tax rate applies)
- - Amount by tax rate (before or after tax)
- - Consumption tax amount OR applicable tax rate (either one is OK)
- - (Recipient name not required)
Consumption Tax Calculation Methods & Filing
Three Calculation Methods
Standard Taxation
Deduct actual consumption tax on purchases from sales consumption tax
- + Most accurate calculation
- + Advantageous if expenses are high
- - Heavy record-keeping burden
Simplified Taxation
Pay: Sales tax x (100% - deemed purchase ratio)
- + Simple calculation
- + No expense record-keeping needed
- - Advance application required
- - Must apply for 2 years
20% Special Rule
Pay 20% of sales consumption tax
- + Simplest calculation
- + No application needed
- + Choose at filing time
- - Available until 2026 only
Deemed Purchase Ratios for Simplified Taxation
| Category | Main Industries | Deemed Ratio |
|---|---|---|
| Type 1 | Wholesale | 90% |
| Type 2 | Retail, Agriculture, etc. | 80% |
| Type 3 | Manufacturing, Construction, etc. | 70% |
| Type 4 | Other businesses | 60% |
| Type 5 | Services (most side hustles) | 50% |
| Type 6 | Real Estate | 40% |
Most Side Hustlers are Type 5
Writing, design, programming, consulting, and many other side hustles fall under services (Type 5) with a deemed purchase ratio of 50%. With simplified taxation, you pay half of the sales consumption tax (effectively 5% of sales).
AI-Powered Invoice System Compliance
Automating Invoice Creation
What AI Tools Can Do
- Auto-generate templates
Automatically create invoices meeting requirements from transaction details
- Missing item checks
Auto-verify registration number, tax rate breakdown, consumption tax amount, etc.
- Consumption tax calculation
Accurate consumption tax calculation including rounding
- Registration number validation
Cross-reference with NTA database to confirm client registration status
Recommended Invoice-Compliant Tools
freee
- + Auto-create invoice-compliant invoices
- + Auto-generate consumption tax returns
- + Store & manage received invoices
- + Electronic bookkeeping law compliant
Money Forward Cloud
- + AI-powered journal entry suggestions
- + Invoice-compliant invoice issuance
- + Batch registration number verification
- + Bank & credit card auto-sync
Yayoi Online
- + Established reliability
- + Full Invoice System compliance
- + Strong support system
- + Smooth tax accountant integration
Misoca
- + Invoice creation focused
- + Free plan available
- + Simple and easy to use
- + Invoice-compliant templates
Continuing as a Tax-Exempt Business
Expected Risks and Countermeasures
Risk 1: Price Negotiation
Clients may request discounts equivalent to the non-deductible amount
Countermeasures
- - Clarify your value proposition and differentiate beyond price
- - Prepare for price negotiations considering consumption tax equivalent (~9%)
- - Propose benefits through long-term contracts or volume
Risk 2: Loss of Business
Some companies limit transactions to registered invoice issuers only
Countermeasures
- - Consider transitioning to B2C-focused business model
- - Build networks with other tax-exempt businesses
- - Use platform-mediated transactions (invoices may not be required)
Risk 3: Difficulty Acquiring New Clients
Harder to win new business from corporate clients
Countermeasures
- - Develop services/products for individual consumers
- - Expand overseas client services (consumption tax exempt)
- - Increase skill scarcity to become the chosen provider
Protection Under Competition Law
Unilateral changes to transaction terms or termination of business relationships due to the Invoice System may violate antitrust or subcontractor laws. If you receive unfair treatment, you can consult with the Fair Trade Commission or Small and Medium Enterprise Agency.
Electronic Invoices and Electronic Bookkeeping Law
Utilizing Electronic Invoices
Invoices can be issued and stored electronically, not just on paper. Using electronic invoices enables business efficiency and cost reduction.
Electronic Invoice Formats
- - PDF format: Most common, widely accepted
- - Peppol: International standard, increasing adoption in large enterprise transactions
- - EDI format: Used between large enterprises, higher implementation cost
- - Email attachment: Widely used between SMEs
Relationship with Electronic Bookkeeping Law
Invoices received electronically must be stored in electronic format (mandatory from January 2024).
Electronic Storage Requirements
- - Authenticity assurance: Timestamps or system with edit/delete history
- - Visibility assurance: Search functionality (by date, amount, counterparty)
- - Correlation: Linkable to accounting books
Cloud Accounting Software Handles This Automatically
Major cloud accounting software like freee, Money Forward, and Yayoi meet Electronic Bookkeeping Law requirements, enabling legal compliance without special configuration.
Frequently Asked Questions (FAQ)
Q. Should I register even if my side hustle sales are under 10 million yen/year?
It depends on your clients. If most of your transactions are B2B (with corporations), you should consider registering. If you mainly sell to individual consumers, registration is less necessary. Whether your clients are requesting registration is a key decision factor.
Q. Can I cancel my registration after registering?
Yes, you can cancel by submitting a "Request for Cancellation of Registration as Qualified Invoice Issuer." However, the cancellation takes effect on the first day of the tax period following the submission date, so timing requires attention.
Q. Do I need Invoice registration for side hustles as an employee?
Registration may be needed if your side hustle client is a corporation that requires invoices. However, registration could reveal your side hustle to your employer (business names are searchable by registration number on the NTA website). Registration under a trade name may be possible in some cases - consult a tax accountant.
Q. How long can I use the 20% Special Rule?
The 20% Special Rule is for those who became taxable businesses due to the Invoice System. It's available until 2026 (tax periods including December 31, 2026). No application is required - simply choose this option at tax filing. From 2027, you'll need to choose between standard taxation or simplified taxation.
Q. Are invoices not required for platform sales?
When selling through platforms like Amazon or eBay, the platform may handle invoice issuance to buyers. For payments received from the platform, you receive payment statements from the platform operator and typically don't need to issue invoices yourself. Check each platform's terms for details.
Q. Are invoices required for transactions with overseas clients?
Services provided to overseas businesses are generally export-exempt and not subject to consumption tax. Therefore, invoice issuance is not required. However, services performed domestically (like on-site consulting) may be taxable, so judgment depends on transaction details.
Practical Checklist
Invoice System Compliance Checklist
[ ] Registration Decision
- [ ] Identified my main clients (B2B/B2C)
- [ ] Checked if clients are requesting invoice issuance
- [ ] Calculated estimated consumption tax payment if registered
- [ ] Simulated revenue under both registration/non-registration scenarios
[ ] Registration Procedure (if registering)
- [ ] Submitted registration application via e-Tax or paper
- [ ] Received registration number
- [ ] Notified clients of registration number
[ ] Invoice Preparation
- [ ] Created invoice template meeting requirements
- [ ] Verified registration number, tax rate breakdown, consumption tax amount
- [ ] Configured accounting software/invoicing tool for Invoice compliance
[ ] Consumption Tax Filing Preparation
- [ ] Decided between standard/simplified/20% special rule
- [ ] Submitted application if choosing simplified taxation
- [ ] Established system to set aside tax payment funds
- [ ] Established storage rules for received invoices
Summary: Invoice System Compliance for Side Hustlers
Key Points of This Article
- + Registration is optional, but should be considered if B2B transactions are significant
- + The 20% Special Rule (until 2026) can reduce consumption tax burden
- + Invoices have 6 required items - watch for omissions
- + Cloud accounting software enables efficient compliance
- + Impact is limited for tax-exempt businesses with B2C-focused models
Consult a Professional
The optimal choice for Invoice System compliance varies depending on your business situation. We recommend consulting a tax accountant or other professional for registration decisions and consumption tax calculation method choices.