South Korea operates a robust tax system that encompasses both national and local taxes, impacting individuals and businesses alike. For employers, understanding and complying with payroll tax obligations and income tax withholding requirements is fundamental to operating legally within the country. Similarly, employees benefit from various deductions and allowances that can significantly affect their final tax liability.
Navigating these regulations requires careful attention to detail, from calculating social security contributions and withholding income tax accurately each pay period to completing the annual tax settlement process. The system is designed to ensure contributions to national welfare programs and collect income tax progressively based on earnings, with specific rules and deadlines that must be adhered to throughout the year.
Employer Social Security and Payroll Tax Obligations
Employers in South Korea are responsible for contributing to several mandatory social insurance programs on behalf of their employees. These contributions are typically shared between the employer and the employee, calculated based on the employee's monthly standard wage or income, often with upper limits. The primary social insurance programs are:
- National Pension (NP): Provides retirement, disability, and survivor benefits.
- National Health Insurance (NHI): Covers medical expenses. Includes long-term care insurance.
- Employment Insurance (EI): Provides unemployment benefits and employment stability/vocational training support.
- Industrial Accident Compensation Insurance (IACI): Covers work-related injuries or illnesses. This is typically borne solely by the employer.
Contribution rates for 2025 are expected to be structured as follows, though specific rates can be subject to minor adjustments:
| Program | Total Rate (Expected 2025) | Employer Share (Expected 2025) | Employee Share (Expected 2025) | Calculation Basis |
|---|---|---|---|---|
| National Pension | 9.0% | 4.5% | 4.5% | Standard Monthly Income |
| National Health Insurance | ~7.09% | ~3.545% | ~3.545% | Monthly Wage |
| Long-Term Care Insurance (part of NHI) | ~12.95% of NHI contribution | ~6.475% of NHI contribution | ~6.475% of NHI contribution | NHI Contribution |
| Employment Insurance | 1.6% - 2.0% (varies) | 0.8% - 1.1% (varies) | 0.8% | Monthly Wage |
| Industrial Accident Compensation Ins. | 0.7% - 18.6% (varies) | 0.7% - 18.6% | 0% | Total Gross Payroll (varies by industry risk) |
Note: Rates are subject to change and may have upper limits on the calculation basis.
Employers must register with the relevant authorities for each insurance program and report employee information accurately. Contributions are typically calculated and paid monthly.
Income Tax Withholding Requirements
Employers are legally required to withhold national income tax and local income tax from their employees' monthly salaries and bonuses. The amount to be withheld is based on a progressive tax rate system applied to the employee's taxable income. While the final tax liability is determined annually, employers use withholding tax tables provided by the National Tax Service (NTS) for monthly calculations. These tables consider the employee's monthly income and the number of dependents to provide a simplified withholding amount.
The national income tax rates for 2025 are expected to follow a progressive structure:
| Taxable Income (KRW) | Tax Rate |
|---|---|
| Up to 14,000,000 | 6% |
| 14,000,001 - 50,000,000 | 15% |
| 50,000,001 - 88,000,000 | 24% |
| 88,000,001 - 150,000,000 | 35% |
| 150,000,001 - 300,000,000 | 38% |
| 300,000,001 - 500,000,000 | 40% |
| 500,000,001 - 1,000,000,000 | 42% |
| Over 1,000,000,000 | 45% |
Local income tax is levied at a rate of 10% of the national income tax liability. Employers typically withhold both national and local income tax together. The withheld amounts must be paid to the tax authorities by the 10th of the following month.
Employee Tax Deductions and Allowances
Employees in South Korea can reduce their taxable income by claiming various deductions and allowances during the annual year-end tax settlement process (Yeonmaljeongsan). These deductions are designed to alleviate the tax burden based on personal circumstances and specific expenditures. Common deductions and allowances include:
- Basic Personal Allowance: A fixed amount for the taxpayer and eligible dependents.
- Dependent Allowance: Additional amounts for elderly dependents, dependents with disabilities, etc.
- Special Deductions:
- Insurance premiums (health, employment, etc.)
- Medical expenses (exceeding a certain threshold of total income)
- Education expenses (for self and dependents)
- Housing expenses (rent, mortgage interest)
- Donations to eligible organizations
- Other Deductions:
- Credit card and cash receipt usage (exceeding a certain threshold)
- Retirement pension contributions
- Small and medium-sized enterprise (SME) investment deduction
Employees are responsible for submitting documentation supporting their claims to their employer during the year-end settlement period, typically in January. The employer then calculates the final tax liability, adjusts for the monthly withheld amounts, and either refunds overpaid tax or collects underpaid tax from the employee.
Tax Compliance and Reporting Deadlines
Employers have several key deadlines throughout the year for tax compliance:
- Monthly Withholding Tax Payment: National and local income tax withheld from employee salaries must be paid to the tax office by the 10th of the month following the payment of wages.
- Monthly Social Insurance Contributions: Contributions for National Pension, National Health Insurance, and Employment Insurance are typically due by the 10th of the following month. IACI payments have different schedules depending on the industry.
- Annual Year-End Tax Settlement (Yeonmaljeongsan): Employers must complete the year-end tax settlement for all employees by the end of February each year, based on income earned in the previous calendar year. This involves calculating the final tax liability, applying deductions and credits, and settling any difference between tax due and tax withheld.
- Filing of Payment Records: Employers must file payment records (like income statements) for employees with the tax authorities by March 10th following the tax year.
Accurate record-keeping and timely filing are crucial to avoid penalties and interest.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies in South Korea are subject to specific tax rules based on their residency status and the nature of their income or business activities.
- Residency: An individual is generally considered a tax resident if they have their domicile or a place of residence in South Korea for 183 days or more within a tax year. Residents are taxed on their worldwide income, while non-residents are generally taxed only on their South Korea-sourced income.
- Tax Treaties: South Korea has tax treaties with many countries. These treaties can provide relief from double taxation and may affect tax rates or exemptions for certain types of income for residents of treaty countries. Employers of foreign workers should consider applicable tax treaty provisions.
- Flat Tax Rate Option: Certain foreign employees may be eligible to elect a flat tax rate of 19% (plus 1.9% local income tax, totaling 20.9%) on their gross income for a specific period, instead of the progressive tax rates and deductions. This option can be beneficial for high-income earners with few deductions.
- Foreign Companies: Foreign companies operating in South Korea may be subject to corporate income tax on their South Korea-sourced income, potentially through a branch or permanent establishment. Specific rules apply regarding withholding tax on payments made to foreign entities.
Understanding these special considerations is vital for foreign individuals and companies to ensure compliance with South Korean tax laws. Engaging with local tax experts or an Employer of Record service can help navigate these complexities.
