Taxes are a pretty complicated thing, and Korea is no exception, in this post, I hope to explain in a bit more detail how taxation works in Korea and cover some frequently discussed yet often unsatisfactorily covered ground.
First off, if you work in a public school in Korea, you are able to receive a 2 year tax exemption (This applies to all nationalities except for Canadians). It’s important to note, that the clock on your 2 year exemption starts ticking from when you start working in Korea, so if you’ve already worked for 2 years in Korea outside of a public school, you will have lost out on your 2 year tax exemption.
For people working outside of the public system, or those whose exemption has expired, you will have to pay taxes, and this is where much of the confusion starts.
One of the biggest causes for confusion is the 3.3% tax rate which is mentioned in many contracts. Let me clear this one up, the tax rate is NOT 3.3%, ever. 3.3% is the withholding rate for independent contractors (how it’s supposed to work: your employer withholds 3.3% of your salary each month, and at the end of the year you depending on whether you paid too much or too little tax, you either have to pay in more, or you receive a rebate) Though shadier hagwons (the ones most likely to enroll you as an independent contractor) aren’t know for returning tax rebates to employees.
Legally someone on an E2 cannot actually be an independent contractor, but in reality this happens.
Another major cause for confusion is the option for foreigners to be taxed at a flat rate of 15%. While this is in fact true, using this method will forfeit most tax deductions and credits, so this only starts becoming a realistic choice once your salary is around 100 million won per year.
So what is the tax rate in Korea?
Well, like most countries, Korea uses a progressive taxation method. This means, the higher your salary, the higher your tax rate will be.
These are the current tax brackets based on an annual salary:
0-12mill – 6%
12 – 46 mill – 15%
46 – 88mill – 24%
88 mill – 300mill 35%
300mill or more – 38%
So, the first 12mill is taxed at 6%, the next 34mill is taxed at 15% and so on.
This is rather simple, however, there are many deductions and credits which make calculating your tax a little bit more complicated.
The ones that apply to most people are:
Deduction for “wage and salary earners” which is calculated according to a formula based on your salary.
The basic deduction which is a flat 1,500,000, however this deduction will be higher if you have dependents.
The standard deduction. This takes into account health insurance, pension contributions, medical expenses and educational expenses. If the total of your deduction is less than 1,000,000, then you are given a base deduction of 1,000,000.
Lastly is a tax credit of 500,000 for “wage and salary” income.
So let’s do an example.
Say you’re earning a salary of 2.5m a month. That’s 30m per year.
The first major deduction is the deduction for “wage and salary earners” which on the 30mill salary is a deduction of 11,250,000.
This means that your “taxable” income is actually 18,750,000.
Then there is the basic deduction of 1,500,000.
Next is the standard deduction of 1,000,00
So your tax taxable salary is now 16,250,000.
12,000,000 @ 6% = 720,000
4,250,000 @ 15% = 637,500
Now we subtract tax credit of 500,000 for “wage and salary” income.
So your total tax due is 857,000.
But, there’s is also a local resident tax of 10% of your total tax (85,700 in this case)
Final amount: W943,250. This translates into an effective tax rate of 3.14%
Using the same information as above, here are the taxable amounts on some different salaries:
2,000,000 per month: 377,630 = 1.57%
3,000,000 per month: 1,834,250 = 5.09%
A few things to remember.
1. Your monthly tax deduction won’t necessarily match up with these numbers. Usually a “ball-park” figure is deducted each month, with a final amount being assessed after your tax return in Jan/Feb. Depending on your deductions, you may have to pay in more, or you may receive a rebate.
2. Based on how your salary is calculated, your tax rate may vary. Things like transport and meal allowances aren’t taxed (up to a limit) which may greatly reduce your tax liability.
3. There are a long list of other deductions. Some of the most common ones include medical expenses and credit card usage. These have pretty high minimum thresholds, and unless you’ve spent a significant sum on these things, you most likely won’t receive any sort of deduction.
Note: The above post is meant to serve just to educate readers about their taxes. Each individual situation will be different.
For more detailed information on taxation please refer to the National Tax Service website. The link to “Automatic Calculation service for year-end settlement” on the left, if you click “progressive tax rate method” will output your tax liability according to the calculations I demonstrated above, no Math required. (Works best in Internet Explorer)