Hire in South Korea

Introduction to South Korea

After experiencing rapid economic growth for decades, South Korea has emerged as a high-tech, industrialized economy valued at $2 trillion. Key sectors driving this growth include electronics, telecommunications, automobile manufacturing, chemicals, shipbuilding, and steel production. Seoul, the capital of South Korea, boasts a population of over 25 million, representing approximately 50% of the country’s total population. South Korea operates under a civil law system, with its legal framework based on the Constitution of the Republic of Korea.

What to Know about South Korea’s Geography

South Korea occupies the southern portion of the Korean Peninsula, spanning approximately 99,720 square kilometers. It is bordered by the East Sea and the Yellow Sea.

Climate in South Korea

South Korea experiences a temperate climate characterized by four distinct seasons. Winters are cold, dry, and prolonged, while summers are typically short, hot, and humid, accompanied by significant rainfall.

The Culture of South Korea

Situated in the heart of Northeast Asia, South Korea boasts a culture that embodies the essence of Asia, featuring a diverse blend of multicultural influences. The society is characterized by peaceful coexistence and harmony among its people. Koreans are known for their warmth and friendliness, readily welcoming foreigners into their social circles.

Religions Observed in South Korea

Approximately 46% of South Korea’s population identifies as having no religious affiliation, while 23% adhere to Buddhism and 29% identify as Christian.

Languages Spoken in South Korea

Korean is the official language of South Korea, and Hangul is the official alphabet used for writing.

Employment Law Protections in South Korea

The Labor Standards Act (LSA) serves as the primary legislation governing the employment relationship in South Korea, establishing minimum employment standards. The country’s labor environment is known for its employee-friendly policies, characterized by stringent employment protection laws.

Employment Contracts in South Korea

Employers in South Korea are obligated to furnish employees with written documentation outlining key terms related to wages, working hours, annual paid leave, and weekly holidays upon entering into an employment contract. These written terms must be provided to the employee at the commencement of their employment, and the employer must retain a copy for at least three years following the termination of the contract. While contracts do not necessarily need to be in Korean, verbal or implied agreements are enforceable provided the existence of an employee-employer relationship can be established.

Personal Income Tax in South Korea

Every individual subject to taxation in South Korea must declare their income to the National Tax Service (NTS).

Resident:

Residents of South Korea are subject to income tax on all incomes derived from sources both within and outside South Korea. Foreign residents who have stayed in Korea for longer than five years during the last 10-year period are taxed on their worldwide income. However, foreign residents who have stayed in South Korea for five years or less during the last 10-year period are taxed only on South Korea-source income. Foreign-source income is reportable only if it is paid by a South Korean entity or transferred to South Korea.

Non-resident:

Non-residents are subject to income tax only on income derived from sources within South Korea. When a non-resident without a domestic place of business has Korea-source income to report through an annual tax return, they will be subject to most provisions concerning the tax rates and the filing procedures of residents. However, in calculating taxable income and tax amount, a non-resident is not entitled to claim any personal exemptions for their dependents (except for themselves), income deductions, and tax credits.

Resident Surtax:

In addition to the personal income tax (PIT) collected by the National Tax Service (NTS), there is also a local income tax assessed at a rate of 10% of the PIT rates. The PIT is paid to the NTS, while the local income tax is paid to the city or province where the taxpayer resides.

Non-Taxable Items & Deductions

The following items are considered to be either non-taxable reimbursements or tax-exempt earned income:

Here are some common fringe benefits provided by employers in South Korea:

1. Meal allowance: Up to KRW 200,000 per month.
2. Reimbursement of vehicle operating expenses: Up to KRW 200,000 per month for business use of employee-owned vehicles.
3. Childcare allowance: Up to KRW 200,000 per month for employees with children aged six years and under.
4. Cost of uniforms: Provided to employees required by law to wear uniforms.
5. Work clothes: Cost of work clothes exclusively worn at the workplace by employees in specified industries.
6. Social membership and entertainment expenses: Reimbursement for business-related social and entertainment expenses.
7. Education fees: Employer-paid education fees for qualified employees.
8. Housing costs: Cost of housing for expatriate employees, paid directly by the employer if the rental contract is between the employer and the landlord.
9. Insurance premiums: Premiums for Group Genuine Indemnity Insurance and Group Refund-cum-guaranty Insurance, up to KRW 700,000 per year.

Deductions for all taxpayers in South Korea can include the following, with specific conditions applicable for each:

Here are some deductions and allowances available to taxpayers in South Korea, along with applicable conditions:

1. Automobile Allowance: Taxpayers may be eligible to deduct automobile-related expenses, such as fuel and maintenance costs, up to a certain limit.

2. Meal Allowance: Deductions are available for meal expenses incurred for business purposes, subject to specific conditions and limitations.

3. Employer-Paid Insurance Premiums: Insurance premiums paid by the employer on behalf of the employee may be deductible, depending on the type of insurance and the coverage provided.

4. Medical Expenses: Taxpayers can deduct medical expenses, including payments for medical treatment, prescriptions, and hospital visits. Receipts must be submitted as proof.

5. Payments via Credit Card or Designated Cash Receipts: Taxpayers may be eligible for deductions for certain payments made using credit cards or designated cash receipts, with rebates provided under specific conditions.

6. Charitable Donations: Deductions are available for donations made to eligible charitable organizations, both domestic and some foreign entities.

7. Education Expenses: Deductions are allowed for expenses related to education, including tuition fees and educational materials, for dependents’ kindergarten through university, and for self-education, such as graduate studies.

8. Dependent Deduction: Taxpayers can claim deductions for themselves, their spouse, and dependent family members, with the amount of deduction for dependents being age-related.

These deductions and allowances are subject to change based on tax laws and regulations. Taxpayers should consult with tax professionals or relevant authorities for the most accurate and up-to-date information regarding deductions and eligibility criteria.

PIT: Employer Requirements

Employers in South Korea have specific obligations regarding tax settlement and reporting for their employees:

1. Tax Settlement Documents Submission: Employers must submit tax settlement documents on behalf of their employees by March 10 each year. Employees are typically asked to provide necessary documents and information in January. During this time, foreign employees can choose between paying the flat 19% tax rate or using the progressive rate based on their income.

2. Monthly Reporting: Employers are required to report each employee’s income and withholdings from the previous month by the 10th day of each month. For instance, the report for January’s income and withholdings must be submitted by February 10.

3. Annual Reconciliation: The annual reconciliation for the previous tax year is conducted in January, with reports due by February 10. This process ensures accuracy and compliance with tax regulations.

4. Wage & Salary Income Taxes Withholding Receipt Form: Employers must provide employees with a Wage & Salary Income Taxes Withholding receipt form every February.

5. Resident Tax: If the monthly average total salary of employees at the workplace exceeds 150 million won (calculated as 3 million won multiplied by 50), resident tax becomes payable. This additional employment cost is calculated at 0.5% of the total salary minus non-taxable income, regardless of the number of employees.

Employers play a crucial role in facilitating tax compliance and ensuring accurate reporting for their employees in South Korea.

Retirement Pension Plans

All employers, with the exception of those employing relatives living together, are mandated to establish either a defined benefit (DB) plan, defined contribution (DC) plan, or Severance Pay System. However, this obligation does not extend to employees with less than one year of service or temporary workers who perform less than 15 hours of work per week on average for the most recent four weeks.

Under the Severance Pay System, unlike retirement pension plans, employers are not obligated to make external cash contributions. Therefore, the authority strongly encourages employers to opt for one of the retirement pension plans. Consequently, accrued severance pay expense in the profit and loss account is not tax-deductible from 2016 onwards.
The government plans to gradually eliminate the severance pay system and encourage retirement pension plans for all employers.

Types of retirement pension plans:

Defined Benefit (DB) Plan: ERBSA mandates that upon termination of employment, an employee’s retirement entitlements should be no less than 30 days’ worth of average salary per year of service. Moreover, employers must contribute to the DB Plan, with contributions equal to or exceeding a prescribed percentage (e.g., 80% from 2016 to 2017) of an employee’s statutory retirement benefit entitlement.

Defined Contribution (DC) Plan: Employers who adopt a DC Plan are obligated to make periodic contributions equivalent to one-twelfth of an employee’s annual salary to the DC Plan. Notably, 100% of these contributions to the DC Plan are tax-deductible for the employer. Unlike a DB Plan, employees enrolled in a DC Plan have the option to make additional contributions to their pension plan.

Individual Retirement Pension (IRP) Plan: Employees have the option to establish IRPs to manage their retirement benefits provided by their employers. Employers cannot establish IRPs for their employees, but they are required to transfer existing retirement benefits to the employee’s IRP within the prescribed deadline after termination of employment. It’s important to note that employees can contribute a maximum amount of KRW 18 million per year to their personal type IRP, in addition to the retirement benefits paid by the employers.

Benefits to the Employee in South Korea

South Korean Statutory Benefits

Pension

In South Korea, employer-sponsored retirement plans serve as supplements to the pay-as-you-go National Pension Scheme, which forms the basic social security safety net covering old-age, survivors, and disability benefits. Initially introduced in 1961, these plans were mandatory for companies with 30 or more employees, providing lump-sum severance payments of at least one-month average pay per year of service. Over time, coverage expanded to include employers with five or more employees.

Under the 2005 Employee Benefit Retirement Security Act, employers are encouraged to adopt tax-advantaged retirement plans, such as defined benefit or defined contribution plans. They may also convert existing mandatory severance plans, subject to employee consent. Additionally, employers with fewer than ten employees have the option to make tax-free contributions to individual retirement accounts on behalf of their employees.

General Information

Pension

The following special income tax rules are available to expatriates in South Korea:

Foreigners have the option to choose between two methods for calculating their employment income tax:

1. Apply a flat tax rate of 19% to their total Korea-sourced employment income. No deductions or credits are allowed under this method.
2. Use the regular method of tax calculation, which involves applying graduated tax rates ranging from 6% to 42% to adjusted taxable income. This adjusted income is derived by subtracting applicable deductions and exemptions from gross income. The tax amount calculated using this method is further reduced by applicable tax credits to determine the final tax due amount.

To select the 19% flat rate, taxpayers must file an application during the monthly payroll withholding tax return, year-end payroll tax reconciliation, or when filing the annual composite income tax return.

The monthly payroll withholding tax return is due on the 10th day of the following month. Year-end tax reconciliation is due on March 10, and the annual composite income tax return is due on May 31 of the year following the tax year.