Definition
In Korea, the simple expense rate and the standard expense rate are estimated ratios that the National Tax Service (NTS) uses to calculate your deductible expenses based on average spending in your industry, when a business owner or freelancer hasn't recorded a year's worth of costs in account books.
Why you can pay taxes even without receipts
If you run a business or work as a freelancer, you pay tax on your net profit. That's your revenue (the money you earned over the year) minus necessary expenses (the money you spent to do the work). But for a tiny new business or a busy freelancer, saving every receipt and keeping a ledger like a household budget book is a real hassle.
So Korea's tax offices use statistics they've collected in advance, like "businesses in this industry usually spend about X percent of their revenue on costs." Even without books, taxpayers aren't left completely out in the cold, because the tax office estimates and recognizes a rough level of spending. Filing by estimating instead of using actual books is called 'estimated filing' (chugye sin-go in Korean).
The expense rate is the official ratio the government sets for how much to recognize as expenses in an estimated filing. Thanks to it, even a small business with no books can have its costs recognized using the government's set expense ratio, with no complicated paperwork, and then calculate its income.
Without this system, first-time owners who didn't keep receipts could be treated as if all their revenue were profit, and get hit with a tax bill they couldn't handle. The expense rate is a kind of safety net in the tax code that eases the paperwork burden in the early days of a business.
The key difference between the simple and standard expense rates
Expense rates come in two main types, depending on how much revenue you have: the 'simple expense rate' and the 'standard expense rate.' The simple expense rate is a big benefit for owners whose revenue last year was below the cutoff for their industry, or for new businesses whose revenue this year stays under a set limit (some professionals, such as doctors and lawyers, are excluded). The National Tax Service says, "We won't check your receipts. We'll just count a set percentage of your revenue as expenses," and it deducts generously. The rate differs by industry, and it's often well above half of revenue.
On the other hand, once your business gets going and your revenue passes the cutoff, you move to the standard expense rate. From then on, the share of costs that the government recognizes automatically is much lower than under the simple rate, depending on your industry. To have the rest of your spending recognized, you have to collect receipts for the three main expenses yourself and prove them to the tax office.
The three main expenses you must prove with receipts are the cost of materials or goods you bought to sell (purchase costs), your monthly shop rent (rent), and the pay you gave to employees (labor costs). If you don't have documents for these three, you can't claim the deduction, and that hurts a lot.
In the end, the simple expense rate is the generous system that wipes out most of your costs on its own, even without receipts. The standard expense rate is the strict one, where the amount of expenses recognized shrinks sharply if you don't have the key receipts. There's also a cap: the result can't exceed the income calculated using the simple expense rate multiplied by a legal multiplier.
A bit more precisely: why books become a must as revenue grows
Getting the simple expense rate in your first year doesn't mean you'll get it the next year too. Which rate applies mostly depends on last year's revenue. If last year's revenue goes over the cutoff for your industry, you become a standard expense rate filer the next time you file.
If you become a standard expense rate filer but keep doing things the old way, with no receipts and no books, you'll run into serious trouble fast. The basic expense ratio you're allowed is so low that, even if you actually lost money, the estimated calculation can make it look like you made a huge profit. That can leave you with an unexpectedly heavy tax bill.
On top of that, if a business above a certain size files by estimate without keeping books, it also has to pay an extra penalty tax for not keeping books (the 'no-bookkeeping surcharge'). Your recognized expenses go down, and a surcharge gets stacked on top.
On the other hand, if you keep books, you can file based on the costs you actually paid instead of a rough estimate. You can also check which type of expense rate applies to you on the National Tax Service's Hometax site.
Common misconceptions
If you never collect any receipts, the expense rate system will always cut your taxes a lot.
Only simple expense rate filers, whose revenue is low, get most of their costs deducted without receipts. Once your revenue grows and you move to the standard expense rate, the expenses recognized without receipts drop sharply, and your tax can jump.
Where you meet it
In an industry with a simple expense rate of 80%, if your revenue in your first year is 20 million won (about $14,500), 16 million won is recognized as expenses, and the remaining 4 million won is counted as your income.
A freelancer whose annual revenue reached 50 million won (about $36,000) became a standard expense rate filer, but didn't keep any rent or materials receipts, and ended up with a much bigger tax bill.
In one sentence
These are ratios the government uses to estimate your spending when you haven't kept books. The simple expense rate is for tiny businesses and recognizes a high percentage across the board, while the standard expense rate recognizes much less unless you prove your key receipts yourself.