Withholding Tax in Korea

Almost everyone has checked their bank account on payday and tilted their head. The deposit is clearly smaller than the amount written in the employment contract. The company didn't pay you less. Under the law, it took out taxes and social insurance premiums in advance and paid them to the government for you. The system gets its name ("withholding at the source") because the tax is collected right at the source where the money comes from.

What if every citizen had to calculate their monthly earnings and go to the tax office to pay tax themselves? Individuals would get headaches studying complicated tax law every time. And the National Tax Service would spend enormous administrative costs checking the payments of tens of millions of people one by one.

So the state gave the duty of collecting tax in advance to the company that pays the money. When the company takes the tax out first and sends it to the national treasury as it pays salaries, individuals have less to worry about, and the state can prevent tax evasion and secure tax revenue on time and reliably.

This method isn't used only for office workers' pay. It works quietly at almost every point where money changes hands. The same goes for interest on savings accounts. Before depositing your interest, the bank first takes out 15.4% interest income tax and puts only the rest into your account.

The "3.3% deduction" that freelancers often hear about when they get paid for business income is also withholding. The payer takes out 3% business income tax and 0.3% local income tax in advance and pays you the rest. Lottery winnings above 2 million won also aren't paid in full. Tax is taken out first, then the rest is paid.

In the end, for the many kinds of income that individuals can't easily report one by one, the system is built so that the party handing over the money collects the tax in advance.

The withholding tax taken from your salary each month is not the final, settled tax. The government can't know in advance exactly how much you will earn and spend over the year. So it is only a rough amount collected in advance based on a standard table set by the government. Still, some income is finished with withholding alone, such as financial income (interest and dividends combined) of 20 million won or less a year, or lottery winnings.

In reality, the number of family members people support differs, and so do the amounts they spend on medical and education costs. Some people may owe less tax, and others may owe more.

So after the year ends, there is a process that compares the tax you paid in advance over the past year with the tax you truly owe. This is the year-end tax settlement (yeonmal-jeongsan) that Korean office workers do at the start of each year. If the tax taken in advance was more than the real tax, you get money back (a refund). If it was less, you pay the extra.