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A Guide to Expat Tax & Social Security in Korea 2014

Horrible horrible tax. On the plus side there's a small chance you won't have to pay any.

If you just want to know how much of your salary will be left after tax, then time to head to the Korean budget, it’ll calculate everything including tax and social security.

On the other hand if you’ve got questions about how tax in Korea works, how it’s calculated, what Korean social security is like etc. then read on.

If you’re unfamiliar with how tax generally works as an expat, then quickly go read this expat tax primer and then come back.

On with the show. The tax show. The least exciting show on earth.

Do I have to pay tax in Korea?

Possibly. Korea mostly follows the rule “You nearly always have to pay tax in the country you earn money in” that we set out in the expat tax primer.

Like most places, tax in Korea is based on residency and if you have a job which requires at least a year of continuous living in Korea (i.e. 95% of all teacher contracts) then you’ll be paying tax.

Well actually there’s quite a large exception. If you’re coming over to teach in a public university, college or school program (EPIK or GEPIK) and you’re either

  • British
  • American
  • Australian
  • South African
  • From New Zealand

Then for the first two years you’ll be exempt from paying tax in Korea (sorry Canada and Ireland).

How do you get this tax exemption for teachers?

Before you leave you’ll need to get a Certificate of Residency from your country.

Then when you arrive in Korea you have to give this to your school, who can then use it to register you for the tax exemption.

What happens about tax in your home country if you get this exemption? It’s business as usual. We go over it in the expat tax primer, whether or not you have to pay tax at home is decided by your home country, usually by looking at if you’re a resident or not. Asking for a Certificate of Residency won’t change any of that, it's just an official record of your residency status when you apply for it. i.e. before you've left the country and started working abroad.

Does that mean it's possible to pay no tax in both countries? Yes. For example, an American can exempt themselves from tax in Korea, then file for Foreign Earned Income Exclusion to avoid paying tax in America. British people can get a certificate of residency before they leave to exempt themselves from tax in Korea, then when they file their taxes, split their tax year (at the point when they left for Korea) to avoid paying tax in England.

If this is an option for you, it's nearly always a good idea.

How to get a certificate of residency?

For all countries it involves filing forms to request one from your countries tax authority.

USA

In the USA you have to file form 8802 with the IRS, which will get your residency certificate (the certificate is confusingly called Form 6166). You can find the official page here.

UK

You’ll need to apply to HM Revenue and Customs for one. You can find the application link here.

Australia

You’ll need to apply to the ATO by sending them a letter or fax. Full instructions and explanation here.

New Zealand

New Zealand doesn’t actually have Tax residency certificates, instead you’ll need a letter dated recently (within a couple months) which has your IRD number and address on it.

If you’re unsure contact the NZ Inland Revenue for more information here.

South Africa

You have to apply for a certificate of residency with SARS.

You can download the form here. (This form can actually be filled out in a PDF reader, which annoyingly means it requires the latest version of Adobe to open. You may have to update Adobe reader to open this or open it in the desktop reader rather than a browser.)

There doesn't appear to be any information about a mailing address, so either bring the form into your local SARS office or contact them to get a mailing address.

And the relevant official page is here.

What are the main taxes in Korea?

There are two main taxes in Korea, income tax and resident surtax.

Income Tax: This is paid to the national government.
Resident Surtax: This is paid to the city or province you’re living in.

How does social security work for expats in Korea?

There are two parts to Korea’s social security that most foreigners will deal with:

Pension Plan & Health Insurance

Both of these programs are mandatory for most people working in South Korea, although each has one common exception:

  • Pension: If you're South African you don't have to sign up for the pension scheme. There are several other uncommon exceptions you can view here.
  • Health Insurance: The main exception is if you’re covered by your own insurance from home, then you don't need to have National Health Insurance. You can read more information here.

There are other parts of Korean social insurance (such as unemployment insurance), but these are only applicable for long term visa holders and we’re not covering them here.

For most people being part of these two programs is mandatory, so the next question is how do you get them. There are two options for getting them, you’ll either have one or the other.

Option 1: Your employer enrolls you into Korea’s social insurance scheme, which means you’ll get a pension and health insurance.

You’re charged a percentage of your salary for each program, you pay half of the contribution and your employer pays the other half.

Option 2: Option 1 is mandatory for all employees, however hagwons may try to get around it by classifying you as an independent contractor rather than a employee. In this case you’ll have to sign yourself up to health insurance and the pension scheme and you’ll have to pay all the contributions.

What does Korean health insurance cover?

Having Korean National Health Insurance means you only have to pay for a percentage of your medical costs:

  • 20- 50% of the cost of visiting a clinic or hospital
  • 30% of the cost of prescription drugs

This makes things like prescription drugs and small visits very cheap. If you're unlucky enough to end up in hospital with something serious or long term like cancer for example, then the remaining percentage can still rack up bills very quickly.

There’s an excellent post on Ask a Korean which talks extensively about how the health care system plays out in Korea, that you should read if you’re interested.

Do you want a pension?

Good question.

The main benefits of the pension are only for option 1, when your employer is paying into it. You also need to be either from:

  • USA
  • Canada
  • Australia

This is because anyone of those three nationalities can withdraw their pension money as a lump sum when they leave, which makes for a great bonus at the end.

If you're not from one of those countries, or you're an independent contractor then there’s really no benefit to this and no way to get the money.

Which brings us to the next question which is: Do I have to sign up for it?

Unfortunately yes. The pension scheme is mandatory for all people working in Korea whether or not you’re an independent contractor.

If you're working in a public school you will be enrolled. With hagwons the hagwon director has to enroll you and it can be hit and miss depending on the hagwon. Many will try to avoid making the extra payments by not signing you up (assuming you're an employee.).

Tax Expat Information
Here is a brief introduction to do some random text because I'm so excited. However if you’ve got questions about how it all works.

If you're classified as an independent contractor then you have to sign yourself up as we mentioned earlier, however some people avoid signing up so they don't have to make the payments.

If for any reason you end up not enrolled and they catch you (usually because a future employer signs you up) you will be forced to pay all of the back payments.

It's annoying that there's no great solution for those who don't get the pension lump sum payments, you're paying money into a system that you can't ever get back. Even if you manage to avoid paying the pension for a little while, if you ever switch to an employer who doesn't try to beat the system and signs you up, you'll be forced to pay all the back payments.

The safest option is to get an employer who will sign you up and pay half of your contribution. It takes off half of the cost and keeps you safe and legal. It's not perfect, but it's better than the other options.

Note: With hagwons if your employer does sign you up, then you should check the payments are going in otherwise they could simply be pocketing the money.

Independent Contractors on E2 Visas

It’s quite common in Korea for hagwons to treat you as an independent contractor.

By treating you as a contract worker rather than an employee they avoid certain requirements that employers have to their employees.

Hopefully it’s fairly obvious by this point, but there is very little benefit in being an independent contractor (IC). You have to pay all of your contributions to National Health Insurance and the National Pension Scheme and although you might be able to avoid paying for benefits by not signing up, if you ever end up as an employee the back payments are very expensive.

There’s another disadvantage which we’ll come onto in the tax section in a little bit, which is that you also have to file an end of year tax return rather than your employer doing it for you.

In short it’s a whole lot of extra effort and you don’t really get anything from it.

(There's a common misconception that IC's pay a different tax rate to everyone else. This isn't true. IC's pay the same tax as everyone else, they simply have a different withholding tax rate. We explain it here.)

How can you tell if you’re an independent contractor?

You’ll need to see what you’re referred to in your contract. Are you an independent contractor or an employee?

If a contract doesn’t clearly spell out which you are, look for the 3.3% tax rate. If you’re being charged that then you’re an independent contractor.

If you’re still not sure ask and get them to spell it out. It’s entirely possible it’s a badly modified contract and it uses both terms. (Although in that case the tax rate of 3.3% is usually the big give away.)

Is it legal to be employed as an IC?

A bit of a grey area. Unfortunately I've been unable to get an official line on this at the moment (still trying).

So lets look at the information step by step: Immigration, or at least the consulates and embassies don't appear to care whether or not you're an independent contractor.

It's also definitely quite common, there are plenty of people on IC contracts and the Korean NTS tax guide for foreigners (page 99) says the status is determined by specific conditions in the contract between you and your employer and most foreign teachers are in fact independent contractors.

Is it possible that an IC contract could be argued as an employee contract rather than an IC contract?

Also yes, The Korean Law blog mentions in a post in 2011 the court system has been less reluctant to deem an independent contractor as an employee and lists some of the factors the courts have looked for when deciding.

So it might be legal, or it might not be. Slightly more usefully, it’s entirely possible your contract looks like one between an employer and employee, not employer and IC, even though it uses the word independent contractor.

But the problem here is chasing after it. You’ll have to raise a formal dispute, often you’ll have to go to court and money you’re trying to win back is minimal. It’s a huge amount of effort for a tiny return and by the end your relationship with your boss will be terrible.

If you want to change employers afterwards you’ll need a letter from your current employer and possibly a reference and getting that is going to be incredibly hard now you’ve just annoyed your boss by taking them to court.

Should you take a job as an independent contractor?

No. The best medicine here is preventative. Don’t take a contract for an IC job, take the time to find a contract which treats you as a proper employee.

It’s entirely possible you’ll get a good employer who will pay you more to make up for it, help you with your tax returns and deductions and it won’t matter than you’re an IC. Some people do it because they can then avoid signing up to health insurance and the National Pension Scheme and keep the money (particularly with nationalities where the pension lump sum refund isn’t on offer).

But there are no guarantees with either of these and you often won’t know until it’s too late. If at all possible, don’t take these jobs. Insist on a contract that treats you as an employee. It’s good for you and it’s good for the industry.

How is tax and social security paid in Korea?

Both tax and social security payments happen in one of two ways depending on if your contract says you’re an employee or an independent contractor.

If you’re an employee then your tax and social security is calculated and withheld. (Hooray we don't need to do anything.)

At the end of the tax year your employer will file your yearly tax return for you. If you want extra deductions you’ll need to provide your employer with all the proof required to get them and they’ll have to file for you.

If you’re an independent contractor then 3.3% tax is withheld each month and you have to file a tax return at the end of the year. Depending on whether you’ve over paid or underpaid, you’ll either get the money back or be charged what you owe.

In the end you’ll pay exactly the same tax as everyone else.

For social security you’ll have to sign up to the National Pension Scheme and National Health Insurance and make monthly payments yourself. If you don’t sign up and get caught, or a future employer signs you up, you’ll then have to pay all of the back payments you missed.

How to calculate tax and social security in Korea?

Onto the explanation. Hopefully this is as free from tax jargon as possible, but unfortunately certain words have still had to be used.

  • Gross Salary/Income: This is referring to your salary before any money is taken out of it like taxes or social security etc. It's usually what's advertised on a job advert.
  • Deduction: This is usually referring to something you don't have to pay tax on, you take it away from your salary before calculating tax.

We need to calculate four things:

  • Income tax
  • Residents surtax
  • National Health Insurance
  • Pension Payments

We want to know how much we'll actually get paid each month, so we take all four off our income to get the number that ends up in our bank account. Let’s get started:

How to calculate National Health Insurance

If you’re an employee then it’s 3% of your monthly salary:

0.03*monthly salary = health insurance contribution

The calculation is different for independent contractors:

Instead you have to calculate a contribution score and multiply this by the current years unit price.

What on earth does that mean? Well you can find the unit price here, however there are no tables in English on how to calculate a contribution score.

Instead we will assume you pay the whole cost of the monthly contribution of an employee so your formula will be (note, this is likely to be overpaying, however it is a safe estimate):

0.06*monthly salary = health insurance contribution

How to calculate the National Pension Scheme

For employees the cost is 4.5% of your monthly salary.

0.045*monthly salary = National Pension contribution

For independent contractors it’s 9% because your employer isn’t paying the other half.

0.09*monthly salary = National Pension contribution

How to calculate income tax & the residents surtax

There are two options for expats.

  1. Flat Tax Rate
  2. Progressive Tax Rate

The flat rate will almost certainly cost you more, so we've put it's explanation in a dropdown box. (If you do want this rate, you'll need to tell the tax office you want to change to the flat rate)

Flat Tax Calculation

The flat rate is 17% for income tax. Resident surtax is calculated by taking 10% of your income tax owed.

So your total tax if you choose the flat tax rate is:

17% + 1.7% = 18.7%

To calculate your tax in this case you simply multiple your salary by 18.7%:

Monthly Salary*0.187 = Total Income tax + Residents surtax

Most people reading this though will be paying progressive tax rates (this is what you have by default), which is what we'll cover now. In which case we have to split into two again:

  1. Independent Contractors
  2. Employees

Are you an independent contractor? Or are you an employee? (See the independent contractor section.)

Calculation for employees:

First take we'll take your gross annual salary and take away a deduction called the Employment Income Deduction. The following table tells you how to calculate it.

Your Annual Salary How to calculate your Employment Income Deduction
0 - 5 million won (Annual Salary x 80%)
5 million - 15 million won 4 million won + 50% of the Salary over 5 million won
15 million - 30 million won 9 million won + 15% of the Salary over 15 million won
30 million - 45 million won 11.25 million won + 10% of the Salary over 30 million won
Over 45 Million won 12.75 million won + 5% of the Salary over 45 million won

Then you need to take away another deduction. This is your standard basic deduction, it's usually 1.5 million won.

If you have other people you're supporting, perhaps a wife, kids etc. then it gets larger.

You get an extra 1.5 million won deduction if you have a wife and an extra 1.5 million won for each dependent you have. In order to qualify though they have to earn less than 1,000,000 won a year.

You can find the full list of basic deductions all listed here. It's on page 81. This covers the other less common circumstances like being a single parent, which also increases the basic deduction.

The final deduction that you always get is your pension payments. Any pension payments you've made are deductible.

So at the moment we have:

Gross income - employment income deduction - basic deduction (usually 1,500,000) - all your pension payments

You then get a choice. Either you can have a special deduction of 1 million won. Or you submit a list of deductions and remove that. The most common ones are:

  • National health insurance
  • Medical expenses
  • Education expenses for kids or yourself (typically schooling)

You can find a list of all the possible deductions on page 93 here. (this is the same document as before)

So now we have:

Gross income - employment income deduction - basic deduction (usually 1,500,000) - all your pension payments - (1,000,000 or your own list of deductions)

We then take this number put it into the tax bracket table below to calculate our income tax.

Your Annual Salary - Deductions How much tax you have to pay
12 million won or less 6%
12~46 million won or less 720,000 won + 15% of the amount exceeding 12 million won
46~88 million won or less 5,820,000 won + 24% of the amount exceeding 46 million won
88~300 million won or less 15,900,000 won + 35% of the amount exceeding 88 million won
More than 300 million won 90,100,000 won + 38% of the amount exceeding 300 million won

Finally you then get what is called "Tax Credits for Wage & Salary Income", which you get to remove from your income tax. You calculate it using the following rule:

  • If your Income Tax is less than 500,000 = Income tax*0.55
  • If Income Tax is more than than 500,000 = 275,000 + 30% of amount of income tax exceeding 500,000

You then take the tax credit off your income tax to get your final amount of income tax.

We're still not quite done though because we need to add the resident surtax, which is 10% of your income tax. Take your final income tax number and multiply it by 1.1 and that is your total tax you need to pay.

Calculation for independent contractors:

If you’re an independent contractor then you'll pay 3.3% tax a month.

At the end of the year you’ll have to calculate how much tax you’ve paid.

Then you’ll have to calculate how much tax you should’ve paid using the method above for employees. You’ll take the second off the first and if the difference is positive then you've overpaid tax and you’ll get the difference back. If it's negative you owe extra tax and you'll have to pay that.

Followed all that? Probably not, let’s do an example calculation:

Example Tax Calculation

Tax example for employees

Our example teacher earns 2.1 million won a month. Their employer has enrolled them in the social insurance scheme, they're an employee not an independent contractor.

They're single and live by themselves (in a good way, not a depressing all alone way).

That makes their total yearly income.

2,100,000*12 = 25,200,000

National Health Insurance:

The monthly salary is 2,100,000 so we can calculate health insurance using our formula:

2,100,000*0.03 = 63,000

So that's 63,000 a month, or 756,000 for the whole year.

National Pension Scheme:

We can follow exactly the same process with our formula for pension payments:

2,100,000*0.045 = 94,500

So that's 94,500 a month or 1,134,000 for the whole year.

Income tax and residents surtax:

We use the first of our two tables to calculate the employment income deduction. It falls into row three, so we calculate 15% of our salary over 15 million and add 9 million to get our employment income deduction.

(25,200,000– 15,000,000)*0.15 + 9,000,000 = 10,530,000 million

We then have the three deductions everyone gets: a basic deduction of 1.5 million won, pension payments and the special deduction which is either 1 million won or our own list of deductions.

We'll go with the flat 1 million deduction because the only item we have on our list of deductions is health insurance which is less 1 million.

So if we add all those deductions together we get:

1,500,000 + 1,000,000 + 1,134,000 + 10,530,000 = 14,164,000

We then take all these deductions off our annual gross income:

25,200,000 - 14,164,000 = 11,036,000

Then we take our remaining salary and put it into the second table to calculate how much income tax we have to pay. It falls into the first bracket so we have:

11,036,000*0.06 = 662,160

We then need to remove our tax credits that we get by default. Our income tax to be paid is greater than 500,000, so we use the following calculation

275,000 + (662,160 - 500,000)*0.3 = 323,648

To get our final income tax, we take income tax and remove the tax credits:

662,150 - 323,648 = 338,512

Our last step is to add the resident surtax, so we take our income tax and multiply it by 1.1 to add 10%. And then we round to the nearest ten.

338,512*1.1 = 372,363 rounded to 372,360

That's the total income tax and resident surtax we have to pay each year.

The Total

Now we can put all those together and see what we'll get in our paycheck each month:

2,100,000 - 63,000 - 94,500 - (372,360/12) = 1,911,470
Annual Salary - health insurance - pension scheme - income + residents tax = Net salary

Tax example for independent contractors

Now suppose our teacher is an independent contractor instead. How is the calculation different?

National Health Insurance:

The monthly salary is 2,100,000 so we can calculate health insurance using our formula:

2,100,000*0.06 = 126,000

So that's 126,000 a month, or 1,512,000 for the whole year.

National Pension Scheme:

We can then use our other formula to calculate pension payments:

2,100,000*0.09 = 189,000

So that's 189,000 a month or 2,268,000 for the whole year.

Income tax and residents surtax:

Month by month a 3.3% withholding tax is paid. So over the year our teachers pays in tax:

25,200,000*0.033 = 831, 600

Each month this is what they get in their pay check (after tax, health insurance and the pension scheme are removed).

2,100,000 - 126,000 - 189,000 - (831,600/12) = 1,715,700
Annual Salary - health insurance - pension scheme - income + residents tax = Net salary

Then at the end of the year they have to file a tax return and do the same calculation as the employee. The only difference from before is that the pension and insurance costs are different this time:

So we take our annual gross salary and take away all the deductions

25,200,000 - 1,500,000 - 10,530,000 - 2,268,000 - 1,512,000
Annual salary - basic deduction - employment income deduction - pension deduction - special deduction

In this case the health insurance is greater than the default special deduction of 1 million won so we use that instead.

Then we calculate the income tax we have to pay on the salary we have left after deductions, using the second table:

9,390,000*0.06 = 563,400

We then take away tax credits again which we calculate in the same manner as above:

563,400 - 294,020 = 269,380

Then finally multiply the result by 1.1 to add the resident surtax and round to the nearest 10.

269,380*1.1 = 296,318 (rounded to 296,320)

So we should've paid 296,320 won in tax but we actually paid 831,600 which means we'll get back the extra we paid - 535,280.

Here's a really standard tax disclaimer: We're not tax lawyers, this isn't official tax advice. You're responsible for what you do, if you're unsure of anything you'll need to talk to a proper tax lawyer and all that good stuff. I'm sure you knew all this anyway.

Image Attribution:
"Income Tax" by Alan Cleaver is licensed under CC BY 2.0.
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