Severance Pay Tax in Korea: How Retirement Income Tax Is Calculated & Tips to Reduce It

Is Severance Pay Subject to Tax?

Many workers are surprised to find less money in their account than expected when they receive severance pay (퇴직금). Severance pay is classified as "retirement income" (퇴직소득) under the Income Tax Act and is subject to retirement income tax (퇴직소득세) plus local income tax (지방소득세) equal to 10% of the retirement income tax. However, because the deductions based on years of service are substantial, the tax burden is far lower than it would be on the same amount of ordinary wage income.

Note for foreign workers: Your employment contract may specify terms that differ from the statutory minimum, but the tax rules described here apply to all workers covered by Korean law.

How Retirement Income Tax Is Calculated

Retirement income tax is calculated in the following steps.

① Retirement Income = Total Severance Pay Amount

② Subtract the Years-of-Service Deduction (근속연수 공제)
A fixed amount is deducted based on years of service. The longer you have worked, the larger the deduction (Article 48 of the Income Tax Act / 소득세법 제48조).

• Up to 5 years: KRW 1,000,000 per year
• More than 5 years, up to 10 years: KRW 5,000,000 + KRW 2,000,000 per year
• More than 10 years, up to 20 years: KRW 15,000,000 + KRW 2,500,000 per year
• More than 20 years: KRW 40,000,000 + KRW 3,000,000 per year

③ Calculate the Converted Salary (환산급여)
(Retirement Income − Years-of-Service Deduction) × 12 ÷ Years of Service

④ Subtract the Converted-Salary Deduction (환산급여 공제)
An additional deduction is applied according to the converted-salary bracket.

⑤ Determine the Taxable Base → Apply Tax Rate → Calculate Converted Tax Amount → Divide by Years of Service to Arrive at Final Tax

This "multiply by 12 → apply tax rate → divide by years of service" method means that the longer you have worked, the significantly lower your tax burden becomes.

Withholding and Payment Deadline

The company paying severance pay acts as the withholding agent (원천징수의무자) and must withhold retirement income tax at the time of payment before remitting the remainder to the worker (Article 147 of the Income Tax Act / 소득세법 제147조). Workers do not need to file a separate comprehensive income tax return for this income.

The Supreme Court has ruled that once the obligation to withhold arises — because payment of retirement income is deemed to have occurred — and the company has actually paid the tax, it may deduct that tax amount from the severance pay (Case 2013da36347 / 2013다36347). Therefore, always obtain your withholding receipt (원천징수영수증) when you receive severance pay and verify the deduction details.

The deadline for paying severance pay is within 14 days of the retirement date (Article 9 of the Act on the Guarantee of Workers' Retirement Benefits / 근로자퇴직급여 보장법 제9조). If this deadline is missed, late-payment interest of 20% per annum accrues under Article 17 of the Enforcement Decree of the Labor Standards Act (근로기준법 시행령 제17조).

Tax Savings by Receiving Severance Pay into an IRP Account

If you transfer your severance pay into an Individual Retirement Pension (IRP) account (개인형 퇴직연금), no tax is levied at the time of transfer. Instead, when you actually receive pension payments, you pay only 70% of the retirement income tax (or 60% if the payment period exceeds 10 years) (Article 146-2 of the Income Tax Act / 소득세법 제146조의2). If you plan to receive the funds as a long-term pension, using an IRP is advantageous. However, be aware that if you withdraw early, the full retirement income tax applies.

When Severance Pay Itself Is Not Paid

Before tax even becomes an issue, some workers do not receive their severance pay at all. Failing to pay severance pay in violation of Article 9 of the Act on the Guarantee of Workers' Retirement Benefits is subject to criminal penalties. Furthermore, even if a contract is formally structured as a consignment or freelance arrangement, if you were in practice subject to direction and supervision and worked in a subordinate relationship, you may be recognized as an employee and entitled to claim severance pay. Courts determine employment status based on the substance of the working relationship, not the name of the contract.

Check Your Severance Pay Estimate on Workbear

If you want to estimate your severance pay, try the severance pay calculator at Workbear (workbear.kr). Enter your period of service and average wage to instantly calculate your expected severance pay. If your severance pay has not been paid, you can also use the AI search function or the complaint-drafting tool.

This article is for informational purposes only and does not constitute legal advice. For specific cases, consult a certified labor attorney (노무사) or lawyer.