Tax guide for Americans in Korea

Social Security in South Korea

South Korea's social security system is a robust framework designed to provide essential benefits and protection, particularly for expatriates working in the country.

This system includes National Health Insurance, Employment Insurance, and Workers' Compensation Insurance, each of which plays an important role in ensuring the well-being and financial stability of individuals.

National Health Insurance

The National Health Insurance (NHI) program in South Korea, effective January 1, 2023, is a mandatory program that plays a central role in the country's healthcare system. It provides comprehensive medical coverage for both residents and expatriates, ensuring access to affordable healthcare services.

For employees enrolled in the NHI, the premium rate, including long-term care insurance, is approximately 7.998% of their monthly salary.

There is a cap on the total monthly contribution, which is currently set at KRW 8,824,598, but may be adjusted in 2023. The cost of these premiums is shared equally between employers and employees, with each contributing approximately 3.999%.

This system not only facilitates comprehensive medical coverage for expatriates and helps manage healthcare costs in a new country, but also allows employee contributions to the NHI program to be deducted when calculating taxable income.

Employment Insurance

Employment Insurance (EI) in South Korea serves as a critical support system for individuals facing unemployment. In addition to providing financial assistance during periods of unemployment, the program includes job training and job search assistance to facilitate re-entry into the workforce.

The requirement to contribute to EI varies depending on the individual's nationality and visa type. Typically, foreigners holding D-7, D-8, and D-9 (trade management) visas are required to participate in EI.

From July 2022, the employee contribution rate for EI will be set at 0.90%. For employers, the contribution rate ranges from 1.15% to 1.75%, depending on the number of employees and the type of business.

This means that in addition to the 0.90% EI contribution, employers must also contribute between 0.25% and 0.85% to Employment Insurance and Professional Development Insurance.

Workers' Compensation Insurance

Workers' Compensation Insurance (WCI) in South Korea is a vital government social security program designed to protect workers from work-related injury, illness, disability, or any hazardous situation that could result in death while on the job.

This program covers medical expenses and provides income replacement in the event of an accident or health problem resulting from workplace conditions.

Employers are solely responsible for enrolling employees in WCI and are required to make contributions.

The contribution rate, which is set by the Social Security Administration, varies depending on the work environment and ranges from 0.7% to 18.6% of total wages and salaries, depending on the type of industry.

Pension system in South Korea

The pension system in South Korea, a key component of the country's social security structure, is designed to provide financial security for individuals in their retirement years. This aspect is particularly important for expatriates who intend to work in South Korea for an extended period.

At the heart of this system is the National Pension Scheme (NPS), which is mandatory for all employees and self-employed individuals in the country. Under the NPS, employers and employees each contribute 4.5% of the employee's salary, for a total annual contribution rate of 9%. These contributions are shared equally, and employee contributions are tax deductible.

The national pension contribution is capped at a monthly salary of KRW 5,900,000. As a result, the maximum monthly pension contribution that an employee can make is KRW 265,500, which is subject to annual adjustment each July. For the period from July 2023 to June 2024, this is the current limit.

Foreigners working in Korea are generally required to contribute to the NPS.

Tax deductions for expats in South Korea

Expatriates working in South Korea can take advantage of several tax deductions that can significantly reduce their taxable income and, therefore, their tax liability.

Earned income deduction

The earned income deduction is a tax relief available to all employees, including expatriates, to reduce their taxable income.

This deduction is determined by subtracting a specified amount, capped at KRW 20 million, from the current year's gross income to arrive at adjusted gross income for individuals earning a salary or wage.

The actual deduction amount varies depending on the individual's income level.

Personal deductions

Personal deductions in South Korea are another way for expatriates to reduce their taxable income.

Basic deductions

In South Korea, basic deductions play a crucial role in the tax system to reduce the taxable income of individuals. These deductions, which apply to all taxpayers, are deducted from their gross income, effectively reducing their tax burden.

Each taxpayer is entitled to a standard deduction of KRW 1.5 million per year.

In addition, a deduction of KRW 1.5 million per year is available for a spouse living with the taxpayer, provided that the spouse's adjusted gross income is less than KRW 1 million per year.

Similarly, a deduction of KRW 1.5 million per year can be claimed for each eligible dependent living with the taxpayer and whose adjusted gross income is less than KRW 1 million per year.

Additional deductions

Under South Korean tax law, there are several additional deductions available to taxpayers under certain circumstances, in addition to the basic deductions.

• An additional deduction of KRW 2 million is available for each disabled person in the taxpayer's household. This includes the taxpayer, the taxpayer's spouse, or other dependents who are disabled.
• For elderly family members, there is an additional deduction of KRW 1 million for each person aged 70 or older in the taxpayer's household, whether it's the taxpayer, spouse, or dependent.
• Female taxpayers are entitled to an additional deduction of KRW 500,000. To qualify, the female taxpayer must be either a head of household with dependents but no spouse, or a married woman with an annual taxable income of KRW 30 million or less (approximately KRW 40 million in total annual compensation).
• Single parents are entitled to an additional deduction of KRW 1 million. However, if a single parent also claims the deduction for female taxpayers, only the single parent deduction of KRW 1 million is allowed.

Pension premium deduction

Contributions to the National Pension Scheme are deductible from taxable income. This not only encourages participation in the pension system but also provides immediate tax relief.

Mortgage interest deduction

For taxpayers with mortgages, the mortgage interest deduction offers a way to reduce taxable income.

This deduction is available to individuals who took out a mortgage to purchase a home. It allows them to deduct the interest paid on their mortgage from their taxable income.

There are caps on the amount of mortgage interest that can be deducted, and these caps may vary based on the taxpayer's total income and the value of the property.

Business deductions

In South Korea, business deductions play a critical role in reducing the taxable income of individuals and corporations engaged in business activities.

Key aspects of business deductions:

• A wide range of business expenses can be deducted from business income. These include costs such as rent, utilities, salaries, and office supplies that are essential to the day-to-day operation of the business.
• Businesses can also deduct depreciation on assets such as machinery, equipment, and vehicles. This takes into account the wear and tear of these assets over time.
• Marketing and advertising expenses, which are critical to business growth and customer acquisition, are also deductible.
• Fees paid for professional services, including legal, accounting, and consulting services, are also deductible.
• Interest paid on loans taken out for business purposes is deductible, reducing the financial burden of borrowing.

Losses

The tax system provides mechanisms for accounting for losses to ensure that businesses are taxed fairly.

In South Korea, companies can carry forward their losses to offset future profits. This means that if a company has a loss in one year, it can use that loss to reduce its taxable income in subsequent years.

There are limits on how long these losses can be carried forward. Typically, losses can be carried forward for a certain number of years, after which they can no longer be used to offset income.

Tax credits for expats in South Korea

Expatriates in South Korea can take advantage of various tax credits that can significantly reduce their tax liability.

These credits are designed to provide financial relief in specific areas such as family support and charitable donations.

Special tax credits

Special tax credits in South Korea are targeted reliefs that reduce the amount of tax payable, rather than simply reducing taxable income.

Tax credits for dependants

Expatriates who have dependents, including children, a non-working spouse, or elderly parents, may benefit from dependent tax credits in South Korea.

The value of these tax credits is set at KRW 150,000 for each child 8 years of age or older, applicable to up to two children. For the third and subsequent children, the tax credit increases to KRW 300,000 per child.

Tax credit for charitable contributions

Expatriates can receive a tax credit for their contributions to approved charitable organizations.

To qualify for this credit, they must provide evidence of their donations, such as receipts or bank transfer confirmations.

The amount that can be claimed as a tax credit is subject to certain limits.

The tax credit rate is set at 15% for donations up to KRW 10 million, and any amount above this threshold qualifies for a higher tax credit rate of 30%.

Tax credit for education expenses

Expatriates in South Korea have access to an education tax credit to help reduce the financial burden of educational expenses incurred for themselves or their dependents.

This credit applies to various educational expenses, including tuition fees at schools and universities.

To qualify for this credit, taxpayers must substantiate their educational expenses by providing documentation, such as receipts or bank statements, showing payments made to educational institutions.

The tax credit rate for these educational expenses is set at 15%. However, there are specific limits depending on the level of education: up to KRW 9 million for each dependent attending a university or college, and up to KRW 3 million for each dependent attending a preschool to high school. There is no limit to the taxpayer's education expenses.

Tax credit for insurance premiums

This tax credit applies to premiums paid for various types of personal insurance, including life insurance, health insurance, and certain other types of insurance.

To claim the credit, taxpayers must provide documentation of the premiums paid.

The tax credit rate for qualifying insurance premiums is set at 12%. This rate applies to premiums paid for life insurance, disability insurance, casualty insurance, fire and burglary insurance, and similar types of insurance.

The beneficiary of these insurance policies can be either the taxpayer or family members who have no income for the year.

Tax credit for medical expenses

The Medical Expense Tax Credit provides significant financial relief to expatriates facing significant healthcare costs in South Korea.

This credit covers out-of-pocket medical expenses, including certain treatments, prescription drugs, and medical procedures not covered by insurance.

To qualify for the credit, the medical expenses must exceed a certain threshold. The tax credit rate is set at 15% for medical expenses up to KRW 7 million, but only if the expenses exceed 3% of the total earned income.

Individual premium tax credit

Expatriates in South Korea who contribute to an individual pension plan may be eligible for a tax credit on these pension contributions.

This credit is specifically for contributions to qualified individual pension plans.

The tax credit rate for pension contributions is set at 12% for contributions up to KRW 7 million per year. However, for taxpayers with an annual income of less than KRW 45 million, the tax credit rate is increased to 15%.

This credit is subject to certain limits, which are determined based on the amount contributed to the pension plan and the taxpayer's total income level.

Credit for Class A and Class B wages

In South Korea, the tax system provides specific credits for Class A and Class B wages to reduce the tax burden on employees based on the type of income they earn.

1. Class A Wage Credit
   Class A wages typically consist of income paid by a Korean company, including regular salaries, bonuses, and other forms of compensation. Employees who receive Class A wages are entitled to a tax credit. This credit is calculated based on their income level and the amount of tax they have paid.
2. Class B Wage Credit:
   Class B wages are income paid by a foreign company that is not claimed as a deduction by a Korean company. As with Class A, a tax credit is available for Class B wages to reduce the overall tax liability on this type of income.

The maximum credit available for both Class A and Class B wages is KRW 740,000 per year. The details of this credit are as follows:

• If the calculated tax amount is KRW 1,300,000 or less, the credit amount is 55% of the calculated tax amount.
• If the calculated tax amount exceeds KRW 1,300,000, the credit is KRW 715,000 plus 30% of the calculated tax amount exceeding KRW 1,300,000. However, the credit is limited to a maximum of KRW 740,000 per year if the annual salary does not exceed KRW 70 million.
• For annual wages over KRW 70 million, the annual credit threshold will be reduced to KRW 660,000, KRW 500,000, or KRW 200,000 depending on the income bracket, with higher incomes receiving a lower tax credit.

Credit for Class B wages through a licensed taxpayer association

Expatriates and residents in South Korea who earn Class B wages have the option of streamlining their tax management by joining a licensed taxpayer association. These associations offer the convenience of calculating and paying taxes for their members.

Members who choose to report their monthly earnings and pay their Class B income tax through a licensed association have an additional benefit.

They are entitled to a tax credit of 5% of their income tax, with an annual limit of KRW 1 million. This tax credit can further reduce their total tax liability.

Credits for business

Business owners and the self-employed in South Korea can also benefit from special tax credits that recognize various business-related circumstances.

Dividend income credit

This tax credit is designed for individuals who receive dividend income from their business investments.

It is designed to reduce the tax due on such dividend income, thereby providing a beneficial arrangement for business owners and investors.

Specifically, shareholders are entitled to an 11% tax credit on certain dividends they receive.

This credit is applied against the individual income tax calculated on their worldwide income. To determine the taxable amount, global income is grossed up by adding 11% to the dividends received.

Credit for casualty losses

This tax credit is specifically designed to assist businesses that suffer significant losses due to unexpected events or disasters.

It provides financial relief by taking into account the magnitude of the casualty loss suffered by the business.

In cases where a business income earner loses assets amounting to 20% or more of the total value of its business assets due to disasters within a given year, a deduction is made from its income tax.

This deduction is calculated based on the ratio of the loss to the business's total assets, providing significant financial assistance during difficult times.

US-South Korea Tax Treaty

The tax treaty between the United States and South Korea is an important agreement that helps prevent double taxation for individuals and businesses operating in both countries.

This treaty outlines tax obligations and provides mechanisms for tax relief, ensuring fair taxation for U.S. expatriates in South Korea and vice versa.

Tax treaty advantage

• The treaty specifies which country has the right to tax various types of income, preventing the same income from being taxed by both countries.
• The treaty often reduces the rate of withholding tax on dividends, interest, and royalties, benefiting expats and international businesses.
• It provides clear definitions and frameworks for residency and income categories, helping taxpayers understand their obligations and plan their finances accordingly

Most popular tax forms for US expats

For U.S. expatriates living abroad, including those in South Korea, complying with U.S. tax laws involves navigating a variety of tax forms.

Key tax forms for US expats:

1. Form 1040 (U.S. Individual Income Tax Return): This is the standard form used by U.S. citizens and residents to file their annual income tax returns, regardless of where they live.
2. Form 2555 (Foreign Earned Income Exclusion): This form is used to claim the Foreign Earned Income Exclusion (FEIE), which allows expats to exclude a certain amount of their foreign-earned income from their US taxable income.
3. Form 1116 (Foreign Tax Credit): Expats use this form to claim a credit for income taxes paid to a foreign government, which can reduce their US tax liability.
4. FinCEN Form 114 (FBAR): The Report of Foreign Bank and Financial Accounts (FBAR) is required if a U.S. taxpayer has foreign financial accounts that exceed certain thresholds.
5. Form 8938 (Statement of Specified Foreign Financial Assets): This form is part of the Foreign Account Tax Compliance Act (FATCA) requirements for reporting foreign financial assets.