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The Ultimate Guide to Payroll in Korea for Foreign Companies (2025-2026)

Introduction: Why Korean Payroll is a Minefield for Foreign Companies

Navigating the world of payroll is complex in any country, but payroll in Korea presents a unique set of challenges for foreign companies. The system is built on a complex foundation of the Labor Standards Act, constantly evolving tax laws, and four distinct social insurance schemes.

For foreign HR and finance managers, misunderstanding these nuances isn’t just a headache—it’s a significant financial and legal risk.

Common pitfalls include:

  • Miscalculating overtime based on the 52-hour workweek.
  • Failing to properly manage the “Year-End Tax Settlement,” a process unique to Korea.
  • Being surprised by the large, legally-mandated Severance Pay (Taejikgeum) liability, which often isn’t accounted for in global budgets.

This guide is designed to be your single source of truth. As a specialist Korean labor law firm, we (Ian Labor Law Firm) will walk you through every critical component of payroll in Korea, ensuring your business stays compliant, efficient, and protected.

At a Glance: Key Components of Payroll in Korea

Before we dive deep, let’s start with a high-level overview. Payroll in Korea is not a single calculation; it’s a bundle of four distinct, mandatory components that must be managed simultaneously:

  1. Core Salary & Wages: Base pay, overtime, and allowances, which are governed by complex “Ordinary” vs. “Average” wage definitions.
  2. The 4 Major Social Insurances : A set of mandatory, co-paid social security contributions (Pension, Health, Employment, Accident).
  3. Income Tax Withholding: The legal duty for the employer to calculate, withhold, and pay the employee’s income tax to the government monthly.
  4. Retirement Benefits (Severance): A legally mandated liability, either as a lump-sum payment (Taejikgeum) or contributions to a pension plan (DC/DB).

A mistake in one of these four pillars can cause a cascade of compliance failures. This guide will walk you through each one.

1. Core Wage Components: What is "Gross Salary" in Korea?

What constitutes a “wage” under the Korean Labor Standards Act (LSA) is complex. It’s the foundation upon which overtime, severance, and insurance premiums are calculated.

Korea's Minimum Wage (and its annual update)

Korea’s minimum wage is updated annually, typically taking effect on January 1st. As of 2025, the minimum hourly wage is ₩9,860. This translates to a minimum monthly salary of ₩2,060,740 (based on a 40-hour week + 8 paid weekly holiday hours, totaling 209 hours). You must ensure all employees, including part-timers, meet this minimum.

Understanding Ordinary Wages vs. Average Wages

This is the single most complex and disputed concept in Korean payroll. These are not interchangeable terms; they are distinct legal definitions used for different calculations.

  • Ordinary Wage : This is the pay for regular work. It includes base salary and any fixed allowances paid regularly and uniformly. It is used to calculate:
    • Overtime Pay
    • Holiday Pay
    • Paid Annual Leave Allowance
  • Average Wage : This is the average pay actually earned during the three-month period prior to an event. It includes the ordinary wage plus overtime, bonuses, and other variable pay. It is used to calculate:
    • Severance Pay (Taejikgeum)
    • (By law, the Average Wage cannot be lower than the Ordinary Wage.)

Misclassifying a fixed bonus as “non-ordinary” is a common mistake that leads to massive underpayment of overtime and severance, often discovered during a labor audit.

The 52-Hour Workweek: Calculating Overtime & Holiday Pay

The 52-hour cap (40 regular hours + 12 overtime hours) is strictly enforced. Any work performed beyond the standard 8 hours per day or 40 hours per week must be compensated with extension pay, calculated using the Ordinary Wage.

  • Overtime (Extension) Work: Paid at 150% (1.5x) of the ordinary wage.
  • Night Work (10 PM – 6 AM): An additional 50% (0.5x) is paid. (If work is overtime and night, the total is 200% or 2.0x).
  • Holiday Work:
    • First 8 hours on a holiday: 150% (1.5x)
    • Over 8 hours on a holiday: 200% (2.0x)

2. The 4 Major Social Insurances : Mandatory Deductions

These are the mandatory social security system. Contributions are split between the employer and employee, based on the employee’s monthly salary, and are managed by different government agencies.

National Pension

  • Purpose: Old-age, disability, and survivor’s pension.(National Pension Service)
  • Contribution: 9% of gross salary (capped).
    • Employee Share: 4.5%
    • Employer Share: 4.5%
  • Key Point for Foreigners: Foreigners are mandatory participants. However, those from countries with a Social Security Agreement (SSA) with Korea (e.g., USA, Germany, Canada, Australia) may be exempt if they can prove they are contributing to their home pension system.

National Health Insurance

  • Contribution: Approx. 7.09% of gross salary (as of 2025) + Long-Term Care Insurance.
    • Employee Share: ~3.545%
    • Employer Share: ~3.545%
  • Key Point (The “True-Up”): The monthly premium is a provisional payment based on last year’s income. In April, the NHIS calculates the actual premium owed based on the finalized income from the Year-End Tax Settlement. This results in a “true-up” (연말정산) where the employee and employer must pay a lump-sum adjustment, often a significant and unexpected cost.

Employment Insurance

  • Purpose: Funds unemployment benefits, job training, and parental leave benefits.
  • Contribution:
    • Employee Share: 0.9%
    • Employer Share: 1.15% – 1.75% (rate varies by company size and industry)
  • Key Point for Foreigners: Mandatory for most foreigners. However, F-visa holders (F-1, F-2, F-5, F-6) can choose to opt-out.

Industrial Accident Compensation Insurance

  • Purpose: Covers all medical costs and lost wages for any work-related injury or illness.
  • Contribution: 100% paid by the employer.
  • Key Point: The rate varies significantly by industry (from ~0.7% for office work to over 20% for high-risk industries). This is a no-fault insurance; the employer is covered regardless of negligence.

3. Income Tax Withholding & Year-End Settlement

In Korea, the employer acts as the tax collector for the National Tax Service (NTS).

Withholding National & Local Income Tax

Every month, the company must calculate the employee’s income tax liability (based on salary and number of dependents) using the NTS simplified tax table, withhold it, and pay it to the government by the 10th of the following month. This includes both National Tax and a 10% Local Income Tax.

The "Year-End Tax Settlement"

This is a uniquely Korean process that is a major administrative burden for employers. In February/March, the company must:

  1. Collect all tax-deductible expense data from employees (e.g., medical, education, credit card, donations).
  2. Recalculate the employee’s final annual income tax liability for the previous year.
  3. Compare this final tax with the total tax withheld monthly.
  4. Issue a refund or collect additional tax from the employee via their February paycheck.

This is entirely the employer’s responsibility to execute.

Special Tax Rate for Foreign Employees

This is a critical benefit for foreign executives and employees. Foreign employees (excluding those working in a related-party setting) can choose a flat 19% income tax rate (20.9% including local tax) on their employment income for up to 20 years.

This flat rate is often highly beneficial as it bypasses the complex Year-End Tax Settlement and avoids Korea’s high progressive tax brackets (which go up to 45%). This is a key piece of advice in structuring compensation for foreign hires.

4. The "Hidden Cost": Understanding Korean Severance Pay (Taejikgeum)

For foreign companies, Korea’s Severance Pay, Taejikgeum, is a mandatory, 100% employer-funded liability, not an optional bonus. It’s a “hidden cost” because this liability grows on your balance sheet daily, even though it is only paid out upon termination (within 14 days).

The Legal Requirement

Any employee (Korean or foreign) working over 15 hours/week for one year or more is legally eligible. The payment is roughly one month’s “Average Wage” for every year of service.

The Calculation Pitfall: "Average Wage" vs. "Base Salary"

This is the single most common and costly mistake. The law requires payment based on the “Average Wage,” which is calculated from the final 3 months of income.

Critically, this includes not just base salary but also all overtime, fixed allowances, and regular bonuses. Relying only on an employee’s base salary for budgeting will lead to significant underpayment and legal disputes.

The Modern Solution: Defined Contribution (DC) Pension

  • Predictable Cost: You contribute a fixed 1/12th (8.33%) of the employee’s total annual income into their personal pension account.
  • No Liability: Once this contribution is paid, the company’s severance obligation for that year is 100% fulfilled and removed from your balance sheet.
  • Simplicity: It completely bypasses the complex 3-month “Average Wage” calculation when the employee leaves.

A DC plan turns a volatile, hidden liability into a simple, manageable operational expense.

The Modern Solution: Defined Contribution (DC) Pension

Be extremely cautious of hiring staff as “freelancers” to avoid severance and 4-Major Insurances. Korean courts and the Ministry of Labor look at the substance of the relationship, not the contract’s title.

If a “contractor” is supervised, works fixed hours, or uses company equipment, they will be reclassified as an Employee upon audit. This triggers massive retroactive liability for all unpaid severance, insurance premiums, and overtime.

5. Essential Compliance: Beyond the Monthly Payment

Running payroll in Korea isn’t just about paying on time. It’s about a framework of legal documentation.

Mandatory Issuance of Payslips

s of 2021, it is a legal requirement to issue a detailed, itemized payslip (electronically or in print) to every employee. This payslip must show the gross pay, detailed calculations for overtime, all deductions (taxes, insurance), and the final net pay. A simple “Net Pay” transfer is not compliant.

Legally Compliant Employment Contracts

A written employment contract is mandatory. It must clearly state all key terms: wage components, working hours, break times, holiday/leave, and severance pay. Failure to provide this written contract is a direct violation of the Labor Standards Act.

The "Rules of Employment"

Any company with 10 or more full-time employees is legally required to create a “Rules of Employment” document. This is the company’s internal handbook governing all employees. It must be drafted, reviewed by employees, and registered with the Ministry of Employment and Labor (MOEL). This is a common compliance failure for new foreign companies.

Why Outsource Your "Payroll in Korea" to a Specialist? (The CTA)

The Risk of Non-Compliance: Labor Audits, Penalties, and Employee Disputes

As you can see, payroll in Korea is a minefield of complex laws. A single miscalculation of the “Ordinary Wage” can lead to years of underpaid overtime and severance, resulting in:

  • MOEL Audits: Surprise inspections from the Ministry of Labor.
  • Punitive Fines: Significant financial penalties for non-compliance.
  • Employee Disputes: Costly legal battles with employees (current or former) who claim unpaid wages.

How Ian Labor Law Firm Provides Compliant & Stress-Free Payroll Services

Simply using payroll software is not enough; you need a partner who understands the laws behind the numbers. 
At Ian Labor Law Firm, we are not just payroll processors; we are certified Labor Law Attorneys . Our service is a complete solution:

  • 100% Compliance: We ensure every calculation, from ordinary wage to severance, is fully compliant with the latest Labor Standards Act.
  • English-Speaking Experts: You get a dedicated, bilingual payroll specialist who can answer your questions and your HQ’s questions.
  • Integrated Legal Advice: If a payroll question becomes a legal question (e.g., “How do we handle this termination?”), you are already speaking to a law firm. This integrated service is our greatest strength.

Our Process: Onboarding to Monthly Reporting

  • Consult & Audit: We review your current contracts and pay structures for compliance risks.
  • System Onboarding: We register your company and employees in our secure, compliant payroll system.
  • Monthly Processing: We collect your variable data (overtime, new hires), process the payroll, and provide a clear report and payslips.
  • Tax & Insurance Handling: We handle the monthly withholding tax and 4-Daebohm reporting and payments on your behalf.
  • Year-End Support: We manage the complex Year-End Tax Settlement  and the NHIS True-Up 

Conclusion: Partner with Korea's Payroll Experts

Navigating payroll in Korea is complex, but it doesn’t have to be your burden. Don’t let compliance risks drain your resources or distract you from your core business. By partnering with Ian Labor Law Firm, you gain peace of mind, knowing your payroll is managed with 100% legal compliance by certified experts.

[Contact Us Today] for a free consultation on your payroll needs.

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