Understanding Payroll in South Korea: What Global Companies Need to Know About South Korea Payroll

Nov 19, 2020  | Topic: Country Payroll

South Korea is one of the top economic success stories in the Asia Pacific region. Now the fourth-largest economy in Asia by GDP, it has enjoyed huge success and expansion in recent decades, driven in no small part by manufacturing and technology giants like Samsung, LG, Hyundai and KIA. Thanks to the extensive investment into education over time, it now also benefits from a highly educated workforce, and along with a youthful demographic (85% of the population are under 65), South Korea is an excellent proposition for international business.

South Korea has a unique status as a bridge to trade in both East and West: the free trade agreement it signed with China in 2015 means it is the only developed nation that can freely trade with China, the United States and the European Union. But this advantage is tempered by some of the unique and complex payroll and employment regulations in place, and it’s essential that incoming organizations are aware of their requirements and responsibilities. This guide sets out the key bases to cover:

 

Getting Started

To start up a business in South Korea, the individuals involved require visas (usually a D-7 for business managers, or a D-8 for corporate investors). The next step is to set up their business structure. The four most common types of business structure are:

  • Sa-eopja: solo proprietorship
  • Hapmyeong hoesa: general partnership
  • Yuhan hoesa: limited company 
  • Jushik hoesa: stock corporation

The type of business structure chosen will generally vary on details about ownership, tax structure and management system for the business. It’s also worth noting that foreign companies are not allowed to use the word ‘hoesa’ in their names so that they are not mistaken for domestic organizations. Establishing a commercial entity in South Korea requires minimum start-up capital of 50 million won (approximately £34,000, $44,000, €38,000).

Most business start-up functions can be carried out online at Start Biz, the South Korean government’s business portal. This covers various parts of the incorporation process, including the National Tax Information System, the Internet Registry Office, local tax payments and more. It also facilitates the checking of available web domains, trade name registrations, getting a tax ID number, opening bank accounts and registering for relevant insurances.

Companies must have an in-country bank account in place to make payments to employees and tax authorities. Banks are generally open from 9am-4pm daily. 

 

Employment Considerations

Upon the hiring of a new employee, whether in-country or expat, companies operating in South Korea need to have that employee registered by mid-month of the first payroll period. Information on the employee should include:

  • the employment contract between company and employee
  • the employee’s start date, resident registration number and other details
  • the company’s payroll policy, including severance pay and payroll calculation

On top of this, expat workers will have to provide the South Korean social insurance authorities with:

  • A legal alien registration check
  • Health insurance and local medical expense information
  • National pension certificate
  • Employment insurance, depending on employee status

South Korea has historically had a culture of employees working long hours, but legislation has been introduced in recent years to clamp down on this. As of 2020, employees in workplaces with 50 permanent employees or more are not allowed to work more than 52 hours per week, a substantial reduction from the previous cap of 68. At its maximum, this would consist of five days of office hours between 9am and 6pm (with a one-hour lunch break) plus 12 hours of overtime. This cap will be extended to all businesses in July 2021. Overtime is paid at a minimum of 150% of the normal rate.

 

Compensation and Severance

South Korea’s national minimum wage has consistently risen in recent years. For 2021, it will rise by 1.5% to 8720 won per hour (approx. £6.00, $7.50, €6.60). In general, salaries in South Korea are based on years of service rather than previous experience or skill sets, and so salaries tend to ramp up year by year. Depending on the industry, choice of profession and length of service, professionals’ annual salaries can range from 2 million won (approx. £1350, $1750, €1500) to 10 million won (approx. £6750, $8750, €7500).

Termination notice must be served 30 days in advance by the employer; alternatively, 30 days’ pay in lieu of notice can be paid instead. Exceptions apply in case of natural disasters, intentional misconduct or when employees have served less than three months. Severance pay entitlement is at least 30 days’ average wages for each year of service, irrespective of the reason for severance, and including cases of voluntary retirement.

 

Tax and Social Security Considerations

Companies have to register their employees for payroll in South Korea by the 15th day of the first month of operations. In doing so, the company can then begin to pay monthly withholding tax during the following month. Companies are also liable for tax registration in the first 20 days of operation to ensure they are complying with all of the Korean tax laws. Companies should allow about 4-6 weeks for this process to be finalized.

Employers withhold income tax from their employees when making payments to them. Income tax is levied progressively across six bands: the lowest of 6% applies to the first 12 million won of annual earnings (approx. £8200; $10,500; €9100), and the highest of 42% applies to all earnings in excess of 500 million won (approx. £340,000; $440,000; €380,000). Local income tax of 10% is applied universally on top of this.

For national pension and national health insurance, employees and employers make equal contributions of 4.5% and 3.335% respectively. Additionally, employees make contributions of 10.25% for long-term care insurance and 0.8% for employment insurance, and employers contribute 3.335% to each of these.

 

Holiday and Leave Considerations

Paid holiday entitlement in South Korea increases based on length of service. Employees in their first year get one day per month worked. From the second year onwards, employees receive 15 days per year, increasing by one day of annual entitlement every two years. The maximum ceiling of 25 days per year is therefore reached at the 22nd year of service.

South Korea has 15 days of official public holidays every year, plus others that are occasionally added temporarily or to allow for elections. In the past, employers have not had to pay workers for these holidays, but the Labor Standards Act (LSA) is changing this. Public holidays are paid holidays for employees at firms with 300 workers or more as of January 2020; this will be extended to firms with at least 30 employees in January 2021 and those with at least five employees in January 2022.

Maternity leave entitlement is 90 days, 45 either side of the birth. Sixty of these are fully paid, and the remaining 30 at a lower percentage rate of salary. Provision for paid paternity leave has recently been extended to ten days, which fathers can divide into two separate breaks if they so wish. Additionally, employees can take one year of childcare leave to look after children under the age of eight; this is paid by the Employment Insurance Fund at 40% of salary.

 

In Summary

South Korea is an excellent place to do international business, but it’s also a very competitive marketplace where being efficient and organized are expected. Keeping on top of business registration and tax requirements is a very important part of trading there, and doing so in-house, while trying to gain traction in a new territory, can be difficult. This is where working with a global payroll service provider, combining a technology-driven outlook with local expertise, can work wonders in both the short and long-term.

 

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.