Over the years, I have gotten a lot of questions about Individual income tax; most frequently, expats ask about the year-end settlement documents (연말정산) from their employer for tax-deductible items.
All individual taxpayers and sole proprietors must file their taxes in May each year. If you do not file your taxes, you may find yourself in deep trouble in a couple of years. The NTS (National Tax Service) will eventually chase you down at your registered address or place of employment to collect unpaid taxes. If you do file late but don’t owe taxes, you should know that you can claim the refunds detailed below for up to five years past the due date, including if you missed some deductible items like charitable contributions or donations to religious organizations.
First off, I always recommend that to make expense tracking and tax filing easier, clients should go to their bank and ask for a “Digital Certificate (공인인증서).” You will have to register your credit and debit cards with the taxation department. Unfortunately this system is so notoriously difficult to use that even our President has complained about it! Making things worse, you should note that as of this writing it is still not available in English, nor will it work on a Mac or Windows 10; you still need on Windows 8 or below with "Active X” installed. You can only use Internet Explorer as well. Frankly it’s a giant pain in the butt, even for Koreans, but if you get a Korean friend (like me!) to help you, you will be eligible for big tax savings when you file the following year.
Without exception, you should be paying for all of your expenses with a credit card issued by a Korean bank, including taxi, subway, flights, and other transportation costs, groceries, restaurants, hotels, gifts... everything! Using your credit card will get you an automatic deduction of up to 3 million won every year. This credit card usage is the number one critical issues most expats usually miss, followed by deducting contributions to your individual retirement pension fund (if you want to stay more than 10 years in Korea).
When tax season rolls around, I usually advise my expat clients to let their employer fill out the year-end settlement, and then we can amend it before the May filing date, since a salaried individual can amend his or her year-end settlement with their global income tax return, especially for those people who are sole proprietors of their own business.
You should also ask your employer to check whether you’re eligible for a tax exemption (eg. based on a tax treaty with your home country or if you’re a qualified tax-exempt engineer according to Korea's FDI articles) from the beginning of your term of employment. A lot of expats are hired by businesses registered as SMEs (small- and medium-sized enterprises), and if you are and you’re younger than 30 years old, you can also apply for a special tax exemption under a relatively unknown deduction created by the government to fight rampant youth unemployment.
To minimize the amount of taxes you owe in Korea by taking advantage of all the deductions offered by the Korean government, please feel free to send me an email at email@example.com.