How Severance Pay Is Taxed (퇴직소득세)
Severance in Korea is taxed separately from your other income, and that separation is deliberately favourable. Rather than stacking a lump sum on top of a year's salary and pushing it into the highest bracket, the system spreads it against your years of service. The result is an effective rate that is usually far below what people fear when they see the gross figure.
Who this affects
- Employees leaving a job after a year or more of service
- Anyone choosing between a lump sum and moving it into a pension account
- Foreign employees leaving Korea at the end of an assignment
- Employers calculating and withholding on final payments
Separate taxation is the whole point
Severance is not rolled into 종합소득세. It is computed on its own schedule so that a payment representing many years of work is not taxed as though you earned it all in one year.
Years of service drive the effective rate
The calculation converts the lump sum into an annualised figure using your service period, applies the rate there, and scales back. Longer service therefore means a materially lower effective rate on the same gross amount.
Moving it into a pension account defers the tax
Transferring severance into an IRP or similar retirement account generally defers the tax until you draw it, and drawing it as a pension rather than a lump sum typically attracts more favourable treatment. Whether that suits you depends on whether you need the cash now.
Your employer withholds, but the figure is checkable
Employers compute and withhold on the final payment. Service-period and calculation errors do occur, and because the amounts are large, a mistake is worth catching. Ask for the computation, not just the net figure.
Common questions
Is severance added to my salary for tax?
No. It is taxed separately on its own schedule, which is generally more favourable than combining it with a year's employment income.
Lump sum or pension account — which is better?
Moving it to a retirement account defers the tax and drawing it as a pension is usually treated more favourably. Taking the lump sum makes sense when you need the money now. It is a cash-flow decision as much as a tax one.
I'm a foreign employee leaving Korea. Does anything change?
The Korean calculation is the same, but your home country may tax the payment as well, and a treaty may affect which country gets to. If you are a US person, that interaction is worth planning before the payment is made.
Official sources
General information, not tax advice. Rules and thresholds change, and how they apply depends on your circumstances — confirm with a licensed professional before acting.