Severance Pay in Korea: How to Calculate Your Payout and Minimize Tax

Severance Pay: The Essentials

Under Korea's Act on the Guarantee of Workers' Retirement Benefits, any employee who has worked for at least one year is legally entitled to severance pay upon leaving. This is not a simple bonus — it can significantly shape a worker's financial future.

Eligibility conditions are straightforward: If you worked an average of 15 or more hours per week for at least one continuous year, you are entitled to severance pay. This applies to contract workers and part-timers as well.

Basic calculation formula:

Severance Pay = Average Daily Wage × 30 days × Years of Service

The "average daily wage" is calculated by dividing the total wages received during the last 3 months before retirement by the total number of calendar days in that period. If you received a raise or performance bonus before leaving, your severance pay increases accordingly.

Real-World Severance Calculations by Salary

Annual salary 40 million KRW, 5 years of service:

• Monthly average: 40,000,000 ÷ 12 = 3,330,000 KRW
• Average daily wage: 3,330,000 × 3 ÷ 91 days ≈ 109,800 KRW
• Severance pay: 16,470,000 KRW

Annual salary 60 million KRW, 10 years of service:

• Average daily wage: (60,000,000 ÷ 12 × 3) ÷ 91 ≈ 164,800 KRW
• Severance pay: 49,440,000 KRW

Annual salary 100 million KRW, 15 years of service:

• Average daily wage: (100,000,000 ÷ 12 × 3) ÷ 91 ≈ 274,700 KRW
• Severance pay: 123,610,000 KRW

Severance Income Tax and Tax Reduction Strategies

Many people overlook the fact that severance pay is subject to a separate "retirement income tax," distinct from regular income tax. Properly applying the tenure-based deduction can dramatically reduce your tax burden.

Deductions Based on Years of Service

• Up to 5 years: 1,000,000 KRW × years of service
• 6–10 years: 5,000,000 KRW + 2,000,000 KRW × (years − 5)
• 11–20 years: 15,000,000 KRW + 2,500,000 KRW × (years − 10)
• Over 20 years: 40,000,000 KRW + 3,000,000 KRW × (years − 20)

A 20-year employee can deduct 40 million KRW — a massive advantage.

Using an IRP Account for Maximum Tax Savings

Receiving your severance pay into an IRP (Individual Retirement Pension) account unlocks significant tax benefits. If you withdraw the funds as a pension annuity after age 55, you receive a 30–40% reduction on your retirement income tax.

Example:

• Severance of 50,000,000 KRW with a retirement income tax of 5,000,000 KRW
• Lump sum: 5,000,000 KRW paid immediately → Net receipt: 45,000,000 KRW
• IRP annuity (1,200,000 KRW/year over 4 years): Tax reduced to 1,400,000 KRW → Tax savings: 3,600,000 KRW

What to Do If Your Employer Refuses to Pay

If you do not receive your severance within 14 days of retirement, file a wage theft complaint with your regional Ministry of Employment and Labor office. Withholding severance pay is a criminal offense in Korea, punishable by up to 3 years in prison or a fine of up to 30,000,000 KRW.

Final Advice: Be Strategic

Severance pay is not just money you receive — it is an opportunity for financial optimization. Consult a tax professional before retiring to compare the after-tax amounts of IRP annuity vs. lump sum payment. If you are able to receive pension payments from age 55 or later, the IRP route is almost always the better choice.