The money that lands when you leave a Korean job is rarely one thing: severance pay, cash for unused annual leave, 30 days’ pay in lieu of notice, a shutdown allowance for days the employer closed, and unemployment benefit. The Income Tax Act sorts each into retirement income (Art. 22), wage income (Art. 20) or tax-free income (Art. 12). The box decides how it is taxed — wage income joins that year’s total pay for year-end settlement, retirement income is taxed separately, and tax-free income goes into neither. Pick what you received and the checker shows which box the articles put it in.
1. Retirement income = paid from employer contributions because of an actual retirement (Art. 22(1)2). An interim severance settlement counts as retiring on the day paid.
2. Wage income = salary, wages, bonuses, allowances, and money on leaving that is not retirement income (Art. 20(1)1 and 4).
3. Tax-free = unemployment and parental leave benefits, industrial accident benefits, absence compensation (Art. 12(3)(c)–(e)).
Checker
Updates as you choose. The daily wage is only for the example sum: ordinary wage for notice pay, average wage for the two absence payments. Lines marked “our reading” are not written in those words in the articles.
The articles that draw the three boxes
| Type | What the source says | Worth noting (ours) |
|---|---|---|
| Income Tax Act Art. 22(1) | Retirement income is (1) lump sums under the public pension acts, (2) income paid from employer contributions because of an actual retirement, (3) similar income set by Decree | Statutory severance and pension lump sums fall under (2), on our reading |
| Income Tax Act Art. 20(1) | Wage income includes salary, pay, remuneration, wages, bonuses and allowances for work (item 1), and income received on retirement that is not retirement income (item 4) | Paid on leaving does not mean retirement income |
| Income Tax Act Art. 12(3) | Not taxed: (c) industrial accident medical, absence and disability benefits; (d) medical, absence and disability compensation under the Labour Standards Act; (e) unemployment benefit, parental leave benefit, reduced-hours benefit and maternity benefits under the Employment Insurance Act | It has to be named on the list |
| Decree Art. 43 | Becoming an executive or moving to an affiliate need not count as retiring if no retirement benefit is actually paid (para. 1); benefits paid early for reasons such as Art. 3(1) of the retirement benefit decree count as retiring on the day paid (para. 2) | Interim settlement = retirement income |
| Income Tax Act Art. 22(3) proviso | Where an executive’s retirement income exceeds the formula amount, the excess is treated as wage income | We did not set out the formula |
| Decree Art. 38(1) | Included in wage income: merit and consolation payments received by employees (item 2), retirement benefits not deductible under the Corporate Tax Decree Art. 44(4) (item 13), holiday pay and similar (item 14) | — |
In short, retirement income turns on two phrases: “employer contributions” and “actual retirement”. Severance the employer built up, paid out because you really left (or an interim settlement the law treats as leaving), is retirement income; wages and allowances for work are wage income even if paid around your last day. Whatever is named on the Art. 12 list is not taxed at all.
Five that confuse people — our reading
| Payment | Which box (our reading) | Worth noting (ours) |
|---|---|---|
| Pay for unused annual leave on leaving | Wage income — an “allowance” under Art. 20(1)1 and income “not retirement income” under item 4 | Decree Art. 38 doesn’t say “annual leave” either; this is our reading of the words |
| Pay in lieu of notice (Labour Standards Act Art. 26, at least 30 days’ ordinary wage) | Not settled by the articles | The Act and Decree articles we read don’t name it; check the tax office’s interpretation |
| Shutdown allowance (Art. 46, at least 70% of average wage) | Wage income — not on the Art. 12(3)(d) list | The list has “absence compensation” (Art. 79, 60% while recovering from a work injury) |
| Executive severance above the limit | Wage income — Art. 22(3) proviso | Not relevant to ordinary employees |
| Merit or consolation payment | Wage income — Decree Art. 38(1)2 | Whether a consolation payment made because of retirement is retirement income isn’t settled by the articles we read |
The shutdown allowance and absence compensation sound alike but rest on different articles. The shutdown allowance is at least 70/100 of average wage for days off caused by the employer (Labour Standards Act Art. 46); absence compensation is 60/100 of average wage for a worker recovering from a work injury or illness (Art. 79). Only absence compensation is named on the tax-free list (Income Tax Act Art. 12(3)(d)).
Three sums — our example
| Case (our example) | Sum | Worth noting (ours) |
|---|---|---|
| Ordinary wage of 100,000 won a day, dismissed without notice | Notice pay for 30 days = at least 3,000,000 won | Art. 26; exceptions include under 3 months’ service |
| Average wage of 100,000 won a day, employer closes | Shutdown allowance at least 70,000 won a day | Art. 46; if 70% exceeds ordinary wage, ordinary wage may be paid |
| Average wage of 100,000 won a day, recovering from a work injury | Absence compensation 60,000 won a day | Art. 79; tax-free under Art. 12(3)(d) |
On the same 100,000 won a day, the 70,000 won shutdown allowance joins that year’s total pay (our reading), while the 60,000 won absence compensation drops out as tax-free. Put your own daily wage in the checker to see the 30-day, 70% and 60% sums.
If it is retirement income, the tax is in retirement income tax calculator, and putting it off through an IRP is in severance tax deferral calculator.
Checklist
- ☐ Severance pay, pension lump sum, interim settlement → retirement income (check the withholding receipt)
- ☐ Leave pay, shutdown allowance and other wage-type pay → wage income for year-end settlement
- ☐ Unemployment and parental leave benefits, accident benefits, absence compensation → tax-free
- ☐ Notice pay and retirement consolation payments: check the tax office’s view
Questions that remain
How do retirement income and wage income differ?
Under Art. 20(2), wage income minus tax-free items is “total pay”, which then gets the wage income deduction. Retirement income is computed separately under Art. 22(3). Different rates and deductions mean the same amount can carry different tax (our note).
Does unemployment benefit go into year-end settlement?
Unemployment benefit under the Employment Insurance Act is tax-free under Art. 12(3)(e), so it is left out of total pay. More in is unemployment benefit taxable.
Sources
- Korean law database (law.go.kr) — Income Tax Act Arts. 12, 20, 22 — source (current text, effective 1 July 2026, Act No. 21221; checked 26 October 2026). Art. 12(3)(c)–(e) tax-free items, Art. 20(1)–(2) wage income and total pay, Art. 22(1) and (3) retirement income and the executive excess.
- Korean law database — Income Tax Act Enforcement Decree Arts. 38, 43 — source (effective 1 October 2026, Decree No. 36737; checked 26 October 2026). Scope of wage income (merit and consolation payments, non-deductible retirement benefits, holiday pay); special rules on retirement (becoming an executive, transfers, interim settlement).
- Korean law database — Labour Standards Act Arts. 26, 46, 79 — source (effective 8 October 2026, Act No. 21533; checked 26 October 2026). Notice (30 days’ ordinary wage), shutdown allowance (70/100), absence compensation (60/100).
- Not read. National Tax Service rulings and interpretations (notice pay, retirement consolation payments), Corporate Tax Decree Art. 44, the Art. 22(3) formula.
- What we added. The “worth noting” column and the Korean everyday gloss.
Where to check further
- National Tax Service — your withholding receipt — which income your employer reported.
- Tax office or tax accountant — payments the articles don’t name, such as notice pay.
Written on 26 October 2026. The content is from the source; the glosses are ours.
