Korea’s employment income tax system has one distinctive feature that often surprises foreign employees and overseas headquarters: the employer plays a central role in finalizing the employee’s annual employment income tax.

During the year, income tax is provisionally withheld from each monthly payroll. After the calendar year ends, the employer recalculates the employee’s final annual tax liability through the Year-End Tax Settlement, commonly referred to as YETS.

For employees whose income consists mainly or entirely of salary from one Korean employer, YETS generally completes their Korean employment income tax obligations without requiring a separate individual income tax return.

What Is the Korean Year-End Tax Settlement?

A useful comparison for US-based companies is that YETS performs a function similar to a simplified Form 1040 reconciliation—but it is completed through the employer rather than filed independently by the employee.

It is not the same as a full US individual income tax return. However, for many employees whose only income is employment income, YETS effectively serves as the final annual tax reconciliation.

The process generally works as follows:

• Income tax is withheld from the employee’s salary each month.

• After year-end, the employee provides the employer with dependent information and documents supporting eligible deductions and tax credits.

• The employer recalculates the employee’s annual taxable employment income and final tax liability.

• The final liability is compared with the income tax already withheld during the year.

• Any underpayment is collected through payroll, while any overpayment is refunded to the employee.

YETS is normally processed in the early part of the following year, typically through the February payroll.

2026 Progressive Income Tax Rates

Under the regular method, Korean employment income is subject to progressive national income tax rates. The rates apply to taxable income after the applicable employment income deduction, personal deductions and other permitted adjustments—not directly to the employee’s gross salary.

The 2026 national income tax rates are:

• Taxable income up to KRW 14 million: 6%

• Over KRW 14 million up to KRW 50 million: 15%

• Over KRW 50 million up to KRW 88 million: 24%

• Over KRW 88 million up to KRW 150 million: 35%

• Over KRW 150 million up to KRW 300 million: 38%

• Over KRW 300 million up to KRW 500 million: 40%

• Over KRW 500 million up to KRW 1 billion: 42%

• Over KRW 1 billion: 45%

Local income tax is generally imposed at 10% of the calculated national income tax. Accordingly, the combined marginal rates, including local income tax, range from approximately 6.6% to 49.5%.

These are marginal rates. Moving into a higher bracket does not cause the employee’s entire taxable income to be taxed at the higher rate.

Special 19% Flat Tax for Foreign Employees

Eligible foreign employees may elect a special flat income tax rate of 19% instead of the regular progressive tax calculation.

Local income tax is additionally imposed at 10% of the national tax, resulting in an effective combined rate of 20.9%.

Under the law currently effective in 2026, an eligible foreign employee who first begins providing employment services in Korea on or before December 31, 2026 may apply the flat tax treatment for up to 20 years, beginning with the tax year in which the employee first worked in Korea. Certain related-company employment arrangements are excluded.

The flat tax method can be particularly beneficial for highly compensated foreign employees. However, it is not automatically the better option in every case.

Under the flat tax method:

• The 19% national rate is applied instead of the progressive rates.

• Most income exclusions, deductions, tax reductions and tax credits are not available.

• The employee must formally elect the flat tax treatment.

• The result should be compared with the regular progressive calculation before the election is made.

An employee with substantial deductions, eligible dependents or tax credits may pay less tax under the regular progressive method. A year-end comparison is therefore essential.

When Is a Separate Tax Return Required?

An employee whose only income is salary from one employer and whose YETS has been properly completed will generally not need to file a separate comprehensive income tax return in May.

A separate filing may still be required where the employee:

• Has additional business, rental, investment or other reportable income;

• Received salary from multiple employers that was not consolidated through YETS;

• Did not properly complete the year-end settlement; or

• Needs to correct or supplement information omitted from YETS.

Tax residency, tax treaty eligibility and the nature of compensation may also affect the final treatment.

Practical Considerations for Foreign Employers

Foreign companies operating in Korea should not view monthly withholding as the end of the annual payroll tax process. Employers are responsible for collecting employee documentation, performing the year-end calculation, reflecting refunds or additional tax in payroll and preparing the required withholding records.

For foreign employees, the choice between the progressive method and the 19% flat tax should be reviewed carefully each year.

Korea Payroll Partners supports monthly payroll withholding, Year-End Tax Settlement, foreign employee tax comparisons and payroll tax reporting in Korea.

Need assistance with Korean payroll or YETS? Contact Korea Payroll Partners by email.

Official References

• Korean National Tax Service – Year-End Tax Settlement Forms and Foreign Employee Flat Tax Application

• Korean Income Tax Act – Article 55, Tax Rates

• Restriction of Special Taxation Act – Article 18-2, Foreign Employee Flat Tax